Nvidia Cuts China Prices in Huawei Chip Battle

According to insiders, Nvidia’s (NVDA.O), the most powerful AI processor for China, has had a rough start due to excess supply, causing it to be priced below a Huawei chip

The declining prices highlight the difficulties Nvidia’s China operation encounters due to increased competition and U.S. sanctions on exporting AI chips. This casts doubt on the company’s future in a market that accounted for 17% of its revenue in fiscal 2024.

A cautionary note is also issued to investors regarding the increasing competitive pressure in China, as the shares of the U.S. semiconductor designer prolonged a stunning rally after Wednesday’s impressive revenue forecast. 

Nvidia, the market leader in artificial intelligence (AI) chips, introduced three processors designed specifically for China in late 2018 in response to the imposition of U.S. sanctions that impeded the export of its most sophisticated semiconductors.

As the most potent Nvidia product sold in China, the H20 is the most closely followed of these chips. However, according to three supply chain sources who spoke with Reuters, the chip is abundantly available on the market, which indicates weak demand. 

In some instances, H20 processors have been sold at a discount of over 10% to Huawei’s Ascend 910B, the most potent AI chip from a Chinese company, according to two of the three sources who declined to be identified by Reuters on account of the sensitivity of the matter. 

According to analysts, despite Nvidia’s best efforts to capture market share in a critical sector for its survival, the outlook is growing increasingly uncertain. 

As per a report published by CCID Consulting, a Chinese market research firm, China is anticipated to surpass 30% of the global AI market by 2035. 

According to IG market analyst Hebe Chen, “Nvidia is striking a delicate balance between maintaining the Chinese market and navigating U.S. tensions.” “Nvidia is preparing for the worst in the long term.”

During Nvidia’s first quarter earnings report on Wednesday, senior executives cautioned that the sanctions have prevented the company from conducting “substantially” as much business in China as it once did. 

“Our data center revenue in China is down significantly from the level before the imposition of the new export control restrictions in October,” said Colette Kress, Chief Financial Officer. “We expect the market in China to remain very competitive going forward.” 

According to analysts, the H20’s performance will significantly impact its business in China. In contrast, its ability to compete with the dominant domestic technology company, Huawei, will determine its long-term prospects.

Huawei began to challenge Nvidia only a year ago, and according to sources, the Guangdong-based company will significantly increase shipments of its Ascend 910B chip this year. In some key metrics, the Ascend 910B chip outperforms the H20, according to the sources. 

Huawei declined to comment in response to a request for clarification. 

Five state or state-affiliated buyers have expressed interest in purchasing H20 chips over the past half-year, Reuters reports, based on an examination of available government procurement data that needs to be more exhaustive and may reflect the full scope of market demand. Over a dozen buyers expressed interest in Huawei’s 910B during the same period. 

MARGIN SQUEEZE Operation

The prohibition of Nvidia’s H800 and A800 in China results from U.S. sanctions designed to impede China’s progress toward becoming a technological superpower. Additionally, its additional sophisticated product lines, H100 and B100, have been prohibited. 

An additional significant obstacle to the success of Nvidia’s H20 chip in China has been a directive from Beijing requiring companies to purchase Chinese processors; however, two of the three sources indicate that the volume of such orders has decreased in recent months. 

According to sources, the H20 became broadly available in China last month, and clients began receiving shipments in just over a month. 

Several prominent technology companies in China have already placed orders, with Alibaba, according to two sources, having purchased more than 30,000 H20 processors. Alibaba declined to comment in response to a request for clarification. 

According to the sources, server distributors in China offer the H20 for approximately 100,000 yuan per card and the eight-card server for between 1.1 and 1.3 million yuan per server. 

When compared, distributors charge more than 120,000 yuan per card for the Huawei 910B, whereas the equivalent price for an eight-card server ranges from 1.3 to 1.5 million yuan per server. According to the sources, pricing for the H20 and Huawei’s 910B is subject to variation contingent upon the quantity of orders initiated. 

According to Dylan Patel, the founder of the research firm SemiAnalysis, China will receive nearly one million H20 processors in the second half of 2024; therefore, Nvidia must compete with Huawei on pricing. 

“Due to its higher memory capacity, the H20 was more expensive to produce than the H100,” Patel explained, adding that it is being sold for half the price of the H100, a reference to the powerful Nvidia chip that will be barred from export to China in 2022. 

“This is a dramatic decrease in margin.”