China Decode: The Global AI Race

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1:28code we're discussing, China pulling the plug on Nvidia's AI chips, the latest on the US-China TikTok deal, and how China's Gen Z is looking back and dreaming of the boom years. So let's get right into it. We're still following the news that Nvidia's AI chips just got the cold shoulder in China. The country's top internet regulator has reportedly told major tech firms like Alibaba and ByteDance, they should stop buying and testing NVIDIA's newest chip, the R2X Pro 6000D. This is a chip NVIDIA designed specifically for the Chinese market in compliance with US export controls. And this is a big deal, apart from it being a very cumbersome and difficult name, which a lot of these chips are, this really matters because the people that I speak to, I rate really highly in the chip world, basically have equated chips to the oil of the digital economy.

2:20And Chinese companies have been stockpiling on these chips over the last few years. In fact, they've ordered thousands of these chips since July, and now they've been told to pull the plug. NVIDIA CEO Jensen Huang said he's quote-unquote disappointed, noting that the company can only serve markets that actually want its products. And right now, Beijing is signaling that it just doesn't want NVIDIA's chips. I do hope that the United States and the Chinese government work out their perspective on what's the best way to share technology and share markets. And I have every confidence it's going to get worked out.

2:55This move comes amid China's accusations that NVIDIA is violating antitrust rules and claims on the part of China that its own homegrown chips are now as competitive as NVIDIA's offerings. James, I know this topic can seem very niche and very arcane. But can you describe to us in plainest language why these chips matter and how big this is a deal for Nvidia? Well, a great quote there, Alice. You know, the oil of the digital economy, that really sums it up. These chips make everything work in the digital economy. And for Nvidia, it really is huge. I mean, I think we first of all have to realize how big NVIDIA is as a company.

3:37It's capitalized on the stock market at 4.3 trillion US dollars. That means that this one company, this one American company is worth more than a trillion dollars more than the entire UK economy. So really, whatever news is coming out with regard to China and NVIDIA, it could be measured in the hundreds of billions of US dollars in stock market valuations. And the news that came out, as you said, from China this week was huge, that they don't want this NVIDIA chip that you mentioned. And, you know, we don't know how much further this is going to go. We don't know if the Chinese government is going to get tougher on all kinds of NVIDIA chips.

4:21Now, the Chinese market accounts for about 13 % of NVIDIA's global revenues. And actually, it's pretty well understood that that's a big underestimate because there's huge smuggling of NVIDIA chips into China through places like Singapore. So if NVIDIA loses the Chinese market, and, you know, we don't know if that's going to happen yet, but if it does, then it will have a significant impact on the stock market price or NVIDIA and also on the company's revenues. This news was greeted by a 3 % sell-off in NVIDIA shares. But I think we can be clear that this is just a fairly modest decline because most of the market participants, the investors, they don't think this is curtains for NVIDIA in China.

5:14They think that what's underway is more of a shadow play between America's biggest company and the Chinese authorities. And eventually, some kind of deal will be done. And we've just heard the news that Trump and Xi Jinping are going to meet in November in South Korea and then again next year for a summit meeting. So I think what's happening is that the market thinks that this will all be patched up and NVIDIA will be able to sell some chips, we don't know which, to China, as it has done in the past. That's my reading. I don't know about you, Alice. Well, James, I was going to add, given that I was just in China two weeks ago, a lot of discussion that I had with some of these entrepreneurs, and some of them were in the semiconductor space, was that Jensen Huang lobbied hard because he was very worried that the CUDA architecture, basically what was described to me as the operating system for chips and the video users, would basically be jockeyed out of the country if Trump didn't relax some of these export restrictions, including on age 20s, which are not the leading edge.

6:19chips that previously during the Biden administration adhered to the export controls for China. That seems quite plausible to me that he is in a desperate situation where he's seeing competitors like Huawei and SMIC, who almost every other day and including today are announcing that they have Ascend chips, they have cutting edge AI chips that they can completely manufacture in-house and design in-house. My sort of question that I'm grappling with, and I struggle with this because I see arguments on both sides, is to what extent are the Chinese puffing themselves up when it comes to these semiconductor capabilities?

