The Daily - The Battle to Control the World’s Most Powerful Technology

Episode Date: September 4, 2024

The American company Nvidia has created one of the world’s most sought-after inventions: a computer chip that powers artificial intelligence.Amid concerns that the technology could help China modernize its military, however, the United States has tried to control the export of the chips.Ana Swanson, who covers trade and international economics for The New York Times, discusses her investigation into the escalating war over the technology.Guest: Ana Swanson, who covers trade and international economics for The New York Times.Background reading: With smugglers and front companies, China is skirting American A.I. restrictions.Read takeaways from our investigation into the trade in the chips.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From the New York Times, I'm Katrin Benhold, and this is The Daily. The American company Nvidia has created one of the most sought-after inventions in the world today. A computer chip that powers artificial intelligence. But the company has been in an ongoing battle with the US government over its chips being sold in China. Today, my colleague, Anna Swanson, on her investigation into America's escalating war to control this crucial technology and how it may be losing that war.

It's Wednesday, September 4th. So Anna, it's really hard to get into China these days as a journalist, but you were there recently on a mission to find something. Tell us about that. Yeah, so I traveled to China actually with Secretary of State Tony Blinken when he went to China in April. I'm a trade reporter, not a State Department reporter, but the State Department reporters were on spring break

with their families, so I stepped in and gladly went on that trip. There's been a lot of tension between China and the United States, and the Secretary of State was there on one of many recent missions to try to stabilize and manage this relationship. But I had been working on this other story about technology that the United States has banned from going to China, and I was really curious if it is available in China.

So I hopped on a train and I went to southern China to a city called Shenzhen. This is Shenzhen. It's just right across from Hong Kong on the mainland. And it is a capital of the tech industry, a really entrepreneurial city. It's Sunday afternoon. There are lots of shoppers out buying every kind of electronics imaginable. And I went to this amazing electronics market. It stretches for about half a mile.

But this market is like a maze. It's just blocks of these confusing buildings. So we're doing a lot of running around today. It's this really bustling place and it's a place that's notorious for selling basically any kind of electronic that you might want. Cables and electronic devices, fake Dyson hairdryers and Apple watches. And I'm wandering around around talking to different vendors,

trying to see if anyone sells this technology. And actually very quickly, I did find some who were willing to readily sell it. sell it. So what exactly is this piece of technology that you found? So these are the most advanced AI chips made by the US company Nvidia. They're essential now for creating artificial intelligence, and they've really landed themselves kind of at the center of this technology war between the United States and China. So how does it happen that this banned product ends up being for sale at this Chinese market?

So the answer to that question is kind of complicated, but it's the culmination of this multi-year cat and mouse game between the US government and Nvidia. And I call it a game, but the stakes are really high. It's happening in the context of this bigger military and geopolitical conflict between the United States and China. Okay, so there's a lot to digest here. Let's maybe break this down.

When I hear cat and mouse, I'm kind of thinking Tom and Jerry, right? A big player going after a smaller player, but perhaps a very nimble one, who always somehow manages to escape. So I guess my question is, in your scenario, who's the mouse? So NVIDIA in this case is the mouse. This company was founded in 1993 by a group of Silicon Valley engineers. And they've always had this knack for making business decisions that people didn't really understand at the time, but turned out to be very prescient and really paid off. Like what?

Nvidia is coming out with a 3D game software. So the first was early in their history. They were making chips that powered graphics for video games. And the company at one point almost went bankrupt, but it ended up inventing a kind of novel graphics card that was programmable. And it ultimately dubbed this the graphics processing unit or the GPU. NVIDIA's graphics processing units, or GPUs,

aimed to make video games ever more realistic. And I don't think the rest of the world, you know, realized what the implications of the GPU were for computing until much later. A single chip able to process a myriad of calculations all at once, not sequentially like more standard chips. But actually, Nvidia was thinking about this pretty early. By 2006, they had started working on this software

platform that allowed you to use these chips that were formerly for gaming for a lot more tasks like science and research. And then things really kick off with the sort of birth of AI, which comes in 2012. At that time, researchers started using GPUs to create an image recognition model. So they're creating a model that can recognize pictures of things like cats or strawberries. And using these GPUs, they create this model that basically blows the performance of all the previous models out of the water.

