China Urges Companies Not to Use Nvidia’s H20 Chips

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0:34Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. Next week on Leaders with me, Francine Lacqua. I speak with Harvard Business School professor Linda Hill about what CEOs need to know to be successful. It really is not about them. It is about the organization. About how to lead in the age of AI. That requires a lot of confidence. And why great leaders embrace conflict. You need to amplify difference. Listen and watch Leaders, the podcast with me, Francine Lacroix, on Bloomberg TV or wherever you get your podcasts.

1:17Bloomberg Audio Studios. Podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right. I have to be honest with you. I'm having a hard time keeping up with this whole China, NVIDIA, AMD. Tell me about it. The 15 % tariffs. Can the chips, are they welcome in China? Are they not? Can they sell them in China? Let's go to Ed Ludlow. He's on top of this stuff. Ed Lovell, Bloomberg Technology co-host.

1:56He's over in London right now. Hey, Ed, what's the latest here? China is, I guess they're urging firms not to use NVIDIA's H20 chip. I thought things were kind of thawing out there. Yeah, this is fast moving. This is, you know, the only appropriate time of the phrase market whipsaw that I've been able to use to date in this context. The information has reported that China's internet regulator has ordered firm, ordered specific technology companies, Alibaba, Tencent among them, to stop placing orders of NVIDIA's H20. The H20 is the China-specific chip that had had performance engineered out of it that was subject to export control.

2:38What we knew, by the way, as of Monday morning, was that NVIDIA had not in any recent months shipped any H20s to China anyway. But the problem with this latest report, which has been in the last hour or so, is that it's a much more extreme move by China than what Bloomberg had reported overnight, which was basically an advisory. Chinese authorities had strongly recommended to various Chinese technology companies not to use the H20 in particular, as well as one chip from AMD. But the market's reacting. That's all that matters, right? Right. So we are seeing shares of Nvidia down a touch, about eight-tenths of a percent here.

3:19Can you just speak a bit more about what are the implications here for NVIDIA in particular? Yeah, so the state of play is really important to understand. NVIDIA's H20 chip is not the best chip that a Chinese technology company can buy. Huawei, which is essentially China's domestic champion, has actually several generations of chip that have better performance and power, not just more than the H20, but of NVIDIA's H200 chip, which until very recently was the sort of cutting-edge generation accelerator that many American companies used. They've since moved on to a later generation called Blackwell that's not available in China.

3:58The president, as you know, confirmed yesterday, about 24 hours ago, that he had cut a deal, an ad hoc arrangement, a quid pro quo, with both NVIDIA and AMD, where he would allow them to export these China-specific chips with lower power and performance in exchange for 15 % of the revenues gained from that market for Chinese AI accelerators. The problem is, what are we interpreting this as? Is China responding in this way because it's a tactic in the broader negotiations between the United States and China of trade overall? That is what the analyst community thinks. Or is China protecting its own domestic industry for AI accelerators, making sure that Chinese tech companies buy a Chinese AI chip.

4:43Both are possible. The main conclusion of cross both is that now Wall Street has to reassess how likely it is that NVIDIA and AMD do business in that market, at least in the near term. And Ed, I guess if I were an analyst or investor, I'd be saying, I think I have to factor into my model that the intro would be no. I can't imagine some of the advanced chips being allowed into China. It just doesn't feel like the political winds are blowing that way at this point. You know, there are certain sections of Wall Street, the most bullish analysts, that NVIDIA's next quarter coming up is the fiscal second quarter.

5:19Some people saw them doing$7 billion of sales in China on the basis that, OK, president said it's cool. Even if you have to pay a 15 percent so-called export tax and there are questions about how constitutional that rule would be, which we can get into, sure. It's still better to have 85 percent access to a market than zero. So everyone was like, they can do this quickly. Like, just turn the tap back on. I would wager, I think I said this yesterday anyway, but 24 hours on, given the news flow, they're probably reassessing their model down and down and down closer towards zero. Ed, we of course know that China is a major player here when we think about NVIDIA, but NVIDIA also holds a significant market share in the AI chip sector, about 95%.