6:54Because on the one side, you definitely have the bulls who say, well, Huawei can generate all these, you know, even close to three nanometer chips, but they can do these clusters that can perform just as well as potentially NVIDIA. On the other side, you hear people on the bear side who say, even if they're, you know, producing more, they're not going to have the same compute capabilities as NVIDIA's cutting-edge chips. But where do you sit on this debate, James? I'm curious. Well, I mean, that's a huge question. And I think there's a lot of debate about that. I had an opportunity this week in London, actually, to meet with a delegation of senior Chinese officials.

7:31And we spoke a little bit about this. And their point was that China's self-sufficiency in advanced chips must happen. They were absolutely clear that this is a priority of the Chinese government. And actually, this goes back quite some time. I remember reporting from China 20 years ago. I remember the president of the time, Jiang Zemin, saying that if China remained dependent on the West for semiconductors, he said, then the West will always have us by the throat. And he was the same president of China that had his son start one of the very first big semiconductor ventures in China. So I'm not surprised to hear this mantra of China must achieve self-sufficiency in chips.

8:20But the question is, are they actually going to do it? We can look at some of the resources that China's put into this, about 150 billion US dollars in grants since 2014. That puts the US Chips Act funding into the shade. It's about three times as much as the funding from the Chips Act. But the really big question now resides with these companies that you've mentioned, Huawei, Alibaba, and some other big Chinese tech companies. Huawei's chips, especially the Ascend series, are supposed to be getting close to some of the best performers that NVIDIA can put out. And particularly, if you cluster several hundred, several thousands of these Huawei chips together, you can get what's called super clusters.

9:13And these Huawei super clusters are apparently really catching up with NVIDIA super clusters in terms of their efficacy in AI, in artificial intelligence. So it's rather involved. I don't think anyone has a clear answer to the question. But as far as I can see and as far as my research is concerned, China is definitely catching up. Yeah, I go back again to why this matters. I think a couple of years ago when China seemed to be behind the curve on chip development and everyone was saying, you know, these export controls from Trump and then Biden are really canny. They're going to be a choke point for China.

9:53They're not going to be able to catch up. I sensed that this was going to have material impacts for the AI rollout or even the discussion about AGI, which we'll get to in just a bit. But when I was there three years ago, the general feeling was from the people I spoke to in China, yes, we're screwed when it comes to semiconductors, but we'll have good enough workarounds through, and they didn't say illegal smuggling, but it does happen through smuggling and increasing stockpiles through potentially illegal means, but also through some of the domestic options like SMIC, which is a fab based in China.

10:31They felt as though they had the workarounds to support EVs, AVs, the IoT industry. But when it came to AI inference and training, which requires strong compute and memory, there was a realization. And I think even an admission from the people I spoke to in China, that this would seriously hold them back. That, I think, rhetoric has shifted. When I was in China two weeks ago, there was this feeling, to your point, James, is that now China is getting better at AI chip design. They have some fabs that maybe not on the level of TSMC, but they're getting there. And certainly, I think what is important that I don't think gets covered enough is that you still have TSMC producing Chinese designed chips.

11:14So even if Huawei and Alibaba are saying that they're designing all their chips in house, they still need fabs. And some of these fabs are outside of China. So I think it's kind of erroneous or potentially overly simplistic to say that these are all completely made in China. There's still a huge ecosystem that supports Taiwanese and Chinese innovation on the semiconductor side. But again, wrap this argument back around to AI, I think this is going to have serious implications when the West considers China's AI rollout. Because a couple years ago, as I mentioned, people were very skeptical about AI because they saw the chip, the hardware constraint, and they said, well, this is going to really screw them when it comes to training.

11:58Absolutely. And I think, you know, particularly this is all about what's called AGI, that's artificial general intelligence. And it's difficult to sort of define what this is, but it's seen in the industry as the kind of El Dorado of the artificial intelligence industry. It's the point where machines become so clever that they can start learning for themselves. And therefore, their learning process can happen at warp speed. And really, I was told by a US analyst close to the Pentagon this week that really what's happening now between China and the US is that their competition in these AI chips is being driven by this race to achieve AGI, artificial general intelligence, quicker than the other competitor.