Over the next decade, researchers are making progress in AI using NVIDIA GPUs. It's their underlying tech stuff that powers everything that we see in this space. They're so far ahead of everybody. And then in 2022, there is this

huge breakthrough when ChatGPT, which is powered by NVIDIA chips, is released. And that's when everybody really woke up to the power of this technology. Nvidia is posting record revenue thanks to the AI boom. They're talking about 24 and a half billion dollars in revenue. Basically over the last year and a half, Nvidia's revenue and its stock have gone bananas. That's the technical term for it.

revenue and its stock have gone bananas. That's the technical term for it. Well, you know, Nvidia is up a thousand percent since chat GPT was introduced to the world. Its value becomes bigger than Amazon, Google or Facebook. Nvidia, how much further will it go? Wow. So this is basically the biggest company many people have never heard of. Definitely. And the secret to their success is they are selling the vast majority of hardware and software now that underpins the AI boom. So it's a little bit cheesy, but people like to say if the AI boom is a gold rush, NVID Nvidia is the one selling the picks and shovels to everyone. So what you're saying is that Nvidia is really synonymous with AI, this incredibly powerful

technology that everyone in the world is now trying to get a hold of. So that's the mouse. Who's the cat in this cat and mouse game? So the cat in this scenario is the US government. The US government starts to become very interested in this cat and mouse game? So the cat in this scenario is the US government. The US government starts to become very interested in this technology. It's watching Nvidia chips power science and AI developments all over the world, including in China. And in China, it's making big strides in terms of commercial industry,

but it's also helping to develop the military. So basically, Nvidia is a concern for the US government because it's selling to China, which is the US's main military and economic rival, and it's making a key component that can be used in advanced weapons technology, which is worrying. Right. So I think the vast majority of the chips that were sold to China by Nvidia weren't used for military purposes. They're used for commercial technologies like powering social media feeds and keeping high speed trains from derailing.

But they do go to designing new weapon systems. And there are also concerns about them being used for surveillance, for cyber attacks, and for things like disinformation. And that's why the US government is trying to figure out a way to stop the flow of this technology to China. Okay, so how does the US try to do that? So the US has a few different restrictions when it comes to technology. One of the most basic and widely used ones is something called the entity list. And what exactly is the entity list?

So the entity list, it's like a kind of sanction. It's a list that has foreign companies, universities, and organizations that the US considers a threat to national security and wants to stop the flow of technology too. The Entity List was started in the Clinton administration, but it was used more sparingly at first. And then the government starts to use it much more aggressively under the Trump

and Biden administrations, and particularly against China. And one of the companies that gets added to this list is an Nvidia customer. And what makes this particular customer of Nvidia so dangerous that the US government decides to put it on this entity list? So this is a company called Succon. It's a technology company that does advanced computing,

and it's buying American technology from Nvidia, Intel and Microsoft. And in 2019, the US government adds them to the entity list for helping to advance the Chinese military. And Sougan has also built this computing center in Xinjiang that the Chinese government is using to surveil Uyghurs, the minority population there. Okay, so Nvidia has been selling chips to a company that effectively has been partnering with the Chinese government.

But now it can no longer sell its chips to Sougan. Yes, but the thing about the Entity List is it's pretty easy to find workarounds. How so? Because the Entity List is based on names and addresses of particular companies, and companies can find ways to work around it by changing those. Okay. That seems like a big problem. Yeah.

So in this example, a bunch of former Sougan executives have left the company. It's been entity listed. And six months later, they create a new company, which is called Netrix They have a lot of ties Netrix executives are all former Sougan executives. They use Sougan's technology They buy parts from Sougan and they serve some of the same customers And we also found in reporting that Netrix's owners shared a location With some of Sougan's executives as well. But the companies say that they're separate companies and NVIDIA and Intel

and Microsoft all quickly form ties with this new company Netrix and continue to sell technology to it. And that's technically legal? So this is kind of a gray area. The companies need to do due diligence to ensure that Netrix is not a threat company for Succon. And the companies say that they've followed all the rules. But you know, even if it's legal, you have to ask, is this really doing much to accomplish

