Huawei AI Chips Contain Advanced Parts from Rivals

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1:18Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Ludlow in San Francisco. This is Bloomberg Tech. Coming up, Huawei's Ascend AI processors were found to contain advanced components from TSMC, Samsung and SK Hynix. This is it works to boost domestic production of AI chips. Plus Rivian is reworking the manual release of its vehicle doors after employees and customers raised concerns over potential safety issues. And Taylor Swift's 12th studio album, The Life of a Showgirl, was just released at midnight here on the East Coast. We're going to discuss the Swifty effect.

1:58and we've both listened. But now we're tuning in to what's happening in the markets because they're a new record high. Nasdaq 100 up once again. We are seeing the best week in all two weeks or so at the moment. We're up 1.6%. Many calling it a hype bubble at the moment. That's what key investors in tech have been calling it. We've had Bezos say, look, it's a bubble, but it's the right kind of bubble. And we're going to dig into what David Solomon talked about in terms of the tech industry more broadly. He's also seeing concerns about some of the valuations. But dig into also where we've seen a little bit more risk sentiment turning to the upside.

2:29And it's in crypto, up 9 % over the course of the week. Ed, we're back in excess of$120 ,000. The moon music has changed despite the government shutdown, Ed. Look, there's a lot moving right now on Friday's session. But I want to look at one of the big movers over the course of the week. It's Samsung and its Korean shares. Four straight weeks of gains, trading at its highest level since early 2021. There has been a lot of detailed reporting about Samsung technology going into all kinds of infrastructure projects. But the big Bloomberg scoop, as you know, is about what Huawei in China is doing with Samsung, particularly in the context of high bandwidth memory.

3:05So let's get to that report, Cara. Another teardown. Let's get to how really the global chip supply is working right now. Bloomberg's Peter Elstrom joins us. So we get inside the latest, greatest chips from Huawei, and there's a lot of other companies that are within them. Yeah, that's right, Caroline. We've had a number of scoops about Huawei and specifically what it's doing in AI chips. And the reason is that they're really the most viable competitor to NVIDIA at this point. They have a lot of backing from the Chinese government in particular, where the Chinese government is not just encouraging them to develop these chips, but also encouraging their customers to actually buy from them and not from other companies too.

3:45So what we found is our reporters found that in this teardown, inside of the Huawei Ascend chips, which are their AI chips, they've been able to use components from TSMC, Samsung, and SK Hynix, as you mentioned. Now, these are components that they're not supposed to have access to under the sanctions that they are under, that Huawei is under through the U.S. government. They're not supposed to have access to these components, but they've been able to get them. And so they've been able to use TSMC dyes. They've been able to use the HBM chips from Samsung and SK Hynix. These are somewhat older HBM components.

4:17It's the HBM generation 2E, which is not the most cutting edge at this point. Now, there's a possibility all the companies that we reached out to said that they've cut off Huawei at this point. They're not doing business with Huawei. But in the past, Huawei was able to buy from them and was able to stockpile from them. So that may be where they got some of these components. So China's Huawei, we found evidence of other nations' technology inside of their server designs, essentially. But the other part of the reporting and the story speaks to China not being able to supply these core components themselves from their own domestic supply chain.

4:58That's a very good point. Yet, if Huawei stockpiled these components in the past and is now using them as they sell into the market, as they sell these Ascend 910C chips into the market, there's a suggestion that they can't get those from domestic supply. And if they can't get them from domestic suppliers right now, that suggests that maybe they're going to run out at some point. So that's one of the concerns about whether they'll continue to be able to sell these chips. As we wrote in another scoop a few days ago, Huawei is trying to ramp up their production right now. They would like to meet even more of the domestic demand.

5:33We anticipate that they're going to be able to actually double production of these 910C chips based on the components that we've seen. So Huawei is making some progress. They are providing some competition. But many of the companies within China would prefer to buy NVIDIA chips if they were able to for political reasons. Bloomberg's Peter Elstrom, who's the executive editor leading our international coverage of tech. Really appreciate the reporting. Thank you very much. For more on wider tech markets, Anna Raffin, CEO and founder of Wealth Management Firm. Grenadilla Advisory joins us now. Let's just start with that reporting, right?

6:05And a lot of the names that were mentioned were ex-US, you know, international names. Some of them have ADRs. But these stories keep coming up about global supply chain and China's reliance on them. I just wonder what you made of it. Yeah, good morning. You know, this reminds me of what happened like a year and a half ago with Deepfake. You know, they said they were able to produce all of this, you know, at a fraction of a cost, but it turned out that it was old NVIDIA chips. So, I mean, in some ways, am I surprised? No. I don't think, you know, AI chips is something you can produce, you know, on a dime just because you want to and you tell people to use Huawei chips only.