12:47We don't know who's going to win that race. But if China wins, according to the analysts that I spoke to, then it will mean that its military development in all kinds of technologies will get a leg up. And that's what's really scaring the U.S. And similarly, it's scaring China, too, from the other perspective. So we're in this kind of extraordinary, I won't call it an arms race, but it's clearly a chip race or a chip war, which is part of what people talk about when they talk about the new Cold War between the U.S. and China. and it has echoes to me of the old Cold War. It's this sense we must win and therefore we're going to throw everything at this.

13:31Money, our most brilliant people, our best scientists to come up with the best chips so that we can win this race to AGI. So it's really, I mean, I don't know, maybe it's being overplayed, but it seems at this point to be high stakes. Yeah, I want to take this back to what is China's strategy here? because the statement that came out a couple months ago in which Chinese media and the government were casting aspersions as to the safety or security of using Nvidia chips begs the question, are they doing this because A, they want to support domestic competitors, so it's a form of national protectionism, or are they doing this because they actually are concerned about the security risks?

14:13I was reading an article by a colleague of mine, Chris Miller, who also wrote Chip War. It's funny that you make that analogy. So he basically says that the US is looking into geotracking the semiconductors that it's exporting because it's aware that there's a huge degree of smuggling via Southeast Asia mainly. I looked at it a couple of months ago. There was a huge potential smuggling through Malaysia, for instance. So they're looking into that. I think that he calls it telemetry. And the Chinese may be concerned that that could be used to geolocate or geotrack chips as they get into China. So I struggle with this, and I'm curious if you have a view.

14:51What is China's end goal? Because it's not like China can overnight rival NVIDIA or even TSMC. It still needs other countries and companies, be it the Dutch's ASML for lithography or TSMC for fabrication. It can't produce everything domestically. So I'm struggling to figure out what its strategy is here by saying no to NVIDIA chips, basically. You're struggling, Alice. I think everybody is struggling. It's really an opaque situation. I mean, if you ask me my guess, I think that what China's doing is coming up with a negotiating ploy so that when Xi Jinping meets President Trump and all their officials get together to prepare those meetings, the Chinese have got more leverage with America.

15:38I think that's number one. The second point is, can China really go it alone without NVIDIA chips? My guess is no, not for quite a few years yet. And so ultimately, I think the Chinese are angling to get hold of the best NVIDIA chips. So not the ones that we've been talking about so far, but the Blackwell series, which is the latest series of NVIDIA chips coming out, hugely powerful, much more powerful than anything that China's got. And I think that the ban on NVIDIA today is a negotiating ploy to get the Americans to allow NVIDIA to export the Blackwell chips to China so that China can use those in its AI model so that China can race faster towards this goal of AGI that I mentioned.

16:29I'm glad you mentioned that because it reminded me of a conversation I had with a PE investor in China recently, in which he said basically the same thing, is that it's rather a negotiating ploy or a gambit to, again, as you mentioned, get higher grade chips that could potentially be compliant with some of the U.S. export controls. but I completely buy that in this argument and I think that that's extremely convincing and it seems like just to use a pun all chips are on the table when it comes to the negotiation between uh and Trump and Xi and as you referenced James there had a productive call this Friday and it seems like they've agreed on a number of issues uh but it also paves the way for a TikTok deal which is the next subject of discussion uh do you have TikTok James?

17:12I do. What's on your feed because my feed is all food and fashion. So the algorithm knows me. I've got quite a few food things. I've got quite a few sports. I got a lot related to China, actually, because obviously that's my interest. But really, it's spooky how quickly the algorithm learns your preferences. I mean, and I guess this is why TikTok is so popular around the world with 170 million users in America alone. It's quite extraordinary. Right. We'll take a break now. Stay with us and we'll come back for more on TikTok.

18:08Thank you.

