The AI chip war has entered a new phase: Nvidia has been blocked from China, and Huawei is cashing in. Perhaps there’s room for two global champions.
Nvidia’s dominance in artificial intelligence hardware is under mounting pressure from US export restrictions and a surging Huawei, but investors say the American chip giant still holds the high ground – at least for now.
This is despite the speed at which Huawei has begun to fill the void left by the bans on some US high-tech exports. The company, which began by making mobile handsets and networking equipment, started delivering advanced AI chip clusters last week to Chinese clients unable to access Nvidia’s semiconductors.
A day later, Nvidia chief executive Jensen Huang publicly conceded that the Chinese rival was catching up fast.
“China is right behind us,” Huang said. “We are very close. [Huawei] is one of the most formidable technology companies in the world.”
These high-end chips at play are mostly used to power large language models (LLMs). These models underpin the AI boom and use immense computing power to crunch through data in real time.
For investors, the rapidly shifting dynamics of the AI chip war are creating fresh uncertainty. But some say the market might be underestimating the strength of Nvidia’s technological lead and entrenched ecosystem.
“Nvidia’s technology is still very far ahead, and they have very high margins and deep pockets, so they can withstand a lot of this trade war,” says William Liu, portfolio manager at Wilson Asset Management. “But when you earn really attractive returns on capital, that attracts a lot of competition – and China has a lot of levers to make itself very competitive.”
Trade restrictions
US President Donald Trump and former president Joe Biden have both targeted Nvidia’s chips as part of a broader effort to deny China access to high-performance AI hardware. After restrictions were tightened, Nvidia launched a downgraded H20 chip tailored for China. That, too, was banned, prompting a $US5.5 billion write-down and a reassessment of the company’s China exposure.
Still, Nvidia’s real moat may lie not in hardware, but in software. CUDA, its proprietary development platform, has become the operating system for the global AI evolution. It is deeply embedded across research, enterprise and start-up ecosystems, making it difficult for customers to switch, even as Chinese alternatives gain ground.
“It’s an incredible moat for Nvidia, which remains the overwhelmingly preferred platform for AI,” says Andrew Leece, chief operating officer at cloud computing provider SharonAI. “But in the China context, Chinese companies are likely responding by developing chips, and their own developer platforms.”
Next week, the US will bring in the new “AI Diffusion” laws, which tighten restrictions on AI chip exports to countries deemed high-risk, including China. That has forced Chinese companies to source from within – and Huawei, which has also become a global electric vehicle player, is quickly becoming the national champion.
Last week, the Shenzhen-based tech group launched its Ascend 910D chip, designed to compete with Nvidia’s flagship H100. Analysts were sceptical of its efficiency but noted its raw computing scale and strong state backing.
“Chinese tech companies have historically led mass adoption of technologies, and this could now accelerate global AI deployments as well,” Faisal Kawoosa, an analyst at Techarc, says.
This week, the Financial Times reported that Huawei was behind a giant cluster of manufacturing facilities taking shape in Guanlan, a district of Shenzhen, that will form a new production line for advanced chips.
It said the previously unreported project underlined the Chinese company’s ambitions to challenge the US in AI technology.
In China’s state-led economy, the government has the power to order companies such as Alibaba and Tencent to use Huawei hardware.
“China doesn’t have another option,” Liu says. “If they want to be at the forefront of the technology revolution, they have to build their own hardware.”
Beijing’s push is already shifting procurement. Some Chinese data centres now report that most of their AI chips are sourced locally. Huawei has also introduced CloudMatrix 384, a brute-force system connecting hundreds of its Ascend chips to rival Nvidia’s more efficient clusters.
But for Nvidia, the risks are not just technological. The shares fell 6 per cent one day last month on reports of a US investigation into whether the company circumvented export controls through third-party sales in Asia.
However, thanks to huge orders from tech giants Microsoft, Meta and Alphabet, Nvidia has posted stellar numbers so far this financial year. Revenue is up 114 per cent to $US130.5 billion, net income has hit $US72.9 billion, and the gross margin is an impressive 73 per cent.
Meanwhile, Huawei’s 2024 revenue has risen 22 per cent to $US118.2 billion, but net profit is down 28 per cent as heavy R&D spending and shrinking margins – down to 44.4 per cent – have weighed on results.
Despite headwinds in the US, Liu believes Nvidia remains a compelling long-term investment. “They’ve got the innovation edge, the software moat, and the capital to keep leading,” he says.
Although Nvidia remains the global leader, Huawei is burning cash to catch up, aided by state backing and guaranteed local demand. Both are placing high stakes in the chip war, but perhaps there’s room for two champions.
“The US is the most innovative country in the world, but the Chinese have got very good engineers, and they are not going to slow down,” Liu says.
