AI chip sell-off exposes opaque economy leaning on Nvidia

Last week's volatile trading in AI-linked shares offered a stark look at an opaque, circular economy that still depends heavily on one company: Nvidia.

The trouble started on Monday, when Chinese memory chipmaker CXMT soared 466% on its Shanghai debut, reaching a value of 3.3tn yuan (£365bn). The same day brought reports that China had developed its own deep-ultraviolet lithography tools, a key piece of chipmaking equipment previously controlled by the Dutch firm ASML.

Shares in chipmakers around the world fell. South Korea's Kospi index slid 11.5% on Tuesday and another 6% on Wednesday, pulled down by SK Hynix and Samsung Electronics. On Thursday, the Nasdaq briefly entered correction territory, dropping more than 10% from a recent high before easing back. Nvidia fell more than 5%, and Apple overtook it as the world's largest listed company.

Friday brought a sharp rebound after strong results from Amazon and Microsoft calmed investors. The Kospi jumped nearly 20%, although the week still pushed it to its worst month since October 2008.

Analysts saw the sell-off as excessive. CXMT makes Dram memory chips, not the GPUs that are the brains of AI systems, so it is not a direct challenge to Nvidia. It could hurt memory makers SK Hynix and Micron, but Forrester analyst Alvin Nguyen said the global memory shortage is likely to continue until 2030.

The more serious worry is China's reported ability to make lithography tools. If the reports are correct, Beijing could eventually produce GPUs rivaling Nvidia's, but a serious competitor remains years away. "Fabs still take years to develop," Nguyen said. Mark Boost, chief executive of UK cloud company Civo, called the panic an overreaction, saying a handful of lithography machines is a symbolic victory, not an overnight commercial replacement for ASML.

Nvidia's slide also reflected a Wall Street Journal report that it was considering a $250bn backstop for OpenAI's large datacentre project, about six months after a $100bn deal between the two fell apart. Morningstar called that a significant factor in Nvidia's decline.

The underlying anxiety is that Nvidia has become the "central bank of AI," propping up vast parts of the economy and stock market in ways most people do not understand. Nguyen said the gravy train will eventually run out, and while Nvidia may no longer be one of the most valuable companies in the world, it could still be worth $2tn. "It's still pretty good."

Source: The Guardian