18:17Welcome back. As of this taping, the year-long fight over TikTok may finally be moving forward towards a resolution. President Donald Trump announced that he had a quote-unquote productive call with Chinese President Xi Jinping on Friday, and that they've effectively approved a framework deal for a group of U.S. investors to take control of TikTok U.S.'s operations. It has tremendous value with TikTok. And I'm a little prejudiced because I frankly did so well on it. And so we were able to work out a deal with China. And it's a very good deal for us. I hope it's a good deal for them. I want to say I want to thank President Xi because he was a gentleman.

18:57And we've just had a good relationship. The agreement would spin off a new U.S. entity with 80 % owned by a consortium consisting of Oracle, venture firm Andreessen Horowitz, and private equity firm Silverlake, alongside some existing ByteDance backers. And ByteDance's total stake would fall below 20%, meeting the requirements of a U.S. legislation passed last year. Trump said that he and Xi signed off on the deal during the phone call on Friday, and that they also discussed other topics, including trade, fentanyl, Russia's war on Ukraine. And Xi, for his part, framed it as a commercial solution, while stressing that China should retain authority over TikTok's core technology.

19:39I want to read, actually, a statement that I just saw from the Chinese Foreign Ministry, in which they basically seemed to be happy with this deal. They said they were happy to see productive commercial negotiations in keeping with market rules, leading to a solution that complies with China's laws and regulations and takes into account the interests of both sides. So it seems like TikTok has finally, after almost a year of torture, seen a pleasant ending for it in terms of its app being still used within the US, where you've got 170 million US users who can still use the app as of right now. So now that the deal seems to be done, the big question remains, what happens to the algorithm?

20:20Because insofar as I understand, the Chinese semantic is that we are licensing this algorithm out to our U.S. operations, but the algorithm is still owned by ByteDance, which is, after all, a Chinese company. Whereas this, I think, is a bit of a murky territory because at least according to the US legislation, the algorithm cannot be owned at all by a Chinese entity. So we may be in a period of strategic ambiguity in which both sides agreed to disagree. But certainly, I think TikTok has evaded the worst. What do you think, James? Yes, I mean, this is a remarkable deal. It appears to pave the way for TikTok to operate in the United States.

21:00But as you rightly point out, Alice, what we really don't have a clear sense of yet is what's going to happen to the algorithm. The old algorithm, or we should say the existing algorithm before it's changed, means that American users' data is accessible to China. And China's national intelligence law of 2017 creates a legal obligation for all Chinese firms to turn over data collected abroad and send it back to China if China requests that. So it isn't absolutely clear to me at this stage as to whether this new deal will mean that American data stays in America or whether there'll be a backdoor for that data to come back to China if TikTok so desires.

21:49That's just absolutely not clear, I don't think. Have you picked up anything on that? Well, I think we have to understand this TikTok deal within the context and framework of the broader U.S.-China relationship. and what's become apparent to me is that a trump cares a lot personally about tiktok for his branding for his appeal to the base and that sort of view that's shared i think by a lot of his colleagues and peers potentially who take a more hawkish posture uh you look at some of the senators and congressmen like tom cotton for instance who i think are going to be tough on this issue and be the chinese i think understand that trump sees this as part of a grand deal a grand bargain and are employing the art of the deal in potentially offering him something that looks like it's ticking some of the boxes.

22:38And so I think it's a big magic act where Trump basically says that it complies with the U.S. legislation, even though it doesn't fully. And meanwhile, other companies may decide not to sue the administration or ByteDance because they don't want to fall afoul with Trump. So I think Trump ends up with TikTok. and on the same time the Chinese end up potentially with a better deal on trade and technology because they see this as an area in which it's been an easy concession for Trump. So I think that that's how I kind of approach it and the real minutiae in a way doesn't matter because ultimately it's a political game in which the Chinese are swapping TikTok potentially for maybe relaxation on chips.

