A New Career – Smuggling of AI Chips

An online recruitment ad in China recently garnered a lot of attention by announcing that couriers were needed to smuggle semiconductor chips, 5kg at a time, into China, with the chips having been illegally rerouted from the US.

The remuneration for each trip stood at CNY 150,000 (about $20,000). Curiously, the job post also acknowledged that although smuggling is illegal, it still contributes to the ‘motherland’.

Artificial Intelligence (AI) chip smuggling into China should not come as a surprise. China has a long history of diverting US technology to various end users, in spite of US export restrictions. Indeed, many goods being smuggled into Russia today – including those destined for the Russian military – pass through China. According to estimates, despite the sanctions, about $570 million worth of US chips were sold to Russia from Hong Kong and mainland China in 2022.

How it started

In 2022, the US government banned tech companies from supplying advanced chips and chipmaking equipment to China, citing security reasons. The restrictions caused American multinational tech company NVIDIA to stop providing China with its A100 and H100 graphic processing units (GPUs), used for building large-scale machine learning infrastructure and developing generative AI.

As a result of the ban, NVIDIA, which commands more than 90% of China’s $7 billion AI chip market, introduced modified substitutes of A100 and H100, specifically for the Chinese market, thereby allowing it to comply with the new export rules.

However, in October 2023, the US government decided to expand its export control regulations on AI chips by banning China-specific NVIDIA and Intel GPUs. Furthermore, it added Chinese GPU design start-ups Biren Technology and Moore Thread Intelligent Technology to a trade blacklist, placing these two firms in the same situation as Huawei Technologies – which is struggling to find water foundries to process its chip designs into finished silicons.

The AI chip market in China 

According to McKinsey, the AI market in China will provide a $600 billion opportunity over the next decade. AI chips have a strong demand among Chinese tech giants, including Tencent, Alibaba, ByteDance, and Baidu. These companies have been purchasing NVIDIA’s chips in large quantities in recent months, leading to a shortage in the local market. As Chinese chip manufacturers need to gain expertise in designing their chips at the level of AMD, Intel and NVIDIA, the silicon designed in China is not as good as that produced by the big three.

Exorbitant markups

The US tech ban, combined with the strong demand from Chinese big tech companies, has led to the emergence of a massive smuggling ring inside China, dealing in high-end AI and machine learning GPUs – like those of NVIDIA – at an exorbitant markup.

As a result, the price of NVIDIA GPUs obtained through unofficial channels has been driven even higher. In Shenzhen’s Huaqiangbei subdistrict, the world’s largest electronics wholesale market, one vendor is selling A100 GPUs for almost $18,000, surpassing the manufacturer’s suggested retail price of $10,000.

With so much at stake in this booming market, Chinese tech giants are also looking for a domestic source to reduce reliance on American technologies. But until Chinese chip manufacturers are able to elevate their expertise to the level of AMD, Intel, and NVIDIA – and as long as US export bans remain in place – the smuggling of AI chips will likely continue unabated, with the promise of a lucrative new career for couriers – all in the name of the ‘motherland’.