6:01So tell us a bit how big of a deal this most recent news is, And how does it kind of change how you look ahead of these earnings that we're going to be getting coming soon? Well, the thing is, and the reason why, you know, Paul and I back and forth over the sell side over the last couple of days is important is there's been zero business for NVIDIA in China, at least since the turn of the year. You know, they wrote down five billion dollars worth of chips that were specifically made for that market and they haven't sent any of them there. Let's say they're just sitting in a warehouse somewhere.

6:32They probably are. However, when you think about the context of AI development, the number of researchers and companies working on models, about half of the world's activity is happening in China. It was an important end market. Will we return? Stay with us. More from Bloomberg Intelligence coming up after this. When your options are limited, so are your opportunities. At Cibo, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next.

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7:42Catch up on the conversations you miss during the day. Subscribe to the Bloomberg Business Week Daily Podcast on Apple, Spotify, or anywhere you listen. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Looking at the cannabis company Tilray Brands, it's a name we've been talking about a little bit this morning. Stock's up about 9 percent, 10 percent here. That's the good news. The bad news is it's down about 25 percent year to date.

8:18And I think it's up on part looking at some of the Bloomberg reporting here. President Trump made some comments that maybe he'd be open to reclassifying cannabis, maybe as a less restrictive drug, their substance. So I want to bring in Ken Shea. He covers all this stuff for Bloomberg Intelligence, senior consumer products analyst for Bloomberg Intelligence. Ken, talk to us about the comments that President Trump made as it relates to the cannabis industry and how impactful could that be? Yeah, hi, Paul. Sure. So what I understand is President Trump over the weekend made some comments with regard to marijuana rescheduling in the U.S., a topic that's been very top of mind among this industry for a while.

8:59And apparently he said that the administration was going to be looking into it. Now, that's really a long way between that and actual rescheduling. But nevertheless, this beaten down industry and the close observers to it took that as a dose of over, you know, overdue good news. I mean, these stocks, as you alluded to before, are down over 50 % or so, many of the big ones. So this hint of good news has led to a rally yesterday and today. But I would advise observers to temper their enthusiasm because, as I mentioned, it's a long process between looking into it and actual rescheduling it. And it's even further to legalize it, which would really bestow the greatest benefits of all.

9:47So you mentioned how we've seen a lot of these stocks really taking a beating this year. Can you just kind of contextualize here for our listeners what has created this lag? Yeah, sure. So the market really had turned negative for the last couple of years, actually, with a lack of progress made on federal reform of this industry. Many states have taken it upon themselves to legalize either at the medical or adult use level. I mean, some 40 states now, talking about a vast majority of states have now legal cannabis in some form. So a lot of the industry players and the market thought it's just a matter of time that the federal government would retire these really old, you know, the treaties that require cannabis to be a Schedule I drug.

10:37And that really puts the handcuffs on this industry to do a lot of good things in terms of business. You know, consumer product companies in general have the benefits of the economies of scale because they have interstate commerce. They can advertise. They're not hurt by onerous taxes, which these companies are subject to. So a lot of barriers facing this industry still, given their current status. And so it really, prior to these comments over the weekend, I think there's really been a sense of throwing the towel in among investors with this group. And so that's why you're seeing the magnification of response to this news today.

11:19So Ken, if the majority of states have legalized cannabis, what's the problem with the federal government coming around and doing the same? Well, the biggest thing, Paul, is because this is a treaty that was signed back in the 70s in the Nixon administration that, again, it's part of the anti-drug wars back then. They set this in a stone, basically, and only an act of Congress can change that treaty to no longer include marijuana, cannabis, you know, as a Schedule I drug. So I guess, you know, Congress doesn't seem to be willing to act. I mean, that's the biggest thing, the biggest blockade to legalization.

