China would be hit hard by Jensen Huang’s fall from grace

• By Catherine Thorbecke / Bloomberg Opinion

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Jensen Huang’s (黃仁勳) resignation from Nvidia Corp may give the company he has led for three decades a path out of the mess he created. For China’s artificial intelligence (AI) industry, the fallout is just beginning.

The spiraling crisis goes far beyond the sad and stunning scandal of alleged affairs with a Chinese spy and a direct report. Washington is going to demand answers over how much he and his company knew about their products being used in China. And none of it looks good.

Huang’s relationship with the suspected espionage asset Alice Huang (黃樂) reportedly helped facilitate Chinese companies’ access to at least US$7.5 billion worth of Nvidia chips, according to The Information. Her company, Megaspeed International, is the single largest buyer in Southeast Asia, and has raised red flags for more than a year. Nvidia allegedly intervened in a US investigation into Megaspeed (both have denied acting improperly). All of this gives major ammunition to China hawks in the US. Expect export controls to tighten sharply — including on the approved and legal routes that Chinese companies have had to access Nvidia hardware.

At one level, is this not what Beijing wanted all along? Officials have certainly signaled their desire to accelerate the shift to homegrown alternatives, including through the government’s own restrictions on approved Nvidia products re-entering the market. However, technocrats cannot will mass production of cutting-edge AI processors into existence. That takes time. The gray market and loopholes cushioned the blow of a hard cutoff. This reliance is still apparent, indicated in reports that Beijing-based AI champion Moonshot, maker of breakout model Kimi K3, accessed a trove of Nvidia’s most advanced chips this summer. Huawei Technologies Co, the company’s chief Chinese rival, has said it cannot meet demand at home.

If anything, there is a lesson on the worst possible way to execute export controls. Washington imposed enough aggression to light a fire under Beijing and Huawei to rally an all-out effort for local alternatives, while leaving enough work-arounds to blunt the transition. If that pipeline closes, the suffering is going to be severe even if the long-term ambitions remain unchanged.

For Chinese AI firms caught in the middle, threats of new restrictions could not come at a worse time. Despite rapid technical advances, many are still struggling to compete with each other, let alone find a path to profits. The industry has accomplished impressive breakthroughs, but the squeeze from all sides is tightening just as it needs to prove they can pay. As Nvidia’s board met to discuss their CEO’s fate on Thursday, Chinese AI stocks tumbled.

Chips are not the only problem. In addition to being an ardent advocate of selling hardware to China, Huang was one of Silicon Valley’s most powerful champions of open models, where Chinese firms have concentrated their bets.

In July, he used his first-ever X post to rally the US tech industry behind open-weight AI after fears mounted of a US ban on Chinese offerings. He has defended distillation, or training one model on the outputs of another, as a “widely used technique” and “competition.” The distillation debate has become central to efforts to restrict Chinese open models in the US amid accusations from companies and lawmakers that Chinese firms are shoplifting US AI progress. Without one of the industry’s most influential voices speaking up for distillation and open models more broadly, pressure for a crackdown could grow. This would hurt the US startups and developers who rely on these Chinese models for cheap, customizable tools and even cybersecurity defenses. Over time, it could concentrate power among elite Silicon Valley AI labs. However, the immediate pain would be felt by Chinese AI outfits that just lost their biggest cheerleader.

And remember when we were mostly preoccupied with AI killing us all? This scandal broke mere weeks before US-China AI safety talks were set to take place, extinguishing already faint hopes for cooperation on that front. The Nvidia crisis could deepen mistrust and reduce visibility on both sides. The result could be a blind and reckless race for dominance.

If that sounds like the Cold War, look at this throwback espionage case. Huang’s legacy had seemed to be one of building improbable bridges in the hope that the AI revolution did not have to be so cleanly divided in two. Now, it may be about how quickly one man can incinerate those bridges. And China might find itself stranded on the other side.

Catherine Thorbecke is a Bloomberg Opinion columnist covering Asia tech. Previously she was a tech reporter at CNN and ABC News. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.