Business Prospects Nvidia's AI Mega-Growth Stalls Due to Chinese Regulations

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NVIDIA GmbH

Wuxi InfiMotion Technology Co., Ltd.

Nvidia has reported its business figures for the second quarter of 2025, and despite growth, the mega-growth of recent years is tapering off. This is also related to the regulation of AI chips for China. However, customers from the People's Republic might become rare in the future anyway.

Anyone who is a shareholder in Nvidia has had little to complain about in recent years and will continue to be delighted these days, as the figures for the second quarter of fiscal year 2026 look solid on their own. Nvidia continues to benefit massively from the data center business. Revenue, profit, and free cash flow are rising sharply, and margins remain at an exceptionally high level, even without the special effect from H20 inventory. The outlook promises an even stronger Q3, driven by the ramp-up of the Blackwell generation.

Despite double-digit growth rates compared to the previous year, such as in data centers (+56 percent), gaming (+49 percent), and automotive (+69 percent), and a 56 percent increase in revenue, an end to the steep rise of the AI leader is becoming apparent. Nvidia has increased its quarterly revenue within a year from $29.4 billion to $46.7 billion, and its net income from $16.6 billion to $26.4 billion. Even a gross margin of 72.4 percent is impressive.

However, even Nvidia officials view the U.S. export restrictions on AI chips and the current developments in China surrounding backdoor speculations regarding the H20 chip, specifically reduced for the People’s Republic, as a risk. This is reflected, for instance, in a slight loss in Nvidia's stock value after the Frankfurt Stock Exchange opened, despite a revenue forecast for the third quarter of $54 billion and margins potentially exceeding 73 percent. Nvidia downplays the concern: demand impulses from the U.S., Europe, and the Asia-Pacific region remain extremely strong and could offset market weaknesses in China. Despite the minor setbacks, the stock remains significantly higher year-to-date.

Is China dwindling as a market for AI chip revenues?

Nvidia generated no revenue from H20 chips in China in Q2, as they are affected by U.S. export restrictions. Approximately $180 million worth of H20 inventory previously reserved for the Chinese market was released and redirected to other regions. Additionally, the company recorded about $650 million in H20 revenue outside of China—in markets not subject to the export restrictions.

Even if Nvidia were able to sell H20 and subsequent market-specific AI chips in the People's Republic in the future, the question arises whether the vast market would even want this hardware by then. Chinese companies have long been encouraged by the government to switch to domestic hardware in many industrial sectors, which is now quite comparable to Western products.

In the field of data centers, there is also an effort to become independent of Western providers, as can be inferred from a report by the Financial Times. According to the report, China is planning to triple the production of AI processors. "The report cites sources and notes that a factory dedicated to manufacturing Huawei AI chips is expected to begin production by the end of this year, with two additional plants likely to start operations in 2026," write the authors of Trendforce with reference to the FT report. Once these fabs reach full production capacity—who owns them is currently unknown—the combined capacity of these three facilities could surpass the current production of comparable manufacturing lines at Semiconductor Manufacturing International Corporation (SMIC). As a reminder: SMIC is currently the world's third-largest contract manufacturer after TSMC and Samsung.

Deepseek as a major client

And speaking of SMIC: The report also points out that SMIC plans to double its production capacity for 7-nanometer chips next year. This is currently the most advanced process used in mass production in China. This, in turn, allows smaller Chinese chip manufacturers, such as Cambricon and Biren, to secure additional SMIC production capacities and generate significant revenue. CNBC reported, for example, that Cambricon's revenues in the first half of 2025 rose by 4,000 percent compared to the same period the previous year.

China's OpenAI competitor Deepseek has reportedly conducted small tests with Chinese chips to demonstrate technical feasibility and announced that its models have adopted an FP8 data format tailored to the next generation of domestic chips. At the same time, Huawei's 910D and Cambricon's 690 are considered products that align with Deepseek's preferred standards. It sounds like the Chinese market may no longer play a significant role for Nvidia in the future.

Blackwell as a growth driver outside China

Even as China increasingly builds up its own chip capacities, Nvidia remains well-positioned globally. The ramp-up of the Blackwell generation reportedly brings an exceptional technological leap—particularly through new rack-scale designs that can optimize entire data center architectures. These systems are being used by hyperscalers worldwide to train and deploy the next wave of large AI models.

Additionally, the dynamics are shifting: Non-Chinese hyperscalers in the U.S., Europe, and the Asia-Pacific region are driving the majority of demand. In Europe, for instance, governments and industries are specifically promoting the development of an industrial AI cloud based on Blackwell systems. This creates a counterbalance to China—and Nvidia benefits from being the only provider technologically capable of delivering complete platforms from chip to rack. (sb)