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China Launches Antitrust Probe Into Nvidia Amid US-China Chip Tensions

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China announced on Monday it has launched an antitrust investigation into Nvidia, targeting alleged violations of the country’s anti-monopoly law. This move is seen as a countermeasure to recent U.S. restrictions on China’s semiconductor industry, escalating tensions in the ongoing tech rivalry between the two nations.

The State Administration for Market Regulation (SAMR) stated that Nvidia, known for its AI and gaming chips, is under scrutiny for potentially breaching conditions set during its 2020 acquisition of Israeli chipmaker Mellanox Technologies. While details remain scarce, the regulator mentioned suspicions about Nvidia violating commitments to supply products on “fair, reasonable, and non-discriminatory” terms, among other stipulations.

Retaliatory Backdrop

This probe follows heightened tensions between Washington and Beijing. Last week, the U.S. introduced new restrictions on 140 Chinese companies, further curbing China’s access to advanced semiconductor technology. In response, Beijing banned exports of critical minerals like gallium, germanium, and antimony to the U.S.

In addition, four major Chinese industry associations called on domestic firms to reduce reliance on U.S. chips, labeling them “unsafe” and encouraging purchases from local suppliers. Nvidia, which once commanded over 90% of China’s AI chip market, has faced diminishing revenue from China, dropping from 26% of its global total two years ago to 17% by January 2023.

Nvidia’s shares fell by 2.5% on Monday following the announcement. The company stated it would cooperate with regulators and reaffirmed its commitment to honoring agreements in all regions. However, analysts like Bob O’Donnell from TECHnalysis Research believe the investigation’s immediate impact on Nvidia will be limited, as U.S. restrictions already prevent the sale of its most advanced chips to China.

Nvidia’s Strategic Adjustments

U.S. sanctions in 2022 prohibited Nvidia from selling its A100 and H100 AI chips to China, prompting the company to create modified versions for the Chinese market. Further tightened U.S. export controls in 2023 led Nvidia to develop new variants tailored to Chinese restrictions. Despite these challenges, Nvidia faces mounting competition from domestic players like Huawei.

China’s Antitrust Track Record

China’s antitrust probes into foreign tech companies are not new. The most prominent case occurred in 2013, when China fined Qualcomm $975 million for market abuse in wireless communication standards. Similar to that case, Nvidia is accused of practices such as discriminatory terms, product bundling, and unfair supply conditions—issues tied to the Mellanox acquisition conditions.

The investigation could signal Beijing’s intent to leverage regulatory tools to counter U.S. sanctions while fostering its domestic chip industry.

Nvidia’s Engagement with Activist Hedge Fund Starboard: A Pivotal Moment in the Tech Giant’s Growth

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In 2013, Nvidia faced growing pressure from its shareholders. Despite holding a strong cash reserve of $3 billion, the company’s stock had remained stagnant for years, with modest sales growth and declining earnings. The company’s market value was $8 billion, but its growth rate was slow, which led to a relatively low price-to-earnings (P/E) ratio of 14 times earnings. The company’s core assets were undervalued, according to activist hedge fund Starboard Value, which had accumulated a $62 million stake in Nvidia by June of that year.

Starboard, founded by Jeff Smith, expressed dissatisfaction with Nvidia’s performance and raised concerns over its underwhelming growth. Nvidia’s leadership, however, was wary of Starboard’s influence, fearing it might push for drastic changes, including a potential restructuring. Despite initial concerns, the relationship never escalated into a full-blown confrontation, with Nvidia’s board avoiding a “DEFCON 1” crisis. Instead, Starboard advocated for aggressive stock buybacks and a strategic de-emphasis on non-core projects like phone processors. By November 2013, Nvidia agreed to buy back $2 billion in stock, a move that triggered a 20% surge in its stock price. Starboard sold its shares by the following March, marking the end of its involvement.

The Mellanox Acquisition: A Strategic Move Prompted by Activists

Though Starboard’s direct influence on Nvidia was short-lived, it played a crucial role in a later, transformative acquisition. In 2017, Starboard invested in Mellanox Technologies, a company that specialized in high-speed networking for data centers. After Mellanox struggled to achieve strong financial returns, Starboard pressured its leadership for better performance, eventually paving the way for a potential sale.

In 2018, Mellanox received a nonbinding offer for $102 per share, prompting a bidding war between Nvidia, Intel, and Xilinx. Nvidia emerged victorious with a $6.9 billion cash offer, finalizing the deal in March 2019. Jensen Huang, Nvidia’s CEO, saw the acquisition as pivotal for Nvidia’s push into high-performance computing and AI, areas where Mellanox’s networking technology, particularly its InfiniBand products, would be indispensable for large-scale data centers.

A Game-Changing Acquisition for Nvidia

The Mellanox acquisition paid off beyond expectations. By May 2024, Nvidia’s former Mellanox division reported $3.2 billion in quarterly revenue, a sevenfold increase from the final quarter of Mellanox as an independent company. Within four years, the Mellanox business had grown into a $12 billion annual revenue stream.

Nvidia’s strategic understanding of the growing demand for high-performance computing, fueled by AI and data analytics, was key to its success. The integration of Mellanox’s advanced networking technology has become essential in scaling AI applications, where minimal latency and efficient data transfer are crucial.

A Strategic Masterstroke

Looking back, Nvidia executives and industry experts view the acquisition as a defining move in the company’s rise to dominance in the AI sector. Jay Puri, Nvidia’s head of global field operations, described it as one of the company’s best-ever acquisitions, thanks to its pivotal role in enhancing Nvidia’s position in the data-center market.

Despite not initially recognizing the potential of Mellanox, Nvidia’s ability to act decisively when the opportunity arose demonstrates its knack for capitalizing on industry trends and executing on large-scale acquisitions. For Jeff Smith of Starboard, the Mellanox acquisition stands as a reminder of the lasting impact activist investors can have on companies, even after their direct involvement ends. As Smith reflected, “We never should have exited the position.”