The Economist: Nvidia is fighting off two threats — both involve China

One honourable exception to the roster of tech billionaires standing behind Donald Trump at the president’s inauguration on January 20 was Jensen Huang, the chief executive of Nvidia.

He took a quieter approach, meeting Mr Trump at the White House just over 10 days later.

Earlier that week his firm, the dominant supplier of artificial-intelligence chips, had lost $600b in market value during a sell-off precipitated by the release of the latest AI models from DeepSeek, a Chinese firm.

Mr Trump’s plans to respond to the upstart model-maker may have been as much on Mr Huang’s mind as DeepSeek itself.

Nvidia’s shares have made up much of the ground they lost after DeepSeek’s thrifty approach to model-building raised questions over future demand for Nvidia’s top-of-the-range graphics processing units (GPUs).

On February 26 the chipmaker will report its results for the quarter ending in January.

Analysts reckon that its sales grew by 73 per cent, year on year, hardly a sign of weakness.

The American government’s response to DeepSeek, however, is the next shoe to drop.

The Biden administration sought to slow China’s AI efforts by curbing exports of the most advanced chips and chipmaking tools, as well as by curtailing American investment into Chinese AI firms.

Reports swirl that the Trump administration is weighing tightening export controls.

In his confirmation hearing Howard Lutnick, now commerce secretary, threatened to take a hard line on technology sales to China, pointing out that Nvidia’s chips were used by DeepSeek.

“It’s got to end,” he thundered.

Sales to China made up 15 per cent of Nvidia’s total in the quarter ending in October.

Joseph Moore of Morgan Stanley, an investment bank, reckons uncertainty over them will lead Nvidia to issue “conservative” revenue guidance for the year ahead.

“We feel that there will be some incremental export controls in the wake of DeepSeek,” he says.

There are two trade-stifling levers the government may now pull.

The first is to further limit the sale of GPUs directly to China.

When the earlier chip controls took effect, Nvidia produced a scaled-down GPU for sale to the Chinese market, called the H20.

The Trump administration is now said to be considering restricting sales of that chip, too.

Dylan Patel of SemiAnalysis, a consultancy, believes Nvidia is suspending production of H20s in response to the threat (he says it produced over one million of them in the nine months to the end of January).

The chipmaker is quietly explaining to the government that the H20 has no more processing power to help China achieve its AI dreams than commonplace gaming chips it sells in the country.

That said, the chip’s use in China for AI is reportedly soaring.

The American government’s second lever would prevent Chinese firms from getting access to GPUs via third countries, which is the intention of the Framework for AI Diffusion, an interim rule introduced just days before Joe Biden left office.

It aims to halt the illegal smuggling of GPUs to China and stop Chinese firms from getting access to American AI infrastructure via other countries’ server farms.

It will take effect in mid-May, unless ditched beforehand.

As it stands, the rule would limit the access of many countries to the most advanced GPUs and tether them to American regulatory oversight.

It will push them to ally with American cloud-computing giants such as Alphabet, Amazon and Microsoft.

Nvidia hates it.

It publicly lambasted the Biden administration when the rule was announced, calling it a “misguided” morass of over-regulation that would weaken American competitiveness and undermine growth.

Behind the scenes, it argues that the restrictions on access to American AI technology on more than 150 countries risk alienating allies and pushing them into the arms of Huawei, a Chinese tech titan that is developing AI chips of its own.

Even so, Gregory Allen of CSIS, a think-tank in Washington, says he believes the Trump administration will endorse the rule’s “basic architecture”, though it will put its own stamp on it.

Mr Huang may still hope to change the president’s mind.

Although he is not part of the tech “broligarchy” surrounding Mr Trump, he has good connections.

In the run-up to the election Nvidia’s boss lavished praise on Elon Musk, a pal of the president’s, for the speed with which the entrepreneur-turned-hell-raiser built a giant data centre in Memphis for xAI, his GPU-hungry startup.

Even if hawks in the Trump administration want to bludgeon sales of AI chips to China, Mr Huang may hope that Mr Musk uses his power in the White House to soften the blow.

Geopolitics has already made life difficult for Nvidia in China.

American sanctions on Huawei have kneecapped the chipmaker’s strongest competitor in the country, but trade restrictions have hurt the American firm, too.

Sales to China as a share of Nvidia’s total are already down from more than a fifth two years ago.

Efforts by the Chinese government to stimulate demand for home-grown chips have not helped.

By and large Nvidia has tried to remain in China’s good books, which may be one reason it so openly criticises American export controls.

That has not spared it from being used as a geopolitical football.

In December the Chinese government said it was investigating the American firm over alleged breaches of its anti-monopoly law, which was widely interpreted as a retaliatory response to curbs on American chips.

Uncertainty over Nvidia’s business in China makes its continued growth all the more dependent on sales elsewhere.

The chipmaker retains a dominant position in the rest of the world, and continues to outrun its competitors by frequently upgrading its hardware and software offerings.

It is currently transitioning to a new generation of chips known as Blackwells.

The recovery in Nvidia’s share price over the past month also suggests investors believe Mr Huang and others who argue that DeepSeek’s breakthroughs, by making models cheaper, will mean more demand for the hardware powering AI, rather than less, by encouraging adoption of the technology.

Since the DeepSeek rout America’s cloud-computing giants have signalled that they plan to continue ramping up spending on data centres.

Yet a note published by analysts at TD Cowen, an investment bank, on February 21 claimed that Microsoft has recently cancelled some data-centre leases in America (the tech giant insists it is still committed to spending $80b on infrastructure this year).

Trouble could be brewing both at home and abroad for Mr Huang.