Nvidia's Exclusion of China Sales and the Outlook for Prolonged US Semiconductor Export Control Risks

Executive Summary

Nvidia's exclusion of China data center sales from its forecast is a structural outcome of the US Department of Commerce's cycle of approvals and reversals, and is unlikely to be reversed in the short term. As long as Washington and Beijing remain incentivized to leverage their respective bottlenecks in semiconductors and critical minerals, the dual structure of regulation and circumvention is expected to persist. Even if a Trump-Xi summit materializes, the flashpoints of conflict lie on a regulatory track with agencies like the FCC; thus, the bureaucratic accumulation of regulations is assessed to continue regardless of any political agreement. For Korean companies, this situation has dual implications: collateral benefits in areas where they have a commanding lead, such as HBM and foundry services, alongside the erosion of their revenue base as China internalizes production of legacy and mid-range AI accelerators. This calls for a two-track response combining proactive risk management for national strategic technologies with monitoring in the general commercial sphere, as well as adherence to the principle of a sector-specific response to pressure to choose sides.

I. Issue Analysis

Nvidia's Exclusion of China Sales and Persistent Risks from US Semiconductor Export Controls: An Issue Analysis

1. Background and Developments

On August 26, after the market closed, Nvidia announced its earnings for the second quarter of fiscal year 2026 [1]. Its revenue and guidance beat market expectations [1]. However, its forecast for the next quarter effectively excluded sales of chips for data centers in China. This is not a new phenomenon. Since the second half of 2023, the US Department of Commerce has controlled the export of advanced AI accelerators like the A100 and H100 to China. Nvidia subsequently released workaround products such as the H20, but Washington's repeated cycle of approvals and denials has undermined the very predictability of its China sales.

The Council on Foreign Relations (CFR) frames this structure as a problem of mutual bottlenecks. To produce its advanced chips, Nvidia relies on critical mineral supply chains dominated by China [3]. This means both Washington and Beijing have an incentive to use the bottlenecks they control as geopolitical leverage [3]. In other words, the export controls are not a one-sided sanction but part of a cyclical structure intertwined with China's countermeasures.

During the same period, Beijing also showed a trend of tightening its technology controls. An EAI report noted that Beijing's hardline response to Meta's attempted acquisition of Chinese AI startup Manus "led to the Chinese government tightening its cross-border controls on data and AI technology" [2]. This measure, combined with Nokia's withdrawal from its China business and the accelerated phase-out of Windows in government agencies, is leading to "a phase where decoupling in specific technology sectors is becoming institutionalized" [2]. The assessment is that US-China tech competition is solidifying not into a complete severance, but into a selective separation limited to areas directly linked to national security [2].

2. Current Situation

In Nvidia's latest earnings report, the exclusion of China data center sales was treated as a risk already priced in by the market. This is evidenced by the stock's reaction, which was more sensitive to concerns about hyperscaler capital expenditures and memory shortages than to the earnings surprise. Chinese media outlet Sina Finance (新浪财经) pointed out that despite Nvidia's gross profit margin approaching 75%, its forward price-to-earnings ratio had fallen to its lowest level in over five years [4]. The assessment is that market concerns are growing over customer concentration risk and the AI circular financing model [4].

At the same time, evidence suggests that the flow of Nvidia chips into China has not been completely cut off. Swedish media outlet Dagens Industri reported that despite strict export regulations, Chinese Big Tech firms like ByteDance and Alibaba have secured hundreds of thousands of Nvidia's most advanced processors [13]. This indicates the existence of clear regulatory loopholes (kryphål) [13]. In Taiwan, nine individuals, including one Nvidia employee, were indicted on charges of smuggling 74 Supermicro servers to China [15]. A dual structure where regulation and circumvention operate simultaneously is close to the current reality.

Washington's regulatory front appears to be expanding from semiconductors themselves to the broader AI hardware ecosystem. An EAI report noted that the Federal Communications Commission (FCC) is "accumulating its own technology regulations against China," such as considering a ban on optical transceivers [11]. It is characteristic that even ahead of a potential Trump-Xi summit, the flashpoints of conflict are not on the White House's diplomatic track but on the "bureaucratic track at the regulatory agency level" [11]. This implies that localized friction is likely to continue regardless of the summit's outcome [11].

Meanwhile, Nvidia is also showing signs of pivoting away from its closed development strategy. The Global Times (环球时报) reported that Nvidia paid $6 billion for a technology license from AI startup Poolside and hired over 100 engineers to build an open model to compete with Chinese open models like DeepSeek and Moonshot AI's Kimi K3 [12]. Chinese experts interpreted this as a shift away from the US industry's closed development approach and reacted positively [12].

