China Urges Tech Giants To Shift Away From Nvidia And Other Foreign Chip Makers, Boost Domestic AI Chip Purchases: Report

China has reportedly instructed its tech giants to reduce their reliance on foreign-made chips, particularly those from NVIDIA Corp NVDA, and increase their purchase of domestic AI chips.

What Happened: The Chinese government has advised major tech companies such as Alibaba Group Holding Ltd BABA, Baidu Inc BIDU, ByteDance, and Tencent Holdings Ltd TCEHY to decrease their spending on foreign-made-chips, including those from Nvidia, The Information reported on Monday, citing people familiar with the matter.

These companies are now expected to purchase an equal number of locally and foreign-made AI chips for their new data centers.

The directive, as per The Information, has not been strictly enforced, and it is unclear if any penalties will be imposed for non-compliant companies.

China’s new directive poses a significant challenge for Nvidia, which has been striving to provide specialized offerings for the Chinese market. The company is developing three new GPUs for China, designed to meet the restrictions under prevailing U.S. sanction rules.

China is a critical market for Nvidia, accounting for 19% of its data center chip revenue in fiscal year 2023. However, U.S. export restrictions have caused a significant drop in China’s revenue share, a matter of concern for Nvidia.

Representatives for China’s Ministry of Industry and Information Technology, Alibaba, Baidu, ByteDance, and Tencent did not immediately respond to Benzinga's request for comment.

See Also: US Ready To Impose New Tariffs On China’s EV, Solar Sectors: ‘Could Cause More Severe Damage’ Than Last T

Why It Matters: This move by China comes at a time when the global supply of high-performance memory chips is expected to remain constrained throughout 2024, driven by the soaring demand for artificial intelligence technology. This is likely to affect the supply of these chips for the rest of 2024 and well into 2025.

Gaining control over the global supply of chips is becoming a central priority for Western governments trying to compete with China in the race to dominate the industry. This is part of the reasoning behind a long list of sizable investments that governments are pouring on their domestic building capabilities. Subsidies are expected to reach hundreds of billions of dollars in the coming decade.

HSBC Global Research maintained Nvidia with a Buy rating Monday and lifted its 12-month price target as the firm believes the chipmaker's strong pricing power will allow the company to continue to deliver upside surprises through fiscal year 2026.

With the U.S. and China set to discuss the potential risks of advanced artificial intelligence, the talks will explore ways to mitigate the potential dangers of this emerging technology. The Biden administration has been actively seeking to engage China on various issues to minimize misunderstandings between the two countries. The talks on AI were initiated following a discussion between U.S. Secretary of State Antony Blinken and China's Foreign Minister Wang Yi in April.

Read Next: China Refutes Philippines Claims Of Creating Artificial Island In South China Sea: ‘Groundless And Pure Fabrication’

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