6:47So I am not surprised. But it also highlights the urgency of the AI race and one of the reasons why there's so much support for it, especially from the U.S. government. And also taking stake in some of our companies, Intel, for one, some rare earth minerals as well. The race is on. It's very hot. And China's going to have to figure it out if it doesn't have internal supply chains, because, you know, if this gets found out, then some of their negotiating powers go away because it looks like they're bluffing. Anna, it's leading not just to a hot race, but to hot valuations. Are they too hot? You know, I would say compared to what, right?

7:32We haven't had AI before. We haven't had this kind of support behind the tech movement before. And it's not just the U.S. It's global, right? I mean, we just talked about the race between U.S. and China. So, you know, yes, it feels hot compared to historical standards. But, you know, when money goes into something like this, and this isn't just a year or two, this has been for a while. And we have to ask yourself, what is the wisdom of the masses in the markets telling us? What is behind this? And I think there's something to pay attention to. Maybe not compared to the valuation, to the historical norms.

8:07But think about what the norm in this new world might be. And it might actually just be a little bit higher. Yeah, but Anna, that is a lot of hope baked in. We had GQG on the show yesterday. And they're saying, look, the level of revenue that an open AI has to bring in to vindicate the investment, The level of money that NVIDIA has to continue earning and the worries that we're seeing of NVIDIA writing$100 billion equity checks over to an open AI and feeding back the loop of demand. Yeah. How are you strategizing and seeing that becoming a reality? No, it's actually very difficult if you're looking at from a company by company standpoint.

8:46They're absolutely correct. There's stuff going on that doesn't really justify those high valuations. But if you look at it from an investor, an allocator point of view, if you look at AI as a theme, there are a lot of things going on that's outside of NVIDIA and open AI. I mean, we just heard about Hitachi. We heard about Caterpillar yesterday, you know, benefiting from some of the AI movements. This is really talking about industries that are not only adjacent to AI, but that adjacency circle is growing wider and wider. And so from an investor point of view, that is what we're really looking at from an AI movement, not just NVIDIA and not just the chips.

9:26And the story in technology markets this week has been about AI enthusiasm, the infrastructure deals that have come daily, the open AI private market valuation of$500 billion. But I think we really need to acknowledge this government shutdown because it's also a factor in markets. How are you looking at that and what are you telling to clients? Yeah, you know, if I'm thinking about government shutdown and the fact that we did not get a labor market report today, this has implications more for old economy sectors. When it comes to tech, it really doesn't even matter that the government is shut down.

10:04We saw how many deals that took place today, not today, this week. Right. So as far as tech is concerned, I don't think it matters, which is a little bit scary. but at the same time, it's a little comforting because the government might be shut down for a few more days, maybe weeks. So, Anna, when we're just looking at tech not caring, the NASDAQ 100 at a record high, it might be added. The S &P is too. Where do you allocate if you still believe in the AI trade, but just think an NVIDIA or some of the other names would just be overplayed? So earlier I mentioned some of the adjacent industries, right?

10:37So this actually points to the importance of being diversified and not too concentrated on certain names because then you are exposed to idiosyncratic risks. Now, when you're looking at the valuations, it is sky high and nosebleed sections. It's difficult to allocate cash into it. So if you're an investor and you're actually in a boots on the ground, where do you put cash becomes the problem? And that's where the diversification helps you. This idea of adjacencies helps you. If you already own tech, it's difficult to sell. I mean, it's difficult to sell because of the momentum. And in that case, sometimes it's not about selling the whole positions.

11:16It's just about being prudent and taking some of the gains, rebalancing your portfolio. So you're taking the gains and reallocating it to some of the other sectors that may benefit from it in the future. The idea of a diversified portfolio becomes much, much more important. Anna Rathbun of Grenadilla Advisory, wishing you a very happy weekend. Meanwhile, we're watching shares of applied materials. We broaden out the story on chips a little bit more here and indeed the geopolitical context. We're off by 2.4%. Why? Largest U.S. maker of machinery. Used to manufacture semiconductors, but basically they're warning there's going to be a$600 million revenue hit because of the rules that the government is setting, the restrictions end to exporting their products to China.

11:58Yeah, 600 million hit to net revenue. When you send a chip through a fab, the first thing the wafer touches is applied materials and the last thing it touches is an applied materials machine. That's why we care. Coming up, Rivian's looking to rework its doors over potential safety concerns. We bring you that Bloomberg breaking story next. This is Bloomberg Tech. Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday, keeping an eye on what's happening across Europe and around the world.

