Oh, I think we're at most at the bottom of the third. The AI story is still unfolding, and just because every single inning has continued to be shocking doesn't mean we're done yet. When I think about the DeepSeek news and its impact on Nvidia, there were two big arguments out there. One was the idea that, oh my gosh, if we can be so efficient in using these models, then maybe we need fewer Nvidia chips. That was obviously a garbage take, right? Indeed, in an AWS cloud provisioning of GPUs, the prices went up that week, right? So as soon as people said, wow, I could be a lot more efficient in using these chips, they wanted more of those chips, not fewer of those chips. But there was a second line of analysis, which is what about the competitive moat that surrounds Nvidia? Is Nvidia really the only game in town? And that's what I dove into with this paper, which is about the potential alliance of DeepSeek and Huawei to create an alternative cheap chip ecosystem that could finally achieve the relevant network effects, the relevant economies of scale, to be a credible competitor to the Nvidia CUDA software moat.
Wow, this is a horror movie in the making. In that world, are we talking about a competitor that's still using Nvidia chips by routing them around some third party or something, or in fact working with Taiwan Semiconductor to illegally make chips using technology they shouldn't have? Because you touch on that, this is a big, big problem for the export controls.
So if you remember, we don't want China to have advanced AI, so we're not going to sell them advanced AI chips. That means we also have to not sell them the equipment used to make those chips, but we also can't let them rent that equipment from places like Taiwan, TSMC. And it turns out what we've deduced in this report from sources that I spoke to, that TSMC made more than 2 million advanced AI chips for Huawei. Now this is the Ascend series of chips, which Huawei's chip designers have been working on for a long time, and SMIC, a company in China, is trying to manufacture them but struggling mightily. So the assist from TSMC, which is great at making advanced node logic semiconductors, getting 2 million of these chips from them is a big, big leg up. Now that's not the end of the story. Nvidia can still compete; they still have strong advantages. Their chips are not only higher performing, but they're backed by a much more robust software ecosystem, which makes it more desirable to develop on these chips. But if I was Nvidia, this is the part of the DeepSeek story that I would be concerned about, not the efficiency gain.
Or if you're the Trump White House, should it not be as well? We're cutting deals with TSMC to make foundries here. When what, should we be sanctioning this company?
US policymakers were enraged to learn this news, and that was the right response, right? We don't want our allies, people who are under the US defense umbrella, providing national security critical capabilities to China, and that's what's going on here. Now, TSMC, of course, they'll say that this was a shell company, meaning that we didn't know it was Huawei, it was somebody pretending not to be Huawei. But when you're making 2 million advanced node semiconductor chips, what kind of due diligence practices do you have in place if you can't detect a sale of that size being Huawei in disguise?
So then, yeah, what do we have in place, and what does this mean for export controls? This is like a joke.
So the Biden administration, this actually happened in the Biden administration era when these chips were being manufactured, and they introduced a new rule called the Foundry Rule, one of the last actions they took on export controls before leaving office, and it effectively moves all of TSMC from a blacklist model, you know, the entity list, you're not allowed to sell to Huawei, you're not allowed to sell to X, to a whitelist model. You're only allowed to sell to the good guys, and we will tell you who the list of good guys is. So the idea that Huawei could just create another shell company called, you know, Happy Chip Co., done, doesn't matter, you're not on the whitelist. It doesn't matter if you promise not to be Huawei, and any new companies are going to have to be reviewed under a very diligent thing. That's the mess that TSMC has gotten itself into. This failure was so big that things are never going to be the same for them in terms of doing due diligence on new customers.
Incredible to think that this is going on here, and if you're Jensen, you're wondering about the security of your own IP here.
Of course, right? Yes, I mean, Nvidia has been the victim of major cyber attacks that got pretty dang close to the crown jewels. Now, counterintuitively, these were not even state actors. This is reporting done by Wired a few years ago. These were folks who just wanted to use Nvidia chips for Bitcoin mining, and they were mad when Nvidia adopted a policy prohibiting that, and so they started cyber attacking Nvidia and saying, we will release all your critical intellectual property until and unless you lift this Bitcoin mining ban. I mean, that is shocking, that just a cyber criminal outfit was able to get so close to the crown jewels of Nvidia. It makes you wonder when we're dealing with a nation state such as China and they have their crosshairs aimed at Nvidia, at OpenAI, at everybody who has really valuable AI intellectual property. It's a big challenge.
Boy, this is all pretty scary stuff. We're going to go into overtime with you. You don't have to leave yet, right? Because this is too important, and our listeners and viewers find this incredibly compelling. When you consider the findings that you have made here, it also suggests that this whole DeepSeek revelation was based on theft. Is that not the truth? IP theft, actual hardware theft, otherwise it wouldn't have taken place. But you're saying that doesn't matter, they still did things with these tools that are worth our attention.
