China's AI Chip Industry Surges Amid Nvidia Setbacks and Self-Reliance Push

China's AI Chip Leader Cambricon Jumps 20% on Self-Reliance Bets

Cambricon Technologies Corp., China's best-performing stock in 2024, has more than doubled from a July low as momentum builds around the country's push for semiconductor self-sufficiency. Shares of the AI chip maker soared as much as 20% on Friday, fueled by a report that Nvidia Corp. had asked suppliers to halt production related to its H20 chips. That intensified investor bets on Chinese AI chipmakers that would be expected to serve as alternative suppliers. The Shanghai-listed stock has gained about 125% since the July 10 low, making it the top performer on the benchmark CSI 300 index in the period.

Chinese Chip Stocks Get Boost From Made-in-China Hopes

Chinese semiconductor stocks are getting a boost from hopes that more of the chips used in China will be made locally. Shares of companies across the semiconductor supply chain were leading gains in Hong Kong and China on Friday. Analysts said the gains were helped by speculation that U.S. chipmaking powerhouse Nvidia could suspend production of its H20 chip in China, potentially opening space for Chinese firms to step in. In Hong Kong, shares of Semiconductor Manufacturing International Corp.-- China's largest contract chip maker--rose 11%. China's No. 2 foundry, Hua Hong Semiconductor, was up 17%. In Shanghai, Cambricon Technologies, seen as a challenger to Nvidia in the Chinese AI chip market, advanced 20%--the daily maximum permitted in Shanghai--as did Hygon Information Technology. The Information on Thursday reported that Nvidia had told some component suppliers to halt production of the H20 chips. "We constantly manage our supply chain to address market conditions," an Nvidia spokesperson said in response to a request for comment. In late July, Chinese regulators summoned Nvidia representatives to discuss alleged "backdoor" security risks around the H20 chips, according to an official notice. The Wall Street Journal reported that authorities have told Nvidia's biggest Chinese customers not to buy H20s until the U.S. company clears the review. The absence of H20 would create "a void for domestic chipmakers to fill," Morningstar analyst Phelix Lee said Friday. In that scenario, both foundries like SMIC and chip designers like Cambricon could get more support from Beijing given the urgency to replace the supply of advanced chips, Lee said. If demand is strong enough, then local fabs can ramp up capacity despite low yields, Bernstein analyst Qingyuan Lin said. The H20 chip is caught in the crosshairs of U.S.-China trade tensions and the broader technology rivalry. China has ramped up efforts toward local production in recent years, aiming to be self-reliant as the U.S. tightens restrictions on access to advanced tech, but analysts say it still needs Nvidia's chips until its own alternatives are available. The result of China's investigation into the "backdoor" issue could decide the H20's fate, said Lin at Bernstein. There's no guarantee that Chinese-made chips will work as well as Nvidia's, said Morningstar's Lee, likening the localization push as efforts to "brute forcing its way through" complex computations. Another possibility is that Nvidia will design a new chip that satisfies both the U.S. and China, said Lee. Nvidia's spokesperson said that "China won't rely on American chips for government operations, just like the U.S. government would not rely on chips from China." "However, allowing U.S. chips for beneficial commercial business use is good for everyone," the spokesperson added. Another tailwind for chip stocks Friday came from Chinese AI startup DeepSeek, analysts said. DeepSeek, which made waves with a breakthrough low-cost AI model earlier this year, hinted in a technical paper that the next generation of AI chips made by Chinese companies is coming soon. The company said that its latest large-language model uses a new format designed for next-gen homegrown chips. That seems to suggest that it will use more China-made chips for future model development, China Securities analysts said in a note.