12:00Kind of the shortcut, reclassification under the Controlled Substances Act. A lot of the industry is saying, look, you're putting us at Schedule 1, which is the same level as ecstasy and fentanyl and all these harmful things. And the definition for Schedule 1 is there's no proven medical value. Well, that kind of contradicts the own FDA's decision a few years ago when it approved a cannabis drug called Epidiolex, which is used to treat seizures in rare cases for epilepsy. So clearly, this is a medical use, and it doesn't belong to Schedule 1. If it was rescheduled to 3, it would still remain illegal unless that treaties are changed.

12:41it could at least alleviate something called 280E in a tax code, which basically says, look, if you're in the drug business, maybe a bad thing, but we still want your taxes. And so they don't allow these companies, these cannabis companies, to deduct ordinary business expenses like rent, salary, marketing. And so as you can imagine, the taxation hit to these companies is just dramatic. And that's really their biggest problem. So there was a time back in the early 1920s when cigarettes were illegal. And then, of course, we know now when we look at the industry, the tobacco industry globally, it's a multibillion dollar industry.

13:18So if we think about cannabis stocks and a lot of these companies here, what's the bull case? Well, the bull case is that at some point it gets rescheduled or legalized. And that's a long, long term. I'm going to remember the market as a discounting mechanism is looking well into the future. Now, if you're a real bull, you'll look well into the future. These companies at the gross margin line are very profitable. It's about 40%, 50%, 60 % gross margins. That's a pretty good business. But it's when you get below that, they really get hurt, particularly the taxation line. So if you're a bull in this industry, you say, you know what?

13:56These are pretty good companies. You need a license to compete. So there's natural barriers to entry. We know there's a demand for this product. It's been around for a long time. So, you know, if they could just get the regulation right, this could be a pretty good business. Can you also cover the big tobacco companies? How are they? How have they been impacted or may they be impacted with the various tariff discussions that are out there? Well, the U.S. tobacco industry is really a domestic business. You know, the big guys, you know, Altria, they source virtually all their tobacco domestically for domestic use.

14:36So their only exposure to the tariffs is really very small. Some of the materials they use, like their smokeless tobacco cans, tin, metals, things like that that they, you know, get from suppliers offshore. And there could be indirect problems. I mean, you know, other suppliers could raise prices in a small way for other inputs. But by and large, they can skirt this problem. And it's not really an issue for the U.S. tobacco industry. Quickly hopping off of that question, I'm going to ask the same of cannabis. Is that more a domestic industry here? Any tariff concerns? No tariffs concern. Matter of fact, it's illegal to import cannabis into the U.S.

15:18So it would only be to the extent where the vaporizers and the electronic goods and the, you know, the ancillary products that are used with cannabis are subject to those import tariffs. But the the plant itself, there's no tariff issue. Stay with us. More from Bloomberg Intelligence coming up after this. Hi, I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you conversations with the people who shape markets, investing, and business. I speak with CEOs, Nobel laureates, market innovators, and legendary investors. Whether you own stocks, bonds, real estate, commodities, even crypto, these are discussions you absolutely need to hear.

16:02Subscribe to the Masters in Business podcast on Apple, Spotify, or anywhere you listen. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Looking at this market, we still got some green on the screen here today. I want to check in with Anurag Rana, Bloomberg Intelligence Technology Analyst. Anurag, I seem to remember something in the zeitgeist, as Tom Keen would say, Elon Musk not real happy with Apple and maybe even vice versa.

16:39I'm not sure. What's going on there? Yeah, if you go back a few years ago, you know, Elon made a big deal about the fee that they have to pay for, you know, X subscriber, the 30 percent or so. I mean, there was a visible argument. But, you know, in a few days he was seen, you know, walking around with Tim Cook and the campus and, you know, the whole thing. I mean, today's complaint was a bit odd because apps on the App Store don't go up just because Apple wants to do it that way. I mean, they go up because users are downloading one app over the other. In fact, the other day, I remember the perplexity CEO was saying that in India App Store, you know, his app is above ChatGPT and so forth.