12:34We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris.

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13:24Rivian, while it's reworking a key element of the doors in its next generation EV after employees and customers raised concerns over latch design in the vehicles it's already selling. That's according to sources. Now, the move comes just weeks after Tesla faced scrutiny over their powered handle doors. Guess who broke that story? My co-host Ed Ludlow, alongside Bloomberg's Emily Chang. This is a deep dive into the regulation and some of the regulatory pushback there is to some of the building of these ultimately door handles. but take us inside the car. What's happening? Yeah, the specifics are really important.

13:57So the R2 is the next generation EV that Rivian will start building next year. It has decided to make the emergency manual release in the event that the power electronics fail, that the doors and the vehicle lose power, more intuitive simply by positioning it in a more obvious place, making the design in the front seats and the rear seats the same. But what sources tell us is that in June of 2024, Rivian did a refresh on the car it already sells, the R1 generation, both the SUV and pickup. And as part of that, in lowering component count and to bring the cost down, they revised the rear door release latch in particular, making it less intuitive.

14:41It's difficult to find. It's under a cover. And what is recognized by both employees, but also we found some anonymous complaints in the NHTSA database is it presents a potential safety risk. Talk through the safety risk and some of the incidents we've already seen. Yes, this is on the back of Tesla. Bloomberg broke the story that Tesla is revising the design of its doors because of actual cases where there is an accident. And the passengers in that Tesla vehicle found it difficult to operate the manual override and power had been lost. What we are not reporting about Rivian is there is no investigation into Rivian.

15:16And Rivian, not that we have found and Rivian has never disclosed any kind of accident where this has been a factor. but it is an acknowledgement from within Rivian that it is a potential safety risk and they've decided for their next car they have to do something different with the design we do not know if with R1 they will do another redesign to account for what they admit is based on sourcing a mistake but this is this is an industry-wide thing go read the story and there is the Rivian spokesperson talking about safety being at the center of everything that we do it's a breaking story Meanwhile, OpenAI competitor, let's call it Perplexity, has made its AI browser Comet available for free to users worldwide.

15:58The company launched Comet for top-tier subscribers in July. Expanding access to Comet takes aim maybe at the dominance of Google's Chrome, which Perplexity, of course, made a$34.5 billion bid for earlier in the year. Dmitry Shevelenko is with us, Perplexity's chief business officer. And look, we start by introducing you as an OpenAI competitor, but really, this is a Google Chrome competitor. We're focused on building a better internet on Comet. The browser is due for a major refresh. We want to serve and satisfy the world's curiosity and do a great job answering people's questions. And Comet is putting us on the path there and super excited to get to share with everyone this week.

16:41Dimitri, it also makes people ask different kinds of questions and far more questions, as you've said, from the reaction of users already. Can you give us some statistics? Because we knew that there were millions of people lining up to use this. The UX people are really complimenting you. How many people are using it now? Yeah, so we had millions of people on our wait list and they're all getting onboarded this week. How many millions? You know, it's your job to ask those questions and it's my job to compete against a$3 trillion monopoly. So we're not going to be able to share everything today.

17:16But some of the really fascinating stats we're seeing in terms of user engagement is when a user starts being on Comet, they ask six to 18 times more questions than they were before. And that's really, for us, that and retention are the key markers of success. And that's why we felt very comfortable and excited to open this up. Dimitri, we're a technology show and you're in the technology industry. And I think one thing that's true of technology is that just being first to something new doesn't guarantee that you capture that market, right? You know, Apple and the smartphone versus BlackBerry.

17:54That's a good example. I've just at the root of my question is what is stopping Google now from looking at what you've done with Comet and saying, oh, we can do that too? Yeah, well, we're actually not new to we're not the first of browsers, right? Google's been doing this for over 20 years, and their approach to AI is to bolt it on to their existing browser. We've built an AI-native browser from the ground up. And our biggest advantage when competing against trillion-dollar companies is execution velocity. It's the clock speed of iterating and improving the product. If it sounds like you guys were using it back in July, you've probably noticed how much it's gotten better.

18:40You've noticed that we launched for our max users, background assistants and the email assistant. And so it's that rate of improvement, particularly in AI, where new foundation model capabilities advance not every six months, but literally every three to four weeks. And so having the clock cycle around incorporating and finding the useful applications of those new capabilities, that's where the alpha is. Dimitri, you're the chief business officer. What's the monetization pathway for Comet? How are you going to make money from this platform in the end? Yeah, we're fortunate to have a variety of subscription products, our Perplexity Pro offering Perplexity Max, and our only expense is inference.

