'Worst-case scenario': In what ways Nvidia's challenges in China might weaken its market advantage

Nvidia Faces Ongoing Challenges in China

Nvidia (NVDA) continues to encounter significant obstacles in its Chinese operations due to persistent geopolitical tensions, raising concerns about the company's long-term competitiveness in the AI chip sector.

Strained relations between the US and China have severely disrupted Nvidia’s business in one of its most important markets. According to Bloomberg, the company’s latest quarterly report showed that revenue from China, including Hong Kong, plummeted by 45% year-over-year to approximately $3 billion.

This week, the US government approved Nvidia’s H200 chip for export to China, but imposed a 25% tariff. However, Chinese authorities are restricting GPU imports except under special circumstances.

Despite these setbacks, Nvidia’s dominance in the chip industry has remained largely intact since it initially lost access to the Chinese AI market in 2025. The company achieved a $5 trillion market valuation last autumn. Even with declining sales in China, Nvidia’s overall revenue for the third quarter surged by over 60%, reaching around $57 billion.

However, analysts told Yahoo Finance that China’s push to develop and adopt homegrown chips could eventually erode Nvidia’s global lead.

They warned that Nvidia’s strong position in AI software could be threatened if Chinese technology firms make progress with open-source alternatives, potentially undermining the company’s hardware leadership as well.

“That’s the real nightmare scenario,” commented Jay Goldberg, an analyst at Seaport.

Nvidia’s Software Advantage

A significant part of Nvidia’s strength lies in its proprietary software ecosystem. Developers working with Nvidia’s AI hardware depend on the CUDA platform, which offers a suite of exclusive tools that optimize GPU programming and reinforce Nvidia’s leadership in the chip market.

As organizations continue to build on CUDA, switching to a different software platform becomes increasingly costly and inconvenient. This reliance ensures that developers remain committed to Nvidia’s products, as CUDA is only compatible with Nvidia GPUs. This software loyalty is crucial for maintaining Nvidia’s edge in hardware.

Nvidia founder and CEO Jensen Huang at CES in Las Vegas, January 6. (Patrick T. Fallon / AFP via Getty Images)

Although Chinese chipmakers—including major players like Huawei and Alibaba (BABA), as well as newer entrants such as Moore Threads and MetaX—still trail Nvidia in chip performance, there is a growing risk. Chinese AI developers, compelled to use these less advanced domestic chips, may accelerate the creation of open-source software, which is typically designed to run on a variety of hardware platforms.

The Threat of Open-Source Software

If open-source AI software developed in China gains global traction, Nvidia’s competitive edge could be significantly diminished.

Bob O’Donnell, chief analyst at TECHnalysis, remarked, “For Nvidia, the focus is increasingly shifting to software and models. The bigger issue in China may ultimately be whether CUDA is replaced, rather than the chips themselves.”

Jay Goldberg from Seaport also highlighted the potential impact if open-source tools from China become more prominent. “We could see open-source software tools emerging from China that bypass Nvidia’s key advantage, CUDA. As a result, companies outside China might start adopting these alternatives,” he explained.

“That would create a major vulnerability in Nvidia’s competitive position,” Goldberg added.

Debate Over Trade Restrictions

While some US policymakers argue that restricting Nvidia chip exports is vital for national security, Nvidia contends that losing access to the Chinese market could weaken America’s overall competitiveness. The company points to examples like DeepSeek’s progress in early 2025, which demonstrates how Chinese developers are finding innovative ways to advance AI with limited resources.

CEO Jensen Huang stated in a post on X last November, “As I have long said, China is nanoseconds behind America in AI. It’s crucial for America to maintain its lead by accelerating innovation and attracting developers worldwide.”

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