Latest U.S. Chip Curbs Deliver Setback to China’s AI Ambitions

“This is a big step by the U.S. because it is targeting high performance processors that are mainly used for commercial applications,” said Handel Jones, chief executive of consulting firm International Business Strategies Inc.

Nvidia, the world’s largest chip maker by market value, said Wednesday that new U.S. rules barring the sale without a license of the advanced chips to Chinese customers would cost it $400 million in sales. It said it may have to transition some of its operations out of China.

Nvidia shares fell more than 11% midday Thursday. Other chip makers also retreated. Shares in

Advanced Micro Devices Inc.,

which said it was also affected by the license requirement though didn’t expect a material impact, were down more than 6%.

The U.S. Commerce Department, which handles export restrictions, has declined to comment on changes to its policy but said the action was aimed at preventing China from acquiring American technology to advance its military.

China’s Ministry of Commerce on Thursday said the U.S. move would damage the interests of both Chinese and American companies. The U.S. should treat enterprises of all countries fairly, it said.

The restrictions cover sales to China, Hong Kong and Russia of Nvidia’s A100 graphics processing unit, a chip unveiled two years ago and used in data centers to perform demanding artificial-intelligence calculations. Also affected are the company’s forthcoming H100 series of graphics chips, the company’s most advanced, the company said, as well as future products that might be more powerful. Nvidia says​it no longer sells products to customers in Russia following ​the country’s​ invasion of Ukraine.

Users of the A100 include Alibaba, Tencent, and

Baidu Inc.,

BIDU -1.22%

Nvidia has said. The companies operate the country’s dominant cloud computing services, which provide on-demand computing and storage, and can also be used by firms to program AI applications.

A Tencent spokeswoman declined to comment. Alibaba and Baidu didn’t immediately respond to a request for comment.

On Thursday, Nvidia said it received authorization from the U.S. government to carry out exports to support U.S. customers of the A100 through March 1. It also said it got approvals necessary to continue development work on the H100 chip. Earlier, the company said the new restrictions could impede its support for existing A100 customers and hamper the H100’s development.

Beijing has identified AI as a top strategic technology, and has thrown state support behind companies and laboratories in the sector. A weakness for China’s AI ambitions, however, is reliance on U.S. companies such as Nvidia for advanced chips crucial for programming complex AI algorithms.

More than a quarter of Nvidia’s $26.9 billion in fiscal 2022 revenue was derived from China and Hong Kong.

Jensen Huang,

the president and co-founder of Nvidia, said in a call with analysts last month that China is a “very important market for us, a very large market for us.”

In the long term, the impact of losing Chinese AI-chip customers amounted to about 10% of revenues, analysts at Truist Securities said in a note, adding that it was unlikely that the company could recover those losses. In the near term, Chinese customers may move to older-generation Nvidia chips not subject to licenses, it said, but it was unlikely the U.S. would grant the licenses it will need to keep the business going in the future.

Nvidia has had a close relationship with the Chinese market in recent years. The company provided the cutting-edge chips that helped some of China’s surveillance companies train their image recognition algorithms. More recently, Nvidia executives said the company’s technology has also become critical to vehicle makers such as

BYD Co.

1211 -3.96%

to fuel their electric car and self-driving vehicle ambitions.

Other Chinese customers include information technology juggernaut

Lenovo Group Ltd.

LNVGY -0.79%

and cloud provider and server company Inspur Group.

Nvidia has said Inspur uses the A100 for image processing, financial analysis and other applications. In March, Inspur said its AI servers would support Nvidia’s H100 processor, adding the company “has a long-term cooperation with Nvidia.”

Lenovo and Inspur didn’t immediately respond to requests for comment Thursday.

Nvidia said in 2020 that many of China’s largest cloud service providers had adopted the A100 to power an array of AI applications.

Mr. Jones said losing access to the A100 and H100 would have a significant impact on Chinese companies working on certain artificial intelligence technologies, forcing Nvidia’s Chinese customers to use older technology.

For Alibaba, the A100 was useful for applications like training AI algorithms and for high-performance computing, Nvidia said. A page on Alibaba Cloud’s website describes numerous uses for the A100, saying that it can speed up analysis in sectors such as healthcare, finance and manufacturing.

Tencent, which operates China’s third-biggest cloud company, has used the A100 for data analysis, video analysis and other areas, according to Nvidia. Tencent said in April that it would become one of the first cloud vendors in the industry to launch services using a version of the A100.

An alternative for Chinese users of the affected Nvidia chips would be using multiple lower-end Nvidia processors not covered by the new restrictions, said Edison Lee, a Hong Kong-based analyst at investment bank Jefferies. Chinese makers of GPUs include Loongson Zhongke Technology Co. and

Hygon Information Technology Co.

688041 8.55%

, but switching to domestic providers would present hurdles, he said.

“There are no direct local substitutes,” he said in a research report Thursday.

—Qianwei Zhang contributed to this article.