3. Key Actors and Positions

NvidiaStill recognizes the Chinese data center market as a primary growth driver but is in a position where it cannot include these sales in its revenue guidance without Washington's approval. The company is exploring alternative paths between regulatory compliance and revenue maximization, such as lower-spec products like the H20 and an open model strategy through the Poolside acquisition [12]. At the same time, it has notified major customers of a server price increase of over 15%, which, while attributed to soaring memory costs, can also be read as pressure to compensate for the China sales gap with non-Chinese customers [8][10].

US Regulatory Agencies (e.g., Department of Commerce, FCC)Continue to restrict exports of advanced AI accelerators to China while broadening the scope of regulation to the entire AI hardware ecosystem, including optical transceivers [11]. Because measures are accumulated at the bureaucratic level, separate from the White House's high-level diplomatic track, a phase of political reconciliation may not immediately lead to regulatory easing [11].

The Chinese GovernmentHas refrained from direct retaliatory measures, but assessments suggest its patience is being tested [11]. Instead, it is responding by tightening cross-border controls on data and AI technology and providing policy support for domestic firms to achieve self-sufficiency in AI infrastructure [2].

Chinese Big Tech (e.g., Alibaba, ByteDance)Are pursuing a dual strategy of simultaneously securing Nvidia chips and building their own AI infrastructure. While still obtaining a significant number of the most advanced processors through regulatory bypass channels [13], they are also accelerating internalization, with sales of domestic AI accelerators like those from Cambricon increasing by 108% [7].

TaiwanAs Nvidia's manufacturing and logistics partner, Taiwan plays a key role in the server supply chain. However, it has also been exposed as a weak point in the implementation of US export controls, being the site of a smuggling incident [15][16].

4. Key Issues

The first issue is the gap between the persistence of regulations and the possibility of circumvention. While Washington's controls are blocking the Chinese market in official sales statistics, multiple pieces of evidence confirm that a significant volume of gray-market distribution continues via Taiwan and Southeast Asia [13][15]. The effectiveness of the regulations themselves is being challenged.

The second is the speed of China's technological self-sufficiency. The surge in sales of domestic AI accelerators from companies like Cambricon [7] suggests that the longer Nvidia is excluded from the market, the more time China has to secure alternatives—a paradoxical outcome.

The third is the problem of policy consistency within the United States. The White House's high-level diplomacy and the independent actions of regulatory agencies like the FCC are moving at different paces, reducing the predictability of US policy toward China [11]. This is a factor that makes the outlook for the China business of companies like Nvidia structurally uncertain.

II. In-Depth Analysis

Nvidia's Exclusion of China Sales and Persistent Risks from US Semiconductor Export Controls: An In-Depth Analysis

1. Analysis of Root Causes

The root cause of the effective exclusion of China data center sales from Nvidia's earnings is not a single regulation. The key is that Washington's semiconductor export control regime against China is itself designed as a cycle of approvals and reversals. The Department of Commerce has changed the standards for exporting advanced AI accelerators to China multiple times. Each time, Nvidia has responded by releasing alternative products tailored to the new regulatory threshold. The H20 is a prime example. What this repetitive structure creates is not just a loss of sales, but unpredictability itself. It means a state of affairs has solidified where companies cannot include China sales in their earnings guidance.

Behind this structure lies the relationship of mutual bottlenecks identified by the CFR. Nvidia's production of advanced chips depends on critical mineral supply chains dominated by China [3]. Both Washington and Beijing have an incentive to use the bottlenecks they control as geopolitical leverage [3]. This creates a cycle where US export controls provoke China to respond by weaponizing resources, and that response in turn prompts the US to tighten regulations. Nvidia's exclusion of China sales is both a result and an intermediate stage of this cycle.

There is a separate root cause on Beijing's side. Beijing's hardline response to Meta's attempted acquisition of Chinese AI startup Manus "led to the Chinese government tightening its cross-border controls on data and AI technology" [2]. This measure coincided with Nokia's withdrawal from its China business and the accelerated phase-out of Windows in government agencies [2]. This means that it is not only US export controls but also China's own drive to strengthen its technological sovereignty that is accelerating decoupling. The contraction of Nvidia's China market is the result of US regulations and China's push for self-reliance acting in concert.

2. Structural Context

From a political-structural perspective, this issue is the product of a bureaucratic track that proceeds independently of the high-level track of a potential Trump-Xi summit. An EAI report noted that the FCC is "accumulating its own technology regulations against China," such as considering a ban on optical transceivers [11]. Given that the flashpoints of conflict are at the regulatory agency level rather than in White House diplomacy, localized friction is likely to persist regardless of whether a summit takes place [11]. Assessments also suggest that while Beijing has so far refrained from direct retaliation, its patience is being tested [11]. Nvidia's China sales problem is a derivative of this accumulation of bureaucrat-led regulations.

