Chinese Buyers Seek Underground Market for Nvidia AI Chips Amid U.S. Sanctions

Title: Chinese Buyers Seek Underground Market for Nvidia AI Chips Amid U.S. Sanctions

Publication Date: June 20, 2023

HONG KONG/SHENZHEN, China – In the aftermath of U.S. sanctions on Nvidia (NVDA.O), Chinese buyers are turning to the underground market to purchase top-end Nvidia AI chips. The renowned Huaqiangbei electronics area in Shenzhen has emerged as a popular destination for these buyers, particularly the SEG Plaza skyscraper, where the first 10 floors are filled with shops offering a wide range of electronic components.

Although the chips are not openly advertised, discreet inquiries have proven successful for interested buyers. However, the high-end Nvidia chips come at a steep price. According to anonymous vendors who spoke with Reuters, the A100 artificial intelligence chips, manufactured by the U.S. chip designer, are priced at $20,000 each – double the usual price.

While the purchase and sale of high-end U.S. chips are not illegal in China, U.S. export restrictions have created an underground market. Vendors are cautious not to draw attention from either U.S. or Chinese authorities. The U.S. government, under President Joe Biden’s administration, ordered Nvidia to halt the export of its two most advanced chips, the A100 and the recently developed H100, to mainland China and Hong Kong. These measures were part of broader efforts to impede Chinese AI and supercomputing development amid escalating political and trade tensions.

Despite the restrictions, the demand for high-end chips has surged globally, driven by the success of OpenAI’s ChatGPT and the growing popularity of artificial intelligence applications. Nvidia’s microprocessors are widely recognized as the best for handling machine-learning tasks. Consequently, Chinese buyers, including app developers, startups, researchers, and gamers, are actively seeking ways to acquire these chips.

Reuters interviewed 10 vendors in Hong Kong and mainland China who confirmed the availability of small quantities of A100 chips. The ease with which these transactions can circumvent U.S. sanctions for small-batch purchases highlights the intense demand for the chips in China. However, the overall volume of Nvidia A100 and H100 chips flowing into China remains unknown.

Nvidia, in response to inquiries, stated that it does not permit exports of the A100 or H100 to China. Instead, the company offers reduced-capability substitutes that comply with U.S. law. The U.S. Department of Commerce, China’s State Council Information Office, and China’s industry ministry did not provide comments on the matter.

To mitigate the potential loss of $400 million in sales during the third quarter, Nvidia has developed China-tailored slower variants, the A800 and H800, which are being purchased by large Chinese tech firms such as Tencent Holdings and Alibaba.

Chinese vendors primarily procure the chips through two methods: acquiring excess stock that becomes available after Nvidia ships large quantities to major U.S. firms or importing through locally incorporated companies in places like India, Taiwan, and Singapore. However, the quantities they can secure are limited, making it challenging to build sophisticated AI models from scratch.

While the availability of A100 chips is relatively higher, the more advanced H100 chips, introduced to the market in March, are much harder to come by. Only one of the 10 vendors Reuters spoke with claimed to be able to procure H100s.

Industry analysts suggest that the U.S. government may not be overly concerned about small transactions of these chips. However, if China poses a greater threat in terms of technological catch-up, stricter enforcement may be implemented. Additionally, the premiums currently commanded by Chinese vendors for A100 and H100 chips could potentially decrease in the future as Chinese AI startups gradually withdraw from the market.

As the demand for high-end AI chips continues to rise, Chinese buyers are navigating the underground market to acquire Nvidia chips, despite U.S. sanctions. The availability and pricing of these chips reflect the intense demand in China and the efforts made to bypass export controls.

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Hat they are committed to complying with all applicable laws and regulations, including U.S. export controls. They emphasized that their partnership with China’s Baidu in developing the AI system, and their support for Chinese researchers and developers, demonstrates their commitment to the Chinese market.

The underground market for Nvidia AI chips in China is a result of the ongoing trade tensions between the U.S. and China. As both countries continue to impose sanctions and restrictions on each other, Chinese buyers are increasingly turning to the underground market to meet their tech needs. It remains to be seen how long this trend will continue and what impact it will have on the global semiconductor industry.