Underground Network Funnels Banned Nvidia Chips to China

"SINGAPORE -- A 26-year-old Chinese student in Singapore was packing last fall to return home for vacation. Besides his clothes, his luggage included six of Nvidia's advanced artificial-intelligence chips.

A connection from college asked him to bring the chips because the U.S. restricted their export to China. Each chip was roughly the size of a Nintendo Switch game console, and the student didn't flag any suspicions at the airport. Upon arrival, the student said he was paid $100 for each chip he carried, a fraction of the underground-market worth.

The student is part of a network of buyers, sellers and couriers bypassing the Biden administration's restrictions aimed at denying China access to Nvidia's advanced AI chips, The Wall Street Journal found. Nvidia's chips are highly coveted for their ability to handle the computations needed to train AI systems that are critical to China-U.S. tech rivalry.

More than 70 distributors are advertising online what they purport to be Nvidia's restricted chips, and the Journal got in contact with 25 of them. Many of the verified sellers said they have supplies amounting to dozens of the high-end Nvidia chips each month.

The flow of Nvidia chips is so steady that most of those sellers take preorders and promise delivery in weeks, the Journal found. Some sold entire servers -- costing upward of roughly $300,000 -- with each containing eight high-end Nvidia chips.

These merchants don't sell enough of the Nvidia processors to satiate a single tech giant's demands. But for AI startups or research institutions with more modest needs, procurement can be done. 

Every Nvidia chip matters to China, which wants to stay competitive with the U.S. in an AI race seen as crucial to tech sovereignty and national security.

The Chinese sellers could be advertising Nvidia chips they don't actually have or offering refurbished ones from older processors. But counterfeits would be nearly impossible to make given the uniqueness of Nvidia's top-end products.

The Journal's review includes verifying purchases with Chinese buyers who used the underground channels, as well as access to transaction records, customs filings and photos of the Nvidia chips up for sale. The Commerce Department, which oversees enforcement of the U.S. restrictions, didn't respond to requests for comment.

Nvidia doesn't sell its data-center chips individually or provide them directly to its AI customers. Instead, it ships them to third parties, such as Dell Technologies and Super Micro Computer, which deliver fully built AI servers or systems to those customers. These equipment providers often order more Nvidia chips than they need, in case demand surges or they run into manufacturing snags, according to industry participants. The equipment providers' visibility would be limited if the end buyer chooses to route the servers -- and the Nvidia chips in them -- to elsewhere, the participants added.

Dell and Super Micro said they comply with U.S. export controls and act if illicit behavior is discovered.

Nvidia said it doesn't sell its restricted advanced chips to China, in accordance with the U.S. export controls, and it works primarily with well-known partners to comply with the rules. "We apply the same standard to all transactions, large or small, and expect our partners to do the same," a Nvidia representative said.

Enforcement of the export curbs on Nvidia chips largely rests with the Commerce Department and the myriad companies along the semiconductor supply chain. Many foreign governments and jurisdictions aren't legally required to impose the U.S. controls, according to international trade lawyers.

The student transporting Nvidia chips didn't break any Singaporean laws, according to the lawyers, as the tech components aren't subject to any local export restrictions.

"Whether these transactions occur through distributors or intermediaries is very difficult to track," said Frank Kung, an analyst at TrendForce who focuses on semiconductors and cloud data centers.

The free flow of Nvidia's top-end chips in China began to dry up in late 2022 after Washington imposed a first round of export restrictions. Nvidia offered scaled-down versions for Chinese buyers, but Washington further limited access to such chips in October. That move led to the cancellation of hundreds of thousands of Nvidia orders, worth at least $5 billion.

Some Chinese companies have considered temporary solutions until local chip makers such as Huawei Technologies are capable of making better alternatives, people familiar with the matter said.

The informal market for Nvidia's advanced chips is believed to be relatively small compared with the overall market. One estimate put the median number of AI chips smuggled annually at 12,500, according to an analysis by the Center for a New American Security, a Washington, D.C., think tank. Nvidia sold worldwide last year an estimated more than 2.6 million A100 and H100 chips, along with their scaled-down versions, according to tech research firm Omdia.

The chips the Chinese student carried to China were passed down from a broker in Singapore known as "Brother Jiang," who is well known among chip distributors and buyers in the region. In interviews with the Journal, he said he taps contacts at distribution channels and system integrators in Southeast Asia to help Chinese customers get chips and servers.

He said his clients include AI companies, research institutions and chip resellers, some of which used entities set up in Singapore, Malaysia, Vietnam and Taiwan to circumvent U.S. restrictions.

After placing orders, he helped his buyers arrange logistics. That process could mean an individual ferrying in the product, or a more traditional delivery where Jiang helped prepare documents for customs declaration and contact with shipping companies.

"We don't do big orders. That would be too conspicuous," said the broker.

The system relies, in part, on incomplete paperwork that can avoid triggering authorities, some of the sellers said. In two March transactions, a Shenzhen, China, merchant received shipments of 20 Nvidia GPUs from Singapore and 40 from a Taiwan exporter -- without specifying what the chip models were, according to customs filings seen by the Journal. The seller told the Journal that the chips were one of the most off-limits: the high-end A100 processors.

The distributors the Journal found circulated product information in industry-group chats, online yellow pages of electronics suppliers and e-commerce sites. Many run bricks-and-mortar outlets in China's AI hubs such as Shenzhen and Beijing.

The underground-market prices have more than halved from last summer, as supply has become more stable while panic buying abated, sellers said.

Some merchants said they have up to dozens of chips in stock at one time, and preorders of bigger quantities can be delivered in one to two weeks. The chips come in their original wholesale packaging, they said.

"It does become very hard, but don't be silly, there is always a way," said a Beijing-based distributor when asked about how they managed to get the chips.

The Chinese student who brought Nvidia processors in his suitcase said he is willing to do so again. "I'm glad I was able to do something for my country -- and make a little extra money," the student said. "So, why not?"" [1]

 When sanctions hit the big banks, sanctions kick in. When sanctions apply to students carrying chips in their backpacks, they don't work.

1. Underground Network Funnels Banned Nvidia Chips to China. Huang, Raffaele.  Wall Street Journal, Eastern edition; New York, N.Y.. 03 July 2024: A.1.