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A network of smugglers is secretly funneling powerful Nvidia microchips to the Chinese military, right under the nose of a strict U.S. national security blockade meant to stop China’s AI advancements.
A New York Times investigation reveals an active underground market that defies U.S. restrictions, exposing a complex web of illegal trade and corporate tricks boosting China’s tech growth.
Main Findings
The New York Times investigation has revealed a huge smuggling network in China, allowing the illegal purchase of advanced AI chips made by Nvidia, despite strict U.S. national security restrictions. This underground market is growing, with smugglers and front companies playing key roles in avoiding the blockade.
In the bustling SEG electronics market in Shenzhen, many vendors openly sell or transport restricted Nvidia chips. Interviews with representatives from 11 companies revealed extensive involvement in these illegal activities, with one transaction reaching $103 million. Additionally, dozens of businesses are offering these chips online, making them accessible to a broader market.
Further investigation, in collaboration with the Center for Advanced Defense Studies, highlighted that more than a dozen state-affiliated entities, some under sanctions, have obtained these restricted chips. These entities, directly linked to the Chinese military, use the technology to advance their defense research, weakening the impact of the U.S. sanctions.
Companies around the world are finding ways to get around these importing restrictions. By creating front companies or forming new partnerships and subsidiaries overseas, they continue to supply China with the necessary technology. For example, the investigation uncovered the case of Sugon, a company providing advanced computing for the Chinese military.
Case Study – Sugon and Nettrix
- Sugon: A company providing advanced computing for the Chinese military was placed on the U.S. entity list.
- Nettrix: The former executives from Sugon then created a new company called Nettrix, which quickly formed partnerships with Nvidia, Intel, and Microsoft.
- Compliance Claims: These companies stated they complied with the law, but the existence of Nettrix shows how easily firms can dodge sanctions by simply rebranding or relocating their operations.
Background
The U.S. has been tightening its restrictions on exporting advanced AI chips to China to limit Beijing’s access to key technologies that could improve its military abilities.
Recent Measures
- 2022: The U.S. imposed restrictions on the sale of Nvidia’s H100 chip. However, Chinese companies circumvented these restrictions by buying slower versions of the chip, like the H800 and A800.
- 2023: The U.S. announced similar restrictions targeting Nvidia’s A800 and H800 chips. These measures were aimed at controlling access to high-performance chips crucial for developing next-generation AI models with potential military uses.
Now, President Joe Biden’s administration has announced plans for new regulations to further expand U.S. powers to stop exports of semiconductor manufacturing equipment to Chinese chipmakers. However, shipments from key allies such as Japan, the Netherlands, and South Korea will be excluded to limit the impact on these countries.
This new regulation aims to bar several Chinese semiconductor fabrication factories from receiving exports from many countries, including Israel, Taiwan, Singapore, and Malaysia.
Importance of Nvidia in the AI Chip Blockade
Nvidia is the critical player in the U.S. AI chip blockade due to its dominance in the AI and computing industries. Here are some key statistics that show Nvidia’s significance:
- Market Cap: Nvidia’s market cap is $2.6 trillion as of August 2024, most recently driven by the rapidly growing demand for its AI semiconductor chips.
- Revenue Growth: In the first quarter of 2024, Nvidia reported a 262% year-on-year increase in revenue, totaling $26 billion, showing the high demand for its semiconductor chips.
- Revenue Source: Most of Nvidia’s revenue (87%) comes from the data center segment. In the first quarter of its fiscal year ending in 2024, Nvidia’s data center segment brought in a record $22.6 billion, up 23% from the previous quarter and +427% from the first quarter of 2023.
China is a major market for Nvidia, and the restrictions on its chips directly impact Nvidia’s revenue potential. Despite this, the U.S. sees the strategic importance of limiting China’s access to these advanced technologies to maintain a technological edge and safeguard national security.
