Title: Chinese Entities Exploit Cloud Services to Bypass US Restrictions on Advanced AI Chips - What Investors Need to Know
By Eduardo Baptista, Fanny Potkin, and Karen Freifeld
BEIJING/SINGAPORE/NEW YORK (Multibagger) - State-linked Chinese entities are leveraging cloud services provided by Amazon (NASDAQ: AMZN) and its competitors to access advanced U.S. chips and artificial intelligence capabilities, according to recent public tender documents.
Background: U.S. Export Restrictions and Loopholes
Over the past two years, the U.S. government has imposed stringent export controls on high-end AI chips to China, aiming to curb the Chinese military's technological advancements. However, these restrictions have not covered remote access to such technologies via the cloud, creating a significant loophole.
Cloud Services as a Gateway
A Multibagger investigation of over 50 tender documents from publicly accessible Chinese databases revealed that at least 11 Chinese entities sought access to restricted U.S. technologies through cloud services. Among these, four specifically named Amazon Web Services (AWS) as their provider, although they accessed these services indirectly through Chinese intermediaries.
Amazon’s Strategic Position
AWS, holding nearly one-third of the global cloud infrastructure market, has become a pivotal player in this scenario. In China, AWS ranks as the sixth-largest cloud provider, according to IDC. Notably, Shenzhen University spent approximately 200,000 yuan ($27,996) to access AWS cloud servers powered by Nvidia's (NASDAQ: NVDA) A100 and H100 chips. These chips are banned for direct export to China.
U.S. Government’s Response
The U.S. government is actively working to close this loophole. Legislation introduced in April aims to empower the Commerce Department to regulate remote access to U.S. technology. The Commerce Department has also proposed rules requiring cloud services to verify large AI model users and report their activities to regulators.
Chinese Demand for Cloud Services
The demand for cloud services among Chinese entities is not limited to AWS. Microsoft’s (NASDAQ: MSFT) Azure is also in high demand. For instance, Sichuan University intended to purchase 40 million Microsoft Azure OpenAI tokens for a generative AI project. Similarly, the University of Science and Technology of China (USTC) sought to rent 500 cloud servers, each powered by Nvidia A100 chips.
Beyond AI Chips
Amazon has also offered Chinese organizations access to advanced AI models such as Anthropic's Claude, which they would otherwise be unable to obtain. Despite restrictions, subsidiaries of Chinese companies located outside China have managed to utilize these technologies.
Investor Takeaway: What This Means for Your Portfolio
- Growth in Cloud Services: The demand for cloud services in China is robust, driven by the need for advanced AI capabilities. This presents a growth opportunity for companies like Amazon, despite geopolitical tensions.
- Regulatory Risks: The U.S. government's efforts to close regulatory loopholes could impact the revenue streams of cloud service providers. Investors should monitor legislative developments closely.
- Tech Dependencies: The reliance of Chinese entities on U.S. cloud services underscores the strategic importance of advanced AI technologies. Companies with a strong foothold in AI and cloud computing could see sustained demand.
Breaking It Down: Why This Matters to You
Imagine you’re a small business owner trying to access the latest AI tools to stay competitive. Now, think of China’s state-linked entities in a similar position but on a much larger scale. Due to U.S. export restrictions, they can’t directly buy advanced AI chips. Instead, they turn to cloud services from companies like Amazon and Microsoft to get what they need. This workaround has significant implications:
- Economic Impact: Continuous demand for cloud services can drive growth and profitability for tech giants, potentially boosting stock prices and dividends for investors.
- Regulatory Scrutiny: As the U.S. tightens regulations, there could be short-term volatility in the stock prices of cloud service providers.
- Global Tech Dynamics: The situation highlights the interconnectedness of global tech ecosystems and the strategic maneuvers companies must employ to stay ahead.
Understanding these dynamics can help you make informed decisions about investing in tech stocks and navigating the ever-evolving financial landscape.