Chinese Firms Place Massive Chip Order, Leaving Nvidia Facing a $16 Billion Dilemma

Chinese Firms Place Massive Chip Order, Leaving Nvidia Facing a $16 Billion DilemmaNews broke on April 3rd that Chinese companies, including ByteDance, Alibaba Group, and Tencent Holdings, have placed orders for at least $16 billion worth of Nvidia's H20 server chips for AI computing, to be delivered by the first three months of 2025. This massive order, revealed by two sources directly familiar with the deals, aims to secure the chips before a potential US ban on sales to China takes effect

Chinese Firms Place Massive Chip Order, Leaving Nvidia Facing a $16 Billion Dilemma

News broke on April 3rd that Chinese companies, including ByteDance, Alibaba Group, and Tencent Holdings, have placed orders for at least $16 billion worth of Nvidia's H20 server chips for AI computing, to be delivered by the first three months of 2025. This massive order, revealed by two sources directly familiar with the deals, aims to secure the chips before a potential US ban on sales to China takes effect. While representing significant revenue for Nvidia, the order presents a considerable risk.

Nvidia's close ties to the Chinese market are undeniable. In the twelve months ending January 26th, Nvidia generated $17 billion in revenue from China, accounting for 13% of its total revenue. This substantial order, however, puts Nvidia in a precarious position: fulfill the order and secure the massive revenue, or risk potentially massive losses if a US ban is implemented before delivery. The H20 chip is the most powerful AI chip Nvidia is currently allowed to sell to China after the US government, citing national security concerns, banned the sale of its most advanced chips. Although 15 times slower than Nvidia's Blackwell chip sold in other markets, sources indicate Nvidia recently upgraded the H20, integrating it with Blackwell's high-bandwidth memory, significantly boosting AI training and inference performance. Most Chinese companies are ordering this improved version.

The looming threat of a potential ban overshadows the deal. Two sources familiar with the deliberations revealed that the Trump administration considered banning the sale of H20 chips to China, further aiming to curb China's technological advancement. This potential ban is driving the current surge in purchases by Chinese tech companies. Nvidia declined to comment; ByteDance, Alibaba, and Tencent did not respond to requests for comment; and the White House did not immediately respond. Bloomberg previously reported on the potential H20 restrictions.

The continuous increase in orders for H20 chips is closely linked to the rapid development of AI technology in China. Since DeepSeek's January release of its R1 AI model, surpassing the efficiency of models from US companies like OpenAI, the H20 chip has become even more valuable to Chinese businesses. DeepSeek's breakthrough not only boosted demand for H20 chips but also for Nvidia's gaming chips, which Chinese companies are adapting for AI computing. Global adoption of DeepSeek's model, reducing AI development costs, further solidifies the H20's market position.

However, the surge in H20 orders has created immense production pressure for Nvidia. Sources say Nvidia hasn't secured sufficient capacity from its manufacturing partner, TSMC, to meet the growing demand. While both companies can gradually increase capacity, mass production of H20 chips could take up to six months, meaning many orders won't be delivered until the fourth quarter. This sets up a race against time between delivery and a potential ban.

If Nvidia allocates more TSMC capacity to H20 chips, it risks substantial financial losses if a ban prevents delivery. Conversely, given the significant performance gap between H20 and Blackwell chips, Nvidia might have to drastically reduce prices to sell any surplus to non-Chinese customers, further squeezing profit margins. Sources suggest that if the US implements sales restrictions before Nvidia delivers the chips, customers might demand refunds, creating an even greater financial impact.

TSMC stated it won't comment on speculation regarding individual clients or markets. Nvidia CEO Jensen Huang has repeatedly warned that strict export controls could benefit Chinese competitors, enabling them to dominate their domestic AI chip market. His description of Huawei as "indisputably the strongest tech company in China" reflects his concern about the potential of China's AI industry and the unintended consequences of US policy.

Since the initial US chip export restrictions in late 2022, Nvidia's revenue share from China has decreased from 21% that year. However, in US dollar terms, China sales still grew by 70% in the fiscal year ending January 26th, reflecting strong demand following the emergence of ChatGPT. This growth, however, might not fully reflect actual sales to Chinese companies.

Significantly, Singapore has become Nvidia's second-largest market after the US, contributing 18% of revenue. Nvidia, however, notes that much of this sales volume is actually routed to other regions via Singapore, as many Chinese companies use Singapore for "centralized invoicing." Singapore has become a popular business hub for Chinese companies operating abroad, offering a potential workaround for US restrictions. As long as the usage location is outside China, Chinese companies like ByteDance can still purchase or lease Nvidia's most advanced chips. For example, ByteDance leases Nvidia chips in the US through Oracle and uses data centers equipped with Nvidia chips in Singapore and other Southeast Asian countries.

It remains unclear if the new H20 orders will further inflate Nvidia's rapidly growing accounts receivable, particularly unpaid amounts. As of the end of January, accounts receivable soared to $23 billion, up from $10 billion a year earlier, substantially outpacing revenue growth. This trend has raised concerns among some investors that Nvidia may be prematurely booking some revenue. The increase in accounts receivable could also be related to Nvidia's entry into a new product cycle with its Blackwell chips. Because these chips require different cooling mechanisms in data centers, customers might take time to implement them, potentially delaying payments.

This massive order and its inherent risks will have a profound impact on Nvidia's future strategic decisions and the global AI landscape.