Nvidia (NVDA) is facing a new threat, and it’s not a rival chipmaker. On Monday, China announced it is launching an antitrust probe into Nvidia’s $7 billion acquisition of networking technology company Mellanox.
The State Administration for Market Regulation, China’s competition authority, says it’s looking into whether Nvidia is abiding by the terms of its conditional approval of the 2020 deal, which called for the chip giant to treat Chinese companies the same as any other businesses.
Nvidia uses Mellanox’s networking hardware to connect its powerful graphics chips in large servers, allowing them to function as one massive AI processing system.
It’s not clear how Nvidia is violating the terms of the deal, though the US government has forced Nvidia to stop sales of its most powerful products to China-based customers.
The probe follows a series of US actions seeking to curb China’s ability to access American-designed and built AI chips over fears that they could end up in the hands of the Chinese military. Part of that includes cutting China off from Nvidia’s most advanced and powerful chips, including its highly coveted Hopper line of AI accelerators.
It’s difficult to tell how far China is willing to go with the investigation and what, if any, legal ramifications Nvidia will face in the country. But as the US’s current chip champion, the company has quickly become the latest and most valuable chess piece in the countries’ tit-for-tat game of economic brinksmanship that could lead to the development of two wholly separate chip industries.
“It’s potentially very worrisome that China might be using its antitrust authority to further non-antitrust outcomes,” explained Bill Baer, a visiting fellow of governance studies at the Brookings Institution’s Center for Technology Innovation.
“It’s hard to judge whether this [investigation] is on the competition merits, versus part of this broader back and forth we have been seeing and probably will see more of in the [incoming Trump] administration,” he added.
The US first banned the sale of Nvidia’s chips to China in 2022, telling the company it could no longer ship its A100 and H100 processors in an effort to keep them out of the hands of China’s military. In response, Nvidia developed two less powerful chips for the Chinese market, the A800 and H800. But the US blocked the sale of those processors as well.
Now China is firing back. And while the country could have some genuine antitrust concerns, experts say it’s not likely.
“Sometimes China applies its antitrust law in neutral ways,” David Olson, associate professor at Boston College Law School, told Yahoo Finance. “But when its strategic interests are at stake, the law can be a tool of the state. There is plenty of reason to suspect that is what’s behind its enforcement against Nvidia.”
While Nvidia is banned from selling its most powerful, and lucrative, products to China, the company still generates a sizable amount of revenue through sales of less advanced chips it’s allowed to sell in the country.
Of the $35.1 billion in sales Nvidia reported in Q3, $5.4 billion came from China, up from $4 billion in Q3 last year. But because Nvidia can’t sell its most expensive hardware in China, the country continues to make up a smaller overall percentage of the chipmaker’s revenue.
In Q3, China sales accounted for 15.4% of the company’s overall revenue, down from 22.2% during the same quarter last year. And in Q2, China made up 12.2% of Nvidia’s total sales, down from 20.2% last year. It’s a trend that is sure to continue. But according to Andrew Chang, technology director at S&P Global Ratings, Nvidia will be able to withstand the declines.
“For Nvidia, this is a negative, but a modestly negative,” Chang told Yahoo Finance. “This is not to say [Nvidia doesn’t] want to compete in China, but a loss of China is not as devastating as it sounds.”
The American ban on shipping Nvidia chips to China means that Chinese companies are forced to develop their own competing processors. Couple that with prior restrictions on the sale of US semiconductor technologies to Huawei, and you’ve got the start of two competing semiconductor ecosystems: one based around the US and its allies and the other based around China and its own allies.
Last week, four Chinese industry groups covering telecommunications, automotive, semiconductors, and the digital economy advised Chinese companies to avoid using US chips, saying they were no longer safe for Chinese domestic use without providing specific reasons.
Splitting the chip industry into two competing kingdoms, however, would inevitably hurt large companies like Apple that sell their products both in the US and China by adding unnecessary complexities to an already massive supply chain.
“It’s going to create huge challenges for … multinational corporations’ operations,” explained Columbia Business School associate professor Lori Yue. “That … situation is not very good for the business community.”
While a split chip industry is still far from inevitable, the US and China are certainly moving further and further in that direction.
Email Daniel Howley at [email protected]. Follow him on Twitter at @DanielHowley.
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