This is telling of how well Nvidia and AMD played their cards with their recent $78 billion agreement with the US government. This deal gives them the breathing room to restart their AI chip exports to China after releasing an agreed upon share of their sales revenues. The previous administration under former President Donald Trump designed this deal. Most importantly, it delivers for both companies business certainty in their operations in China, which is absolutely vital for their future expansion in the booming semiconductor market.
According to this agreement, Nvidia and AMD will remit 15% of their earnings from chip sales completed in China. These payments will continue to be made directly to the US Treasury. This revenue-sharing model creates a novel precedent in the international relations of trade. It is particularly important in the strategic semiconductor sector, a key driver in AI, consumer electronics, and military applications.
The deal is especially notable given that both companies have recently come under fire for security concerns around their chips. China has complained to the U.N., warning of possible weaknesses, specifically about Nvidia’s H20 chip. Chinese regulators have requested more information in these areas. In retaliation, Nvidia has rejected all assertions of semiconductors having backdoors or tracking threats.
In fact, Nvidia has gone so far as to design its new H20 chip to comply with export requirements to China. AMD’s MI308 chip has obtained similar export licenses. As a result, both firms can now proceed with renewed certainty through the complicated regulatory gauntlet. This modification has lifted prior impediments that constrained their capacity to retail goods in one of many world’s largest know-how markets.
This scheme offers up-front, lucrative benefits for Nvidia and AMD. Analysts view the agreement as a “net positive.” They would argue that 85% of revenue secured is much preferable to losing access to the Chinese market altogether. Ben Barringer, an analyst, remarked on the expected implications of the deal:
“From an investor perspective, it’s still a net positive; 85% of the revenue is better than zero.”
The revenue-sharing requirement provoked sharp debate. Manufacturers such as Nvidia and AMD should be planning to increase their prices by at least 15% to cover this new “tax” for being allowed to operate in China. Or at least Barringer suggested that this was a likely price adjustment to come. In the end, it’s much better for our national security for these companies to remain in the market than to cede it to competitors like Huawei.
The company has stated:
“We follow rules the U.S. government sets for our participation in worldwide markets. While we haven’t shipped H20 to China for months, we hope export control rules will let America compete in China and worldwide.”
There is worry about the overall long-term effects of this structure. Critics claim that it would undercut some of the very security rationales for which the respective agencies were created and serve to restrict exports to China. An article from the Global Times noted:
“This approach means that the US government has repudiated its original security justification to pressure US chip makers to secure export licenses to China through economic leverage.”
Industry experts and inside observers alike are scratching their heads over the deal. For that reason, they criticize its broader use case for other sectors in the technology landscape. Nick Patience commented on this aspect:
“I don’t anticipate it extending to other sectors that are just as important to the U.S. economy like software and services.”
For China, this is a double-edged sword. With powerful new chips, the company is racing to lead the pack in cutting-edge artificial intelligence. Their revenue-sharing arrangement could lead to increased costs and undermine its technology development programs. Neil Shah pointed out:
“For China, it is a conundrum as they need those chips to advance their AI ambitions but also the fee to the US government could make it costlier.”
The semiconductor industry is inherently complex, and experts like George Chen suggest that this pay-to-play tactic may work well for Nvidia and AMD, given the critical nature of obtaining export approval from the US government.
As this settlement is played out, the impact on Nvidia and AMD’s business practices in the future is uncertain. To be clear, this is an extremely hopeful development in the deepening and damaging US-China trade war. The technology sector, and especially the semiconductor industry, is growing in importance to U.S. national security and economic competitiveness.