China is asking its tech giants to ditch Nvidia chips and buy local instead: report

• China wants its chip hungry tech giants to buy local, per The Information. 
• Companies like Alibaba were told to pare down their spending on foreign-made chips like Nvidia's.
• The new directive would be a huge downer for Nvidia, which sees the country as a key market.

Chinese officials are asking domestic tech giants to buy locally-made AI chips instead of Nvidia's, The Information reported on Monday.

Major tech companies like Alibaba, Baidu, TikTok parent company ByteDance, and Tencent were told to pare back their spending on foreign-made chips like Nvidia's, the outlet reported, citing people familiar with the matter.

Chinese tech giants, The Information's sources said, are now expected to purchase equal numbers of locally and foreign-made AI chips for their new data centers.

According to the outlet, the directive hasn't been strictly enforced, and it is unclear if any penalties will be imposed for non-compliant companies.

Representatives for China's National Development and Reforms Commissions, its Ministry of Industry and Information Technology and the four tech giants didn't respond to The Information's requests for comments. Nvidia declined to comment on The Information's reporting too.

The Chinese government's new directive is a huge downer for Nvidia, who has been working hard to come up with specialized offerings for the Chinese market.

Nvidia is developing three new GPUs for China — the H20, L20, and L2. All three chips are designed to meet the restrictions under prevailing US sanction rules, Reuters reported in January, citing two people familiar with the matter.

China is a critical market and key revenue generator for Nvidia. The country accounted for 19% of Nvidia's data center chip revenue in fiscal year 2023. In February, Nvidia CFO Colette Kress told investors that US export restrictions caused China's revenue share to plunge to a "mid-single-digit percentage."

"If China can't buy from the United States, they'll just build it themselves. So the US has to be careful. China is a very important market for the technology industry," Nvidia CEO Jensen Huang told the Financial Times in May 2023.

But Nvidia's hard work could very well unravel with these new developments.

"If we are deprived of the Chinese market, we don't have a contingency for that," Huang said in the same interview with the FT. "There is no other China, there is only one China."

A spokesperson for Nvidia declined to comment when approached by BI.

Nvidia's travails highlights the immense challenges faced by companies that are caught between the geopolitical headwinds of US-China tensions.

Cupertino-based tech giant Apple, for instance, has been working to diversify its supply chains away from China.

Besides banking on India to make its iPhones, Apple has invested nearly $16 billion in investments in Vietnamese suppliers, Bloomberg reported in April, citing a statement it obtained.

"We are rapidly approaching what we call a 'two tech stack divide,' where in essence, each country, the US and China, are effectively walling off or ring-fencing their tech stacks from each other," TPW Advisory founder, Jay Pelosky told BI's Yuheng Zhan. 

Representatives for China's Ministry of Industry and Information Technology, Alibaba, Baidu, ByteDance, and Tencent didn't immediately respond to requests for comment from BI sent outside regular business hours.