Market Analysis

Nvidia Hit with $5.5 Billion Charge as U.S. Restricts H20 Chip Sales to China

Mellissa · 16 Apr20.2K Views

Image Credit: CNBC

Nvidia announced on Tuesday that it would incur $5.5 billion in charges after the U.S. government imposed restrictions on exports of its H20 artificial intelligence chip to China, a crucial market for the company's popular chips.

The move is part of the U.S.'s broader strategy to limit the sale of advanced AI chips to China in order to maintain a competitive edge in the global AI race. Following these export controls, Nvidia began designing chips that comply with U.S. regulations while still aiming to meet market demand. However, Nvidia's stock dropped about 6% in after-hours trading following the announcement.

The H20 is Nvidia's most advanced chip available in China and plays a significant role in the company’s strategy to stay involved in China's rapidly expanding AI sector. Chinese tech giants like Tencent, Alibaba, and ByteDance (parent company of TikTok) had been increasing their orders for the H20 chips, driven by rising demand for low-cost AI models, including from the startup DeepSeek.

Though the H20 chip is not as powerful as Nvidia's chips available outside China in terms of training AI models, it remains competitive in the inference phase, where AI models respond to user queries. Inference is becoming an increasingly important segment of the AI chip market. Nvidia CEO Jensen Huang previously stated that the company is well-positioned to lead in this area.

The U.S. government has imposed the export restrictions on the H20, citing concerns that the chip could be used in the construction of supercomputers. Despite its lower computing capabilities compared to other Nvidia chips, the H20's high-speed connectivity with memory and other computing chips makes it potentially useful in supercomputers. Since 2022, the U.S. has restricted the sale of chips intended for use in supercomputers in China.

The Institute for Progress, a nonpartisan think tank, supported the restrictions, claiming that Chinese companies, such as Tencent, have already installed H20 chips in supercomputing facilities, potentially breaching U.S. controls. DeepSeek’s supercomputer, used to train AI models, is also believed to be in violation of these restrictions.

Nvidia confirmed that the U.S. government informed the company on April 9 that the H20 would require a license for export to China, and by April 14, it was clear that the rules would be enforced indefinitely. It is unclear how many licenses, if any, the U.S. government might grant for the export of these chips.

The $5.5 billion charge includes costs associated with inventory, purchase commitments, and related reserves for the H20 chips.

This news follows Nvidia's announcement on Monday that it plans to build AI servers worth up to $500 billion in the U.S. over the next four years, in collaboration with partners like TSMC, as part of the Trump administration's push for local manufacturing.