23:21Yeah and I mean in the meantime TikTok remains incredibly popular especially with American teens. About 57 % of American teens use TikTok every day, and they use it for an average of 1.5 hours a day. So, you know, this really does matter, isn't it? I mean, this is by far China's biggest cultural export, I guess. And so, whatever the fate of TikTok finally is, it really does make a big difference, not only to TikTok and ByteDance, its parent company, but also normal Americans and normal British and other the Europeans. And just to again, talk about the financial side of things. I read recently that ByteDance, the parent company of TikTok, is on track to make more than$180 billion this year and trades at a valuation of about$330 billion.

24:09And again, to sort of peel back the layers of the onion, Trump's friends, many of them who are in on the deal, if you look at Susquehanna Capital, Jeff Yass there, or you look at Oracle, Andreessen Horowitz, they could be investing in TikTok at a lower price per share multiple than Procter & Gamble. So there's obviously other agenda at play beyond just TikTok itself. And certainly I think a lot of US investors are salivating when they look at TikTok because they see the eyeballs, the potential, the growth, the different income streams that could arise from a stake in TikTok. Absolutely. I think what strikes me as being interesting in the US context is the way in which we've seen some of the hawkish members of the establishment really treat ByteDance like an arm of the CCP.

25:00I remember when the CEO of ByteDance, he was being interviewed by senators in the Senate Commission, and they asked him if he ever had any affiliations with the CCP. And it went viral because a lot of people were seeing that and watching it with a degree of incredulity. But it speaks volumes about the fact that, you know, ByteDance has internally that tension of being seen as a Chinese company, potentially an arm of the Chinese government, whilst trying to be global. In 2023, a former Biden's employee alleged that the CCP spied on pro-democracy protesters in Hong Kong in 2018 by using quote-unquote backdoor access to TikTok to identify and monitor the activists' locations and communications.

25:43My own view on this is that any platform, whether it's X or Instagram or even Telegram, any platform really is ripe for misinformation, disinformation, for any kind of government-led espionage. So I don't think TikTok in this instance is unique, but certainly I think it has been a lightning rod politically for a lot of American policymakers when they look at the company because they're very worried about the longer-term impacts of having a Chinese platform that is disseminating information to millions of daily users in America. And I guess related to that, is TikTok seen as a Chinese company outside of the U.S.?

26:23Because in the U.S., it's very much been politicized in the sense that, you know, they see this as a Chinese company that poses a threat. But I'm not sure if the rest of the world really feels that way about TikTok. I think, you know, in the UK, I think most people don't really see TikTok even as a foreign company. They just see it as an app that gives them pretty inoffensive and quite amusing short videos on their phones. Of course, you know, a certain number of people will know that TikTok is Chinese, and a certain number of people will know that data can be exfiltrated by these apps back to China.

27:02But I think the sort of baseline attitude here in the UK is, well, if I'm looking at a lot of cat videos, then why does that matter? You know, how important is this information to China anyway? I'm not any kind of an agent. I'm just a normal person looking at my mobile phone. So to be honest with you, Alice, I think the popular sentiment towards TikTok is pretty good. But then the security services in the UK and other European countries are very much vigilant towards TikTok because I suppose in addition to sending data back to China, these apps allow these Chinese companies to learn quite a lot about the way cyberspace works in European countries.

27:50So maybe that's it. But generally, I think the public view on this is that it's pretty inoffensive. Yeah. And one last thought that I had on this issue was that decoupling in reality is tough to do, even though politicians want to basically ban TikTok. I think this story leading to a happy conclusion potentially for TikTok proves the point, which is to say that as long as there are vested business interests in the US that are pro-TikTok, it would have been very hard to ban it. And the reason I say that is, you know, ByteDance over the last few years has been teaming up with Oracle more, but Oracle serving basically data centers for TikTok in the US and overseas.

28:32When I was in China, they were talking about potentially adding more data centers through Brazil to service the whole Latin America and North America region. So I think this story, in a way, beyond it being Trump scoring a victory for his communications to the base, is also a story of how, you know, the Andreessen Horowitzes and the Oracles of the World have actually won a big deal by getting an increased stake in this very valuable social media company. Absolutely. That's it. All right. Just before we head off to another break, we're going to talk about another social media trend that is all the rage in China.