In the economic structure, this is compounded by Nvidia's customer concentration risk. Sina Finance pointed out that despite a gross profit margin approaching 75%, Nvidia's forward price-to-earnings ratio has fallen to a five-year low [4]. The market is concerned about customer concentration risk and the AI circular financing model [4]. The exclusion of the Chinese market exacerbates these concerns. With sales already concentrated among a few hyperscale cloud providers, blocking China as an alternative growth driver means Nvidia's revenue base becomes even narrower.

In the security structure, a dual system of regulation and circumvention is solidifying. Swedish media outlet Dagens Industri reported that despite strict export regulations, Chinese Big Tech firms like ByteDance and Alibaba have secured hundreds of thousands of Nvidia's most advanced processors [13]. This indicates the existence of clear regulatory bypass channels [13]. In Taiwan, nine individuals, including one Nvidia employee, were indicted on charges of smuggling 74 Supermicro servers to China [15]. This means the line of regulatory enforcement lies not at the US border but within the logistics networks of third countries like Taiwan and Southeast Asia. This structure creates a dilemma where the more Washington tightens regulations, the greater the incentive for circumvention becomes.

3. Historical Precedents and Comparison of Similar Cases

The current situation is an extension of a pattern that has repeated since the A100/H100 export controls began in the second half of 2023. Back then, Nvidia also responded by designing alternative products immediately after the regulations were announced. The current phase following the H20 represents the third or fourth iteration of this pattern. A cycle has continued where a product designed to fall below the regulatory threshold is released, only for that product to also become subject to regulation a few months later. This repetitiveness is the reason why the market has come to treat China sales as a "nice-to-have, but not essential" variable.

Nokia's withdrawal from the telecommunications equipment business in China is a similar case that has already occurred in the telecom sector [2]. It is a noteworthy precedent in that a Western company's choice to forgo market access in a sector directly linked to national security is now being replicated in the semiconductor and AI sectors. However, there is a difference: Nvidia is closer to being excluded than withdrawing. Nokia's move was a voluntary business restructuring, whereas the void in Nvidia's China sales is a result created simultaneously by Washington's regulations and Beijing's self-reliance policy.

The case of Japan's semiconductor materials industry being relatively sidelined in the AI boom also serves as a point of comparison. An EAI report noted that in the first half of 2026, the export values of South Korea and Taiwan surpassed Japan's for the first time in history [5][7]. This is the result of expanding investment in AI data centers allocating more value-added to South Korea and Taiwan, which control HBM and advanced foundries, than to materials-focused Japan [5]. However, the same report also pointed out that China's semiconductor exports increased by 99.5% during the same period [7]. The assessment is that the advantage held by the party controlling a bottleneck is not permanent [7]. Nvidia's exclusion from China needs to be approached with the same logic. If the current regulations act as a catalyst accelerating China's construction of its own AI infrastructure, the very nature of the bottleneck could change over time.

4. Key Variables Shaping Future Developments

The first variable is the outcome of a potential Trump-Xi summit. Although an EAI report noted that the bureaucratic regulatory track is operating independently of the summit [11], an agreement at the leadership level could create political justification for easing regulations. Conversely, if the summit breaks down or ends without results, the pace at which individual regulatory agencies, including the FCC, accumulate measures is likely to accelerate [11].

The second variable is Beijing's threshold for retaliation. While Beijing has so far refrained from direct retaliation, assessments suggest its patience is being tested [11]. The diagnosis is that if a specific regulatory item crosses this threshold, it could trigger retaliation [11]. Whether the rare earth and critical minerals card will be played again is a key point to watch.

The third variable is whether regulatory bypass channels will persist. The intensity of various countries' crackdowns on physical smuggling routes, as seen in the Taiwan indictment case [15], will determine the actual volume of Nvidia chips circulating within China. At the same time, the size of the existing inventory secured by ByteDance and Alibaba [13] could either slow the pace of Chinese AI firms' transition to their own infrastructure or, conversely, give them more leeway to make that transition.

The fourth variable is Nvidia's pricing policy and the memory supply situation. According to Bloomberg reports, some large customers have been notified that server prices, including those with Vera Rubin and Grace Blackwell chips, will increase by over 15% [8][10]. The reason cited is rising memory costs [8][10]. As the incentive to offset the China sales gap by raising prices in non-China markets grows, Nvidia's reduction of its dependence on the Chinese market takes on the character of a strategic choice.