Nvidia, AMD Deal Sets Bad Precedent: Bernstein’s Rasgon

Key Concepts

• US-China trade relations
• Export licenses for NVIDIA and AMD in China
• Quid pro quo arrangement (potential 15% "export tax")
• Impact of regulations on semiconductor sales in China
• Competitive landscape with local Chinese alternatives (e.g., Huawei)
• NVIDIA and AMD's roadmaps for China
• Lisa Su (AMD CEO) and Jensen Huang (NVIDIA CEO)'s engagement with the US government

1. Potential Quid Pro Quo and its Implications

• The discussion starts with the idea of a potential "quid pro quo" arrangement where NVIDIA and AMD might be paying a 15% fee in exchange for export licenses to sell their products in China.
• The initial reaction is that "85% looks better than 0%" in terms of revenue, but the precedent is concerning.
• The concern is that this could be a "slippery slope," leading to similar demands for other products or companies beyond AI.
• The argument is made that it's better for both the companies and the US to be able to compete in the Chinese market rather than handing it over to local companies like Huawei.
• The question is raised: "Why does it stop here? Why is this tough with China A.I. Why? Why not other products, other companies?"

2. Revenue Booking and Supply Chain Restart

• The reporting suggests a 15% fee in exchange for an export license.
• Before revenue can be booked, NVIDIA and AMD need to restart their supply chains.
• Both companies have "work in progress" that was halted, and restarting it will take time.
• Starting new wafers from the beginning of the process could take six to nine months.
• The ramp-up of sales will be gradual.

3. Long-Term Access to China and Competitive Landscape

• China's sentiment towards the US is a factor in the long-term access for AMD and NVIDIA.
• NVIDIA has a roadmap with new products that are supposedly already compliant and don't require a license. It is unclear if they would have to pay the 15% fee on these products.
• AMD's future China roadmaps are less clear.
• The thresholds for requiring licenses are "fairly punitive."
• China has local products with better performance than what NVIDIA and AMD are allowed to sell there.
• NVIDIA's advantage is its ecosystem, which the US doesn't want to shut off to prevent Chinese developers from coalescing around local alternatives.
• Over time, the gap between what NVIDIA and AMD can sell in China versus the rest of the world will grow.
• The Chinese will continue to improve the performance of their own products.
• China will be a competitive market, and NVIDIA and AMD's sales will be "impaired" compared to what they could sell without constraints.

4. AMD CEO Lisa Su's Perspective

• 90 days prior, AMD did not expect to be able to ship to China due to regulations.
• The current administration is seen as "very open to trying to find the right balance between national security and ensuring that we have U.S. air technologies proliferated across the world."

5. CEO Engagement with the US Government

• Jensen Huang (NVIDIA CEO) is known for his relationship with the president.
• Lisa Su (AMD CEO) is also building relationships in Washington D.C.
• AMD's sales in Asia were $5 billion last year, while NVIDIA's were $100 billion.
• The China ban cost NVIDIA $1.5 billion this year.
• Lisa Su is seen as doing a good job in building her case with the administration and building a relationship with Trump.
• She has been visible and present in Washington.

6. Notable Quotes

• "85% looks better than 0%" - referring to the potential revenue from selling in China even with the 15% fee.
• "Why does it stop here? Why is this tough with China A.I. Why? Why not other products, other companies?" - questioning the logic and potential expansion of the quid pro quo arrangement.
• "China actually does have local products that have better performance than what both NVIDIA and and you're actually allowed to sell there" - highlighting the increasing competition from local Chinese companies.

7. Synthesis/Conclusion

The discussion revolves around the complex situation of US semiconductor companies, particularly NVIDIA and AMD, navigating export restrictions and potential "quid pro quo" arrangements to access the Chinese market. While selling in China is seen as beneficial, the long-term implications of these arrangements and the increasing competition from local Chinese companies are concerns. The engagement of CEOs like Lisa Su and Jensen Huang with the US government is crucial in finding a balance between national security and maintaining a presence in the global market. The future success of these companies in China will depend on their ability to adapt to the evolving regulatory landscape and compete with local alternatives.