17:19So, I mean, he's basically complaining that, you know, XAI is not getting the same love as chat GPT is, which to me is understandable given, you know, where the presence of that is in terms of the ecosystem and the users. So I think that's really, you know, some argument going there. But I think it's just news. Frankly, there's not much to it. I mean, so you mentioned not much to it. So where do you go from here? I mean, what steps forward would he need to make to see any changes here? He has to go prove the world that his Grok model is better than Chad GPT and their models. They just launched a brand new model and they have to go figure out whether it's better than that.

17:58And he has to go and sell that to either enterprises or the consumer application and have the same number of users. I mean, you just can't say that my product is not doing better because somebody else is not giving it the same amount of love. Even Google's Model Gemini doesn't have that level of user base right now. I mean, the first mover advantage is OpenAI and ChatGPT, and the user growth has just been phenomenal on that end. And I don't think I know anybody at this time who's not using ChatGPT on their phone or any other device that they have. You can look at me. I don't use it. Let's talk about Apple.

18:38I see the stock having this nice move here during the month of August here. Is this a sense that maybe they'll do something to maybe get a little bit more in the game as it relates to AI? I think we discussed this a few months ago when, you know, the president came out and criticized Tim Cook for building phones in India. And, you know, the stock really took a hit at that point. But I think Tim Cook did the right thing. He announced the big plan. He went to the White House. He, you know, essentially gave President Trump an assurance that he is working very hard to bring whatever he can in the U.S.

19:14You know, this was just glass at one point. But I think that really made a huge pivot. The president was extremely complimentary of the stuff that he's doing. So, I mean, since then, you can see stocks been at a tear. So there was danger that, you know, there could be additional surcharge on Apple or anything out there. So you don't want to be against the president at this point. So I think Apple's done a good job of managing that. Now the question is whether iPhone 17 will deliver. We've heard it's got a really cool new phone coming out. So I think things are looking good for Apple from that point, but I'm still waiting for one particular element, that is the Google case, and whether Apple gets to keep the, you know, partially or somewhat of the payment that it gets from Google.

19:55Stay with us. More from Bloomberg Intelligence coming up after this. Hi, I'm Carol Masser with a helpful tip to keep you plugged in throughout the market day. Subscribe to the Stock Movers Report from Bloomberg. These are short audio episodes, five minutes or less, delivered right to your podcast feed. Stock Movers fills you in on the day's winners and losers on Wall Street and tells you about the news and data that's driving those gains and losses. Why spend all day watching tickers scroll across your screen? Subscribe to Stock Movers today on Apple, Spotify, or anywhere else you listen. you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple carplay and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube next guest has a fascinating story out bloomberg business week cover story treasury secretary scott besant the u.s treasury secretary has the an ear of an impulsive president and nervous investors worldwide.

20:58Hope it stays that way. And Eric Schatzker has an exclusive interview. Eric Schatzker, Bloomberg New Economy Editorial Director, joins us live here in our Bloomberg Interactive Broker Studio. Eric, you sat down with Scott Besson for an extended period of time. What were some of your takeaways there? Gosh, well, first of all, the man is unbelievably busy. Yeah, I can imagine. Spent a day at the Treasury Department with our colleague Dan Flatley. And to observe how much he gets done in the course of a day, including spending an extended amount of time with us, gives you a window into the life of the Treasury Secretary in the Trump administration.

21:31And it's important to emphasize in the Trump administration, because this particular Treasury Secretary has been given a whole host of responsibilities that go beyond that of the typical Treasury Secretary. We know that the Treasury Secretary in any administration is involved in tax policy, is involved in economic sanctions, is involved in financial regulation and the like. But President Trump has tasked Scott Besson with trade negotiations, with striking, and not just any old trade negotiations. China, perhaps the most difficult trade negotiation of all. Japan, which was successful. South Korea, which was successful.