the government's goals of stopping the flow of advanced technology to China. Okay, so basically what you're saying is that Nvidia is still finding ways to sell its technology to people the government, strictly speaking, doesn't want it to sell to. Or to go back to our metaphor, the mouse seems to have escaped the cat. And it's kind of incredible how easy it seems to be to skirt these very serious efforts by, you know, the most powerful government in the world to stop the sale of these chips. Mm hmm. US officials are aware that the NTD list has some serious drawbacks. And very early in the Biden administration, they start thinking about more effective ways to restrict the flow of technology to China. And then in the middle of this cat and mouse game, something happens. They get a wake-up call, which really gets everyone's attention.

There's new concern tonight about China's military capabilities amid a report the country recently tested, a nuclear-capable hypersonic missile. So in the summer of 2021, China tests this new weapon, a hypersonic missile. The report says the missile circled the Earth before speeding toward its target, demonstrating an advanced capability in space that, quote, caught U.S. intelligence by surprise. And it's important because it could theoretically dodge around U.S. missile defense systems to deliver a nuclear warhead to the

United States or take out US aircraft carriers, which is really important in the event of a potential war over Taiwan. Wow. All this essentially means China is close to being able to launch a nuclear warhead against any other nation without any warning and there'd be no defense against it. And U.S. officials are really worried about it because this technology surpasses what the United States has developed. And much is still unclear about this technology, but the U.S.

government suspects that NVIDIA chips have helped to make this type of weapon possible. that Nvidia chips have helped to make this type of weapon possible. So in a way, this missile confirmed the US' worst fears. Basically, American technology helping China to build a weapon that was actually more advanced than the US equivalent. Yes, this really scared people across the government that the Chinese military might be able to leap ahead in certain areas. So the United States decides to double down on its efforts to restrict NVIDIA chips. We'll be right back.

So Anna, after this Chinese missile that was powered in part by American technology, totally freaked out the US government, what happens next in this cat and mouse game with Nvidia? So in 2022, the US tells Nvidia to stop selling its most advanced chips at the time to China. Overnight chipmaker Nvidia shares fell 7.7% after chipmaker said the US government is restricting some sales into China. So at this point, the Biden administration is going not just after a specific Chinese

company, but it halts the sales of these most advanced chips to the entire country of China. It's a move that could hamstring Chinese firms' ability to carry out advanced work like image recognition and cost NVIDIA hundreds of millions of dollars in business. So I guess in theory, this should be a total shutdown, right? How does NVIDIA react to this? So NVIDIA quickly adapts. Nvidia soon found a workaround, developing a slightly less sophisticated chip, which

got around the US controls. They take their most advanced chip and they develop a slightly downgraded version that's within the limits set by the US government and they quickly start selling it to China and Chinese companies start snapping up this product. And US officials are definitely surprised and quite annoyed and the refrain within the government is that Nvidia is following the letter but not the spirit of the rule. And to Nvidia and its defenders, this kind of charge is ridiculous. They say, if the speed limit is 65 miles per hour and I'm going 63, am I breaking the law?

Of course not. I mean, does Nvidia have a point? In the end, it's up to the government, right, to design its policy in a way that it achieves its policy goal. And this one does not seem to be working all that well. So yeah, the US realizes that these degraded Nvidia chips will basically allow China to do about the same thing as before in terms of AI. So the US government decides to lower the speed limit and also ban these newer chips

that Nvidia has made. But I think this all raises a really interesting question about these rules. How far does the US government need to go? And how much does the US want to erode the business of this American company in China so that we don't risk US national security? The government has to walk this very fine line between business interests and national security and they're still trying to figure out where this line is. Okay, but while the government is trying to figure out where this line is,

we do know that these banned Nvidia chips are still available in China, as you yourself saw at this market in Shenzhen. Yeah, I found people there who were readily willing to sell them. There's no evidence that Nvidia sold these chips directly to the market or broke any laws here, but there are certainly avenues for the chips to end up there. So for one thing, these chips are all manufactured in Taiwan, and then they're sent to companies around Asia that put them into computers or sell them on, and it seems like there are plenty of middlemen and smugglers that are then forwarding these chips on to China and making a good deal in the process.

