• Nvidia shares declined 1.7% following a report that Alibaba is developing a new AI chip, intensifying competition in the constrained Chinese market.
  • The move underscores China's accelerated push for semiconductor self-reliance in response to ongoing US export restrictions on advanced chips.
  • Alibaba's cloud revenue, which grew 26% year-over-year to $4.66 billion in its last quarter, is a key driver behind its investment in domestic AI infrastructure.

Nvidia’s shares slumped in late trading Thursday after a report detailed Alibaba Group’s development of a new artificial intelligence processor, a significant step by the Chinese tech giant to fill a supply gap created by US sanctions limiting Nvidia’s most advanced chip sales to China.

The effort, according to people familiar with the matter, is part of a broader push by Alibaba to reduce its reliance on foreign semiconductor technology. It highlights the escalating tech rivalry between the US and China and the rapid maturation of China’s domestic chip design capabilities. A spokesperson for Alibaba did not immediately respond to a request for comment.

US export controls have blocked sales of Nvidia’s top-tier chips, like the H100 and the new Blackwell series, to Chinese firms, creating a void in the market estimated to be worth as much as $50 billion for data center and AI applications. This has forced Chinese companies to accelerate their own research and development. Nvidia has previously warned investors that it could lose access to the entire China data center market if it cannot develop products that comply with US regulations.

Alibaba’s cloud business, which reported a 26% year-over-year revenue increase to $4.66 billion in its most recent quarter, is a primary beneficiary of and driver for this domestic chip development. The company, along with rivals like Huawei and SMIC, is striving to create viable homegrown alternatives, though industry analysts note the performance of Chinese chips still lags behind that of cutting-edge US designs.

The geopolitical tension has introduced significant volatility for investors. While shares of US semiconductor firms like Nvidia face pressure from the potential long-term loss of a massive market, Chinese chipmakers have seen their stock prices surge on the prospect of increased government support and domestic market capture.

Further complicating Nvidia’s position in China, the company’s H20 chip—the most powerful version it is currently permitted to sell there—has recently faced scrutiny from Chinese cybersecurity officials. Some government advisors have reportedly recommended halting orders over potential security concerns, citing fears of "information leaks."

Without a reliable supply of high-performance AI chips from US suppliers, Chinese tech firms would be forced to rely on their own, less advanced technology, potentially slowing the pace of AI development in the country in the short term but almost certainly fueling a more independent and competitive industry in the long run. The race for AI chip dominance has become a central front in the broader US-China economic and technological conflict.