Exclusive-China's H3C warns of Nvidia AI chip shortage amid surging demand

BEIJING (Reuters) -One of China's largest server makers, H3C, has flagged potential shortages of Nvidia's H20 chip, the most advanced AI processor legally available domestically under U.S. export controls, in a client notice seen by Reuters. The potential supply crunch could create obstacles for China's artificial intelligence ambitions at a time when its tech firms are aggressively expanding their investments in AI.

"H20's international supply chain faces significant uncertainties," the company said in Tuesday's notice, adding that current inventory was nearly depleted.

Geopolitical tension that is roiling global trade and supply of key materials was responsible for the uncertainty, it added, saying new shipments were expected by mid-April this year.

After publication, a Nvidia spokesperson said the company declined to comment. In a statement to Reuters following publication, H3C said "after verification, neither the company nor any of its departments have issued this notice or its related content."

Demand for H20 chips has surged in recent months as companies rush to adopt Chinese AI startup DeepSeek's cost-effective AI models.

Tencent ( TCTZF ), Alibaba ( BABA ) and ByteDance have significantly increased orders of the H20 since the Chinese AI startup burst into the global public consciousness since January, Reuters reported last month.

The Chinese server maker said supply plans beyond April 20 also face uncertainties from raw material policy changes, shipping disruptions, and production challenges. In the notice, H3C said it would distribute incoming H20 chips on the basis of a profit-first principle, prioritising stable, long-term customers with higher profit margins on their orders.

H20 processors are currently scarce in the Chinese market, said an industry source, who distributes AI servers including those that make use of H20 chips.

"We were told the chips would be available, but when it came time to actually purchase them, we were informed they had already been sold at higher prices," added the source, who sought anonymity given the information is private. U.S. officials were considering curbs on sales of H20 chips to China, Reuters reported in January.

H3C is a major OEM partner for Nvidia's AI chips in China, alongside others such as Inspur, Lenovo ( LNVGF ) and Huawei's spin-off x86 server unit, xFusion. The primary chip Nvidia is legally permitted to sell in China, the H20 was launched after the latest round of U.S. export restrictions took effect in October 2023.

Washington has banned exports of Nvidia's most advanced chips to China since 2022, concerned that its rival could use advanced technologies to build up its military capabilities. Analysts estimate Nvidia shipped about 1 million H20 units in 2024, generating revenue of more than $12 billion for the company.

Huawei and Cambricon offer domestic alternatives to the H20.

(Reporting by Liam Mo, Che Pan, and Fanny Potkin and Brenda Goh; Editing by Clarence Fernandez and David Evans)