19:26And so we're able to tailor to a given user's needs the right subscription product. And so that's, you know, led to explosive ARR growth for us just this year. And we're excited about subscriptions as a path forward. Looking at your media partners, this is where subscriptions comes in. $5 for direct access to basically Comet Plus, which you call is a groundbreaking business model for premium journalism. How does that expand, Dimitri? Because all these publishers need paying too. Yeah, I'm so glad you asked about Comet Plus. The internet deserves not just a better browser, but a better business model.

20:07I think we're all exhausted with the traffic and clickbait dynamics that have really led to a race to the bottom on the Internet. And what we're doing with Comet Plus is actually aligning economics with the AI age, where publishers get compensated when users directly access their content, when their AI accesses the content, and when search indexes access the content. And this is really taking a lot of what publishers loved about the Apple News Plus model and expanding it to the full power of the browser. Talking of Apple, their AI partnership strategy is going to broaden out from OpenAI. Are you going to be joining briefly?

20:53We want to be wherever our users are, and our users certainly are on Apple devices. and we're confident that the best OEMs will want the best AIs integrated deeply into their products. And we're excited for the path ahead there. Dmitry Shevelenko, Chief Business Officer for Perplexity. Great to have you back on the program.

21:21OpenAI has rolled out a new social media-like app, Sora, powered by the latest version of its AI video generator, Already, the toll has raised concerns about how easily it could be used to create misleading videos. Bloomberg's AI reporter, Rachel Metz, has been using it, experiencing it, and then writing about it. The idea is that it presents a risk of more misinformation, more content out there that is potentially misleading. And then there's the social element. Just reflect on your experience so far with it. Sure. I mean, I think we've seen a lot of concerns over the past several years about how making it easier and easier for people to make videos that show things that didn't actually happen, but appear to show those things in a realistic fashion that can make it easier to spread things that are not true and hurt people potentially.

22:15And with this tool, OpenAI has made it extremely easy to do that kind of thing. I made several incriminating looking videos of my boss. And I mean, stealing kittens from a pet store, keying cars, stealing a car, all manner of mischief. And it was really easy. One thing that was also doable, at least until yesterday, is you could take these clips and you could, in the draft form, without publishing them, you could screen record them on your phone. And they didn't have watermarks in that format. OpenAI told me that they have since fixed that. But that made it even easier to share any kind of video without making it clear that it was coming from Sora or that it was AI generated.

23:03This, I mean, almost is the playbook of open AI, actually getting into the world, get people stress testing it, pushing it to the brink, and then they learn from it. How has their response been to some of your concerns? I mean, they obviously do not want people to be disseminating false information. And they essentially said they take that very seriously. And they're making a bunch of moves to make that difficult for users. However, people are going to still be able to get around those rules if they want to. And even with watermarks, it's not clear to me that that would actually make people always say, oh, wait, that's an AI generated video.

23:45Especially if they're not that familiar with Sora itself. They might just think that that's just some other kind of watermark on the video. The videos that we've just been looking at are, of course, AI generated and they are from OpenAI themselves. And funnily enough, the cat is not actually riding an ice skater while she performs. But Bloomberg's Rachel Metz, we so appreciate it. Send us the Seth Fiegeman ones that you've made yourself. We're back with Bloomberg Tech and we have some breaking news regarding China pushing the Trump administration to roll back national security restrictions, of course, on Chinese deals in the United States.

24:18What do they say they'll get in return? They're dangling the prospect of a massive investment package. Let's get to all the details. Bloomberg's State Department reporter Eric Martin is one of those that helped break this story. And it really fits in the whole context that Xi Jinping is pushing hard on the U.S. to lift various restrictions and change some of the ways in which it views China. Absolutely, Caroline. This is what we're hearing about seems to be China appealing to Trump's reputation as a dealmaker and his idea, his focus, the art of the deal, of course, being his most famous writing.

24:55and just basically looking at how can China get a treatment in the U.S. more similar to some of the other countries who have announced big investment packages in the U.S., including Japan, a commitment, a looser commitment from the European Union as well. And so looking at how China can invest in the U.S., can export more of its product to the U.S., given that one issue for China and its economy has been weakness of the Chinese consumer. and just overall looking at, this would be a huge change from what we've seen in the past decade. Remember, it was just a few years ago we saw this congressional committee set up to scrutinize Chinese involvement in the U.S.