So based on everything you've told us, am I correct in thinking that Nvidia has won this cat and mouse game? Well, they don't think they're winning. Why is that? So they've been shut off from a massive market in China. So China sales have gone from about 20% of the company's revenue to more like 10 now. And it's creating a massive open market there for Chinese companies to potentially develop rival products to what Nvidia is offering. So you're saying it's almost like these US restrictions have created a vacuum in which China is developing its own chip making capacity. Is it possible that these restrictions hurt rather than help US policy goals?

Well, I think the restrictions are still definitely slowing down China's industry and China's chip development efforts because the country can't get the most advanced technology anymore to make its own chips. But it is creating this kind of huge protected market for Chinese companies to develop. And it's certainly strengthening China's resolve at the amount of money that it's pumping into technology in order to develop alternatives to the United States. This is a trend that China was pursuing before these US restrictions,

but now it has no other alternative. And what do we actually know about China's competition to Nvidia? Do we have evidence that they are catching up? So Huawei, the Chinese technology company, has been rolling out some AI chips and they still seem to be lagging behind NVIDIA. But Huawei is reportedly rolling out another AI chip this year that will be as good as Nvidia's most advanced products.

Wow. Meanwhile, Nvidia is also racing ahead. It's planning to introduce a new, more advanced chip later this year that will be a lot better, but it's certainly a race. And what does the US government make of the fact that China is now investing a ton in this AI space and in fact that its leading company in the space, Huawei, is starting to release chips that could rival Nvidia's chips. So they know that they're not stopping China entirely, but in the meantime, the United States is investing in its own chips industry.

Nvidia and other companies are continuing to innovate and the US is trying to race ahead. And the US government says that that lead matters. So Anna, we spent most of this episode talking about a cat and mouse game between the US government and Nvidia. But as you said yourself earlier, behind all of this is the race between the US and China for technological and military supremacy. And so I guess the key question here is, as we're ending, what does this story about chips tell us about the state of that race?

Yeah, so there is a lot of concern over the economic implications of this and the kind of collateral damage for US companies that we've been talking about. And I think, you know, the government doesn't want to cause that, doesn't want to harm US companies, but it thinks that the stakes are a lot higher here. That artificial intelligence and technology developments can change the course of how the US and China develop and their economies and their national security. And essentially, America's technological supremacy and military supremacy has now been unquestioned for decades.

And China's technological development is starting to put us into uncharted territory. And there are concerns that as China develops, that could change the balance of power in ways that in a worst-case scenario could potentially put peace at risk or lead to a war between the countries. So there are big questions here. Can the U.S. maintain its technological supremacy? For how long? And what happens when China catches up?

And I think we're just at the beginning of that story. Anna, thank you very much. Thanks for having me. We'll be right back. Here's what else you need to know today. On Tuesday, a federal judge in Manhattan denied an effort by former President Trump to claim immunity in his New York State hush money case, in which he was already convicted. Earlier this year, a jury had found Trump guilty of covering up payments he made while

in office to a porn star who had threatened to go public about an affair. Trump invoked a recent Supreme Court ruling granting presidents broad immunity for official acts. But the judge said that ruling was irrelevant in this case. Harsh money payments, he said, were private unofficial acts outside the bounds of executive authority. The sentencing in this case is scheduled for mid-September, less than seven weeks before election day.

And a Russian missile strike killed more than 50 people and injured many more, according to Ukrainian officials. It was one of the deadliest attacks of the two and a half year war. Two ballistic missiles hit a military academy in a neighboring hospital in the Eastern Ukrainian city of Poltava. The attacks come at a particularly active moment in the war. Ukraine is pressing

an offensive into Russian territory while Russian forces are advancing in Ukraine's east. Today's episode was produced by Ricky Nowetzki, Mouch Zadie and Eric Krupke with help from Luke Wunderplug. It was edited by Lisa Chow, contains original music by Dan Powell, Marin Lozano, Pat McCusker and Diane Wong, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wanderley. That's it for the Daily. I'm Katrin Benholt. See you tomorrow.