Possible Backdoor in the H20 Why Business With China is Becoming More Challenging

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Wuxi InfiMotion Technology Co., Ltd.

Nvidia is once again facing geopolitical tensions: The Cyberspace Administration of China has raised security concerns regarding the company's AI chips. A controversial US bill mandating the installation of backdoors in exported chips intensifies the mistrust.

Nvidia is again facing issues with its China business. This time, the pushback comes directly from China itself. The top Chinese cyberspace regulatory authority, the Cyberspace Administration of China (CAC), summoned the US chipmaker to a challenging meeting in its office on July 31.

The company is required, according to the regulators, to explain whether its AI processor H20, specifically developed for China, contains hidden access mechanisms—so-called backdoors. Subsequently, the CAC also initiated an official investigation into the H20 chip. All of this is, on one hand, part of the US-China chip war, but on the other hand, this time, US lawmakers in Washington have specifically contributed to fueling mistrust in China.

Install Backdoors in Exported Chips

In May of this year, Representative Bill Foster, a member of the Democratic Party in the U.S. House of Representatives, introduced a bill that would require American manufacturers to install backdoors in all export-controlled chips. The initiative from the U.S. Congress is also supported by Republicans.

Foster is a physicist with a doctorate and experience in chip design. "As a congressional chip designer, AI programmer, and physicist with a doctorate, I know we have the technical means to prevent powerful AI technology from falling into the wrong hands," he says. "With advanced AI chips being smuggled into China and posing a national security risk, Congress must act," argues Foster.

Certainly, the Democrat is using this initiative to make headlines and advance his political career. The bipartisan China hysteria in Washington is worsening and increasingly resembles the persecution faced by Japanese scientists and businesspeople in the U.S. during World War II. Technically, however, the tracking of individual chips is highly controversial among true experts. Among other things, it would pose a significant security risk for every user if chips were so easily traceable. In the current anti-Chinese fervor, however, it is quite possible that rational arguments will ultimately play only a minor role.

Nvidia's Reaction And the Geopolitical Tensions

The Chinese authority directly referenced this initiative in the U.S. Congress to justify its investigation of the Nvidia chip. "Nvidia's AI chips are said to pose serious security risks, and some U.S. lawmakers have called for advanced chips intended for export to be equipped with 'tracking and location' features," reads a statement released by the CAC.

Nvidia responded with active crisis management on the same day it was summoned to the Beijing CAC office. "There are no 'backdoors' in our chips that would allow anyone remote access to their control or remote operation," stated a press release from the chipmaker, which was sent to Reuters and many other media outlets in China.

Tracking (location) and remote shutdown are the features that U.S. chip manufacturers are being pushed to incorporate into all semiconductors exported to China, according to the wishes of the China hawks in the House of Representatives. For Nvidia, the new controversy surrounding the H20 comes at an especially unfavorable time. It was only at the end of July that Washington lifted its export ban on the H20 to the People's Republic, imposed earlier this spring, after China threatened to halt exports of rare earths as retaliation for all the U.S. boycotts.

The Wheels of Geopolitical Power Struggles

Nvidia CEO Jensen Huang had only just personally announced the resumption of exports during a trip to Beijing. For a brief moment, it appeared that balancing compliance in the U.S. with success in the Chinese market was still possible to a limited extent. Now, however, Nvidia's dilemma deepens as the company seems increasingly caught in the gears of this geopolitical power struggle at the expense of the semiconductor industry.

The company is currently losing trust not only with the Chinese government but also within China's semiconductor industry. "Nvidia, how can we trust you?" headlined the People's Daily (Renmin Ribao) in its report on the CAC meeting. The newspaper, which is closely aligned with the Communist Party of China, called on the U.S. corporation to "comply with the demands and provide convincing security evidence" to regain the trust of Chinese customers. "Ensuring network security is as important as protecting national territory," the People's Daily wrote, warning that China must never use "sick chips."

A WeChat account linked to Chinese state television CCTV, called "Yuyuan Tantian," strikes an alarmist tone as well. It states that Nvidia's H20 chip is unsuitable for China on multiple fronts. "If a chip series is neither environmentally friendly, advanced, nor secure, we as consumers naturally have the option not to buy it," says the commentary.

The commentator fails to provide concrete evidence for the allegation that the H20 is not secure. However, the claim that the Nvidia chip is not advanced is harder to refute. Nvidia developed the H20 as a scaled-down version of its high-performance chip H100 after the U.S. banned the export of the H100 to China at the end of 2023. It is the result of a compromise through which Nvidia aims to salvage at least a portion of the billions it earns in the world's largest semiconductor market.

Huawei Develops Its Own AI Chips

Zhou Hongyi, the head of the Chinese IT security company 360, shared his assessment at a conference in Beijing, stating that Nvidia "probably has no intention of embedding backdoors in its software, but the U.S. government could pressure it to do so." He described the CAC investigation as "completely normal" and suggested that Nvidia should invite independent inspectors to examine its chips.

In a way, Nvidia is now merely forced into similar self-defense measures that have long been part of everyday life for many Chinese companies abroad. In 2019, the U.S. banned telecom routers from the Chinese technology company Huawei, citing alleged backdoors. All of Huawei's assurances at the time that this was not the case were to no avail.

In China, many companies are still dependent on Nvidia's AI chips at the moment. At the same time, however, Chinese competitors, including Huawei, are working at full speed to develop their own high-performance chips to replace those from Nvidia.

Huawei's AI chip "Ascend 910C" is gaining increasing popularity among Chinese internet giants such as Baidu and Alibaba. Market observers predict that Nvidia's market share in China will continue to decline from now on. While the "localization rate" of domestically produced chips by Chinese companies was still at 17% in 2023, it could rise to 55% by 2027, according to a forecast by the American investment advisory firm Bernstein.

Demands for the inclusion of backdoors in Washington and the many export controls on Nvidia are, according to analysts in New York, helping Chinese competitors gradually catch up technologically and in the market. "The U.S. export controls have created a unique opportunity for domestic AI processor providers, as they no longer have to compete with the most advanced global alternatives," writes Bernstein, also highlighting the growing importance of Chinese companies Cambricon and Hygon. (heh)

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