Trump admin. plans to ease chip curbs: Here's the impact on Nvidia and other chipmakers

Key Concepts:

• Rescinding Biden-era chip curbs
• Direct negotiations with countries regarding chip sales
• Three-tiered system of chip restrictions (US/Japan/Western Europe, Tier 2 countries, China/Russia)
• Quotas/caps on chip sales to Tier 2 countries
• Impact on Nvidia's revenue and R&D spending
• Potential for trade negotiations influencing chip sales
• Government intervention vs. market-driven allocation
• Uncertainty in policy impacting long-term planning and investment

1. Trump Administration's Policy Shift:

• The Trump administration plans to rescind some Biden-era chip curbs on broad tiers of countries.
• The new rules would focus on direct negotiations with countries regarding chip sales.
• Nvidia welcomes the administration's leadership and new direction on AI policy.
• Nvidia believes this change presents a "once in a generation opportunity" for America to lead the next industrial revolution.

2. The Old Biden-Era Rule:

• The old rule had three tiers:
  • Tier 1: US, Japan, Western Europe - no restrictions.
  • Tier 3: China, Russia - full restrictions.
  • Tier 2: Restrictions and quotas on chip sales.
• The Biden-era rule imposed quotas or caps on the number of chips that could be sold to each company in Tier 2 countries.
• This was considered "somewhat unworkable" due to arbitrary limits.

3. Impact on Nvidia and China:

• Nvidia had previously anticipated a $5 billion writedown of chips targeted for China due to the restrictions.
• China accounted for 10-15% of Nvidia's total data center revenue.
• This revenue is now considered "gone," but the situation is now known and accounted for.
• The hope is that the new rules will prevent further revenue losses.

4. Concerns Regarding the New Policy:

• The primary concern is whether the new policy will allow Nvidia and other companies to ship chips to legitimate data centers in Tier 2 countries (e.g., Malaysia, Poland).
• The goal should be to prevent chips from reaching China via third-party countries without cutting off legitimate data center business.
• The "devil's in the details" regarding the specifics of the new policy.

5. Potential for Government Intervention and Trade Negotiations:

• There is a risk that individual negotiations with countries could be influenced by trade considerations.
• The analyst fears scenarios where chip sales are tied to unrelated demands from the US government (e.g., "If you give us X, Y, and Z, then we'll allow you to have more AI chips").
• This raises concerns about the administration "picking winners and losers" among countries and companies.
• Government intervention is considered less efficient than market-driven allocation.

6. Impact on R&D and Investment:

• Uncertainty in policy makes it difficult for companies to plan long-term R&D and capital expenditures (CapEx).
• The China restrictions serve as an example: Nvidia invested millions in R&D to design chips specifically for China, only to have the rules change and render those chips unsellable.
• Companies need a degree of certainty regarding policy before investing in R&D and manufacturing facilities.
• The chips designed for China were designed to have the same capabilities as what China could do internally via Huawei.

7. Conclusion:

• The rescinding of Biden-era chip curbs and the shift towards direct negotiations could be a positive development for Nvidia and other chip companies.
• However, the success of the new policy hinges on the details and whether it allows for legitimate business in Tier 2 countries without enabling China to circumvent restrictions.
• The potential for government intervention and trade negotiations to influence chip sales raises concerns about market efficiency and long-term planning.
• Policy certainty is crucial for companies to make informed decisions about R&D and investment.