22:04Indonesia, the list goes on. He's also the acting IRS commissioner. He also crafted the deal that the very novel and original deal that the United States struck with Ukraine for a share of that country's mineral resource wealth back in April. These are not. And furthermore, I have to add, he was instrumental in getting the one big, beautiful bill through opposition in both among Republicans in both the House and the Senate in order to meet the president's self-imposed July 4th deadline. So Scott Besson has taken on way more than your traditional Treasury secretary does. And much of that is because the president himself has asked him to do so.

22:46And it seems as though a lot of people see Besson as really having the president's ear here. And this is a really fantastic story, by the way. What was the most surprising element through your conversation with him? Oh, there are so many surprises. I would say that the thing I didn't fully appreciate and which he spelled out for us and which others spelled out for us is the degree to which this is something he sought after going back many years. Besson told us that he thought about joining the Trump campaign as early as 2016. But at that time, he just started a new hedge fund, Key Square Group, and he didn't feel like he could abandon his employees or abandon his clients.

23:26But what he did do was start to get to know the people close to Trump almost immediately thereafter, starting with Steve Bannon and subsequently Peter Navarro, Stephen Moore, Kevin Hassett, for example, Trump's close economic advisors, Art Laffer. He went down to see Art Laffer in the South, made a pilgrimage of sorts to get Art Laffer's blessing for his ambitions to become Treasury Secretary. And these he didn't make known to Trump until October of 2023. Excuse me, November of 2023. It was almost a six year period in which he was maneuvering to position himself for a shot at Treasury secretary.

24:09And when he saw Trump in that November 2023 meeting at Mar-a-Lago, Trump asked him if he wanted the job, if he was interested in being Fed chair. And Besson said, no, I have another job in mind. Very good. the street Eric gives Scott Besson a fair amount of credit for walking the president back and maybe some of the more difficult tariffs that were initially announced is that a valid point that Scott Besson play a big role in walking the president back a little bit and does he take credit for that or is he kind of demure Besson insists that his job is not to explain things to the president or to advise the president.

24:52It is to present the president with a series of options. Here's path one. Here's path two peers. Here's path three. And I will explain to you where we get if we go down one, if we go down two, or if we go down three. And he leaves it ultimately for Trump to make the decision. That's very, I wouldn't say that's unique to this president, but Trump has a very particular view of his role as a decider in chief in this administration that is perhaps different from what we saw with Biden or with Obama or even going back in history to other Republicans like George W. Bush and maybe even Ronald Reagan.

25:26So Besant does not claim credit for being the de-escalationist, but it is clear talking to people around him and to understanding how the market thinks, market psychology, if you will, which is, you know, one of his areas of expertise, having been a macro hedge fund manager for almost 40 years, that is where it really counts the market trusts him and the market based on its observations draws these conclusions rightly or wrongly does he share any concerns he may have about just getting somehow involved in some of the the crossfire that happens around president trump and getting into president trump's bad graces or just kind of i mean because it's such a perilous those people that fight fly close to president trump historically have done it their own risk well the former vice president so yeah how does he negotiate does he even acknowledge that that's a risk what what i divined from the conversations we had with the treasury secretary is that it there is a formula for success uh in the trump administration and it means making certain compromises if you will with yourself you can come in with your own ideas but it is not your job to advance that agenda.

26:43So you have to make some compromises. If you don't, and Stephen Mnuchin, the former Treasury Secretary, points this out, if you cannot represent the president well, in other words, if you can't get behind what the president wants, the role has no power. What's the point of being in D.C.? What's the point of abandoning a 40-year career in finance where you rose to be one of the most successful hedge fund managers and have, you know, for it all to be worthless, have to have no power. No, you want to be able to wield influence and get things done. And that's very much in the back of Scott Besson's mind.