Market Analysis

Nvidia’s H20 Chip Sees Surge in Demand as DeepSeek AI Gains Traction in China

Amos Simanungkalit · 25 Feb18.5K Views

Image Credit: Reuters

Chinese companies are significantly increasing their orders for Nvidia's H20 AI chip, driven by strong demand for DeepSeek's cost-effective AI models, according to six sources familiar with the matter.

This surge in orders highlights Nvidia's continued dominance in the AI chip market and counters concerns that DeepSeek's entry might dampen AI chip demand. Major Chinese tech firms like Tencent, Alibaba, and ByteDance have notably raised their H20 chip orders, which are tailored for the Chinese market due to U.S. export restrictions. This trend started after DeepSeek, a Chinese AI startup, gained global attention last month.

In addition to their own need for AI chips, these companies provide cloud computing services, giving others access to AI tools. Smaller Chinese businesses, including those in healthcare and education, are also purchasing servers equipped with DeepSeek models and Nvidia's H20 chips, marking a shift from the previous trend where only large financial and telecom companies could afford such systems, according to a source at a major Chinese server maker.

The U.S. government is reportedly considering imposing further restrictions on the sale of Nvidia's H20 chip to China. While these potential restrictions may influence the spike in orders, DeepSeek's success is also a key factor.

While Nvidia declined to disclose specific demand figures, it reiterated that its products "win on merit in a competitive field." The company is set to announce its quarterly earnings soon.

DeepSeek's AI models, which excel at "inference" (making conclusions) rather than relying solely on raw processing power, are significantly cheaper than Western alternatives, making them appealing for various sectors. This shift has fueled an increased demand for AI chips optimized for inference, despite initial doubts about AI computing power needs.

Although the introduction of DeepSeek’s models initially triggered a decline in AI stock prices, Nvidia has since recovered most of its losses and is only down about 3% year-to-date. While Chinese chipmakers like Huawei are expected to benefit from DeepSeek's models, Nvidia's H20 chip remains the go-to standard in China.

Analysts predict Nvidia will ship around 1 million H20 chips in 2024, bringing in more than $12 billion in revenue. The H20 is the only chip Nvidia is legally allowed to sell in China, following the latest round of U.S. export restrictions that began in October 2023. These restrictions aim to limit China's access to advanced technologies that could enhance its military capabilities.

Several Chinese companies, including Tencent and Great Wall Motors, have announced plans to integrate DeepSeek’s models into their services, with Tencent testing the models in its popular WeChat app and Great Wall using them in connected vehicles.