The Nvidia crisis may hurt China more than it benefits it

Of all the fevers unleashed by the rise of artificial intelligence (AI), the one that will end up being regretted the most may be Jensanity. Jensen Huang, founder and boss of Nvidia, who presents himself as a geek turned billionaire, has been fawned over as a rock star. His extramarital relationship with an alleged Chinese spy now puts the spotlight on the corporate governance of the chip manufacturer, valued at around 3.9 billion euros and a key supplier to Anthropic and other AI leaders. Although the distraction may benefit its rival Huawei, Beijing has more to lose if Washington tightens export controls.

After ensuring last month that his relationship with Alice Huang, a former executive at Megaspeed, a Singapore-based client, was “completely normal,” the Nvidia boss took a radical turn on Sunday. He admitted to being unfaithful to his wife and agreed to assist in a board-led investigation to determine whether he was the target of a foreign intelligence operation. The consequences will be far-reaching for what is arguably the world's most important company in the rise of AI.

At the very least, the scandal will disrupt the normal functioning of the business. Nvidia says its boss is determined to run the company “without interruption,” but that seems difficult. Using Nvidia's extreme co-design work model, Huang supervises more than 60 direct reports, an extraordinarily high number for any manager. At worst, it could lead to a full-blown leadership crisis. Nvidia relies heavily on Huang, although he only owned 3.58% of the company in March. There are no shares with enhanced voting rights, and although both of his sons work at the company, Nvidia has no obvious successor if the board decides he must leave.

Nvidia's business with China will also be under the microscope. The company's sales in the People's Republic, made up mainly of less advanced processors and chips not intended for AI, almost doubled in the last quarter, to about 7 billion euros, 8% of the total. The increased scrutiny could end up accelerating Chinese companies' move toward domestic alternatives to Huawei and smaller competitors, which are narrowing the technological gap in processors used for large language models, robotics and automobiles. Those rivals are already steadily eroding Nvidia's dominance over the €79 billion Chinese AI chip market by developing their own software and facilitating migration from the American giant's products.

Still, the consequences may end up hurting China's AI aspirations more than they help them. Technology giants such as Alibaba or ByteDance legally access processors that are banned in the People's Republic through data centers abroad managed by neoclouds such as Megaspeed, which operates in Southeast Asia. But US authorities are also increasingly uncovering chip smuggling operations through the region, raising questions about how effectively export controls are being enforced. The New York Times reported last year that Megaspeed, which bought billions of euros worth of Nvidia processors, was being investigated for diverting chips to China. Then, Huang assured that Nvidia had carried out repeated sampling in data centers around the world and had not detected any deviations.

Your extramarital affair will raise uncomfortable questions about whether your company was negligent, looked the other way, or worse. In any case, Washington will now face more pressure to take a tougher stance on enforcing chip restrictions, and perhaps even to close loopholes.