Write to Liza Lin at [email protected] and Dan Strumpf at [email protected]

“This is a big step by the U.S. because it is targeting high performance processors that are mainly used for commercial applications,” said Handel Jones, chief executive of consulting firm International Business Strategies Inc.

Nvidia, the world’s largest chip maker by market value, said Wednesday that new U.S. rules barring the sale without a license of the advanced chips to Chinese customers would cost it $400 million in sales. It said it may have to transition some of its operations out of China.

Nvidia shares fell more than 11% midday Thursday. Other chip makers also retreated. Shares in

Advanced Micro Devices Inc.,

which said it was also affected by the license requirement though didn’t expect a material impact, were down more than 6%.

The U.S. Commerce Department, which handles export restrictions, has declined to comment on changes to its policy but said the action was aimed at preventing China from acquiring American technology to advance its military.

China’s Ministry of Commerce on Thursday said the U.S. move would damage the interests of both Chinese and American companies. The U.S. should treat enterprises of all countries fairly, it said.

The restrictions cover sales to China, Hong Kong and Russia of Nvidia’s A100 graphics processing unit, a chip unveiled two years ago and used in data centers to perform demanding artificial-intelligence calculations. Also affected are the company’s forthcoming H100 series of graphics chips, the company’s most advanced, the company said, as well as future products that might be more powerful. Nvidia says​it no longer sells products to customers in Russia following ​the country’s​ invasion of Ukraine.

Users of the A100 include Alibaba, Tencent, and

Baidu Inc.,

BIDU -1.22%

Nvidia has said. The companies operate the country’s dominant cloud computing services, which provide on-demand computing and storage, and can also be used by firms to program AI applications.

A Tencent spokeswoman declined to comment. Alibaba and Baidu didn’t immediately respond to a request for comment.

On Thursday, Nvidia said it received authorization from the U.S. government to carry out exports to support U.S. customers of the A100 through March 1. It also said it got approvals necessary to continue development work on the H100 chip. Earlier, the company said the new restrictions could impede its support for existing A100 customers and hamper the H100’s development.

Beijing has identified AI as a top strategic technology, and has thrown state support behind companies and laboratories in the sector. A weakness for China’s AI ambitions, however, is reliance on U.S. companies such as Nvidia for advanced chips crucial for programming complex AI algorithms.

More than a quarter of Nvidia’s $26.9 billion in fiscal 2022 revenue was derived from China and Hong Kong.

Jensen Huang,

the president and co-founder of Nvidia, said in a call with analysts last month that China is a “very important market for us, a very large market for us.”

In the long term, the impact of losing Chinese AI-chip customers amounted to about 10% of revenues, analysts at Truist Securities said in a note, adding that it was unlikely that the company could recover those losses. In the near term, Chinese customers may move to older-generation Nvidia chips not subject to licenses, it said, but it was unlikely the U.S. would grant the licenses it will need to keep the business going in the future.

Nvidia has had a close relationship with the Chinese market in recent years. The company provided the cutting-edge chips that helped some of China’s surveillance companies train their image recognition algorithms. More recently, Nvidia executives said the company’s technology has also become critical to vehicle makers such as

BYD Co.

1211 -3.96%

to fuel their electric car and self-driving vehicle ambitions.

Other Chinese customers include information technology juggernaut

Lenovo Group Ltd.

LNVGY -0.79%

and cloud provider and server company Inspur Group.

Nvidia has said Inspur uses the A100 for image processing, financial analysis and other applications. In March, Inspur said its AI servers would support Nvidia’s H100 processor, adding the company “has a long-term cooperation with Nvidia.”

Lenovo and Inspur didn’t immediately respond to requests for comment Thursday.

Nvidia said in 2020 that many of China’s largest cloud service providers had adopted the A100 to power an array of AI applications.

Mr. Jones said losing access to the A100 and H100 would have a significant impact on Chinese companies working on certain artificial intelligence technologies, forcing Nvidia’s Chinese customers to use older technology.

For Alibaba, the A100 was useful for applications like training AI algorithms and for high-performance computing, Nvidia said. A page on Alibaba Cloud’s website describes numerous uses for the A100, saying that it can speed up analysis in sectors such as healthcare, finance and manufacturing.

Tencent, which operates China’s third-biggest cloud company, has used the A100 for data analysis, video analysis and other areas, according to Nvidia. Tencent said in April that it would become one of the first cloud vendors in the industry to launch services using a version of the A100.

An alternative for Chinese users of the affected Nvidia chips would be using multiple lower-end Nvidia processors not covered by the new restrictions, said Edison Lee, a Hong Kong-based analyst at investment bank Jefferies. Chinese makers of GPUs include Loongson Zhongke Technology Co. and

Hygon Information Technology Co.

688041 8.55%

, but switching to domestic providers would present hurdles, he said.

“There are no direct local substitutes,” he said in a research report Thursday.

—Qianwei Zhang contributed to this article.

Write to Liza Lin at [email protected] and Dan Strumpf at [email protected]