Two people were just arrested for smuggling AI chips to China, and the rumors basically point to the fact that these were Nvidia chips.
There is a whole bunch of drama. People are asking Nvidia to put kill switches and backdoors in their chips.
Nvidia has responded. The White House is weighing in.
This is quite a crazy story and builds on a lot of precedent that's been going over the last few years with chip sacks, and basically the quote-unquote AI race that the US says they're in with China right now.
So we're going to be diving into all of that on the podcast.
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All right, let's get into the smuggling world of AI chips.
So two people were arrested. The Department of Justice in the United States has basically said that these were two Chinese nationals, and they were shipping.
Basically, they were involved in shipping tens of millions of dollars worth of high-performance AI chips to China.
So this isn't a small amount of money. This is quite substantial. you know, we're talking probably like $50 million of these AI chips.
So a lot of money. And again, we know companies spend billions on this.
So it's, I guess, not an insane amount. But what I would say is probably that these aren't the only two people in all of America that were smuggling chips or in all of the world that were smuggling chips.
There's a lot of drama in the past about Singapore being the third biggest purchaser of AI chips from Nvidia.
And Nvidia basically saying no, and people saying, look, Singapore buys them.
And that's just really shell companies smuggling them to China.
And Nvidia is like, no, no. You know, that's just the offices of a lot of, you know, Asian companies are set up in Singapore.
That's where we process, that's where we take the payments from, but really they're going to other countries and we're complying with all the rules.
So there's a lot of drama, to say the least, around this.
But this is, I think, one of the big events that has happened on US soil.
So this is Chung, Yang, and Shih-Wei Yang.
Both of them were arrested in California.
And basically, they, quote, unquote, violated the Export Control Reform Act.
It's a felony. It carries a statutory penalty of a maximum of 20 years in prison.
They are accused of willfully shipping sensitive technologies.
So basically, this is GPUs to China through California.
They had their company. They had this company called ALX Solutions, just this very random shipping company.
It doesn't seem like anything crazy. The DOJ, interestingly enough, didn't say what chips were actually being shipped, but they did say that they were shipping, quote, the most powerful chip in the market.
So basically, this is an NVIDIA chip. Since NVIDIA dominates this entire market, it's kind of funny.
They didn't want to call it NVIDIA. Maybe they're being nice.
And they said that it was, quote, designed specifically for AI applications.
Yeah. So it's basically that means that it's going to be probably NVIDIA's H100 GPUs.
And routers actually reported and specifically said that that was what got shipped.
So I don't know if they know anything else, or they're just saying the quiet part out loud.
But in any case, a review of all of the documents that the DOJ dropped basically showed that they had this company called AXLL Solutions.
And they had basically these chips and some other tech that they were using to And they were shipping between Singapore and Malaysia.
So they weren't shipping this straight to Beijing from California, as that would put a lot of red flags, but they're going to Singapore and Malaysia.
And again, this is kind of in line with the controversy that people have been talking about how Singapore is the third biggest... you know, purchaser of Nvidia chips or sorry, a third of Nvidia sales are Singapore.
It's like, wow, that's a, you know, small company, small country, a lot of GPU chips.
But what was interesting was this company that was shipping to Singapore, Malaysia, they were getting their payments from Hong Kong and China.
So the payments were pretty obvious. I don't know why they wouldn't have also just routed the payments through other countries as this obviously made it like pretty obvious where it was coming from.
The DOJ also found a bunch of records and a bunch of communications that were saying that they were shipping to Malaysia to specifically go around U.S. export restrictions.
So it's pretty blatant what they were doing.
I wonder why it wasn't more sophisticated than that.
Why they didn't go to multiple countries or I don't know.
It just seems silly that they would have Chinese companies paying them.
So anyways, whatever. This is what Nvidia said about this whole situation.
They said, this case demonstrates that smuggling is a non-starter.
We primarily sell our products to well-known partners, including OEMs who help us ensure that all sales comply with US export control rules.
Even relatively small exporters and shipments are subject to thorough review and scrutiny, and any diverted products would have no service support or updates.
Okay, so NVIDIA is saying, look, this is a great example.
They arrested these guys. That means that, you know, this is probably like a very crazy random example and it got shut down.
So this, you know, isn't a thing that happens.
I think in reality, there's probably a lot of these cases that go unprosecuted, that people that haven't been caught doing this.
I don't think this is the only two people in all of America that were, you know, shipping tens of millions of dollars.
Obviously, this is a lot of money. But I think NVIDIA did make a good point, which is that if anything does kind of slip through the supply chain, right, gets stolen or sold on the black market or maybe like a company, a legit company buys a bunch and then the legit company, quote unquote, goes bankrupt or gets acquired by someone else who now has control of the GPUs.
There's a lot of ways you get control of GPUs without like having to get them directly from NVIDIA, even though NVIDIA says, you know, that they make sure everything's legit.
But NVIDIA did say that if something like that did happen, you would have no service support or updates, right?
NVIDIA isn't going to be servicing and updating the chips that are in China, unless maybe there's some sort of VPN or some sort of way.
Like, actually, I think there's probably ways to be pretty sneaky with this.
So what is the solution? What's kind of the political landscape around this whole situation right now?
I think one of the biggest things right now is that the AI action plan has just come out.
Trump recently announced this whole AI action plan.
And in it, he basically says that, you know, it's really, really important that America has strong export restrictions.
And so it's kind of a big thing that they have focused on.
A potential solution to curbing all of this smuggling that the U.S. government suggested was to implement tracking technology into chips.
So basically, you know, they're just like, look, put some tracking technology into the chips.
Um, and then I think, you know, and then, you know, like who's using them and where they're located.
Chip makers are very opposed to this. I think this kind of makes a lot of sense.
Nvidia made a blog post on Tuesday, all about this specific, um, topic.
And basically in their blog post, uh, they say, they say, quote, Nvidia has been designing processes for over 30 years, embedding backdoors and kill switches into chips would be a gift to hackers and hostile actors.
It would undermine global digital infrastructure and fracture trust in U.S. technology.
Established law wisely requires companies to fix vulnerabilities, not create them.
Okay, they make a good point, but also I think they know that like this would completely shut it down.
Whereas like if like let's say 30 or 20% of the revenue might be seeping into China, that's kind of a huge chunk of revenue.
They probably don't want to get shut off.
Now, to be fair, they did like revise their forecasted numbers and completely remove China and like, look, we're not selling anything to China, even though they're working on a deal to basically get some smaller chips shipped to China and be allowed to do that.
But I think what they don't want is like, look, we don't want to put backdoors in.
This is something that China has been criticized for forcing companies in China to put backdoors in.
And so NVIDIA is like, look, we don't want to do that.
And I think a lot of people might be like, yeah, but it's to fight against China.
But I think most americans probably don't and american companies don't want backdoor government back doors into their chips eat from the u.s government either it just seems like you know we already have enough of a surveillance state over here in my opinion but uh who am i in any case um it is it's pretty interesting um and they make a good point that basically it would be uh it would be a vulnerability for hackers, right?
You can imagine if they put these back doors in and it's all well-meaning and maybe it's just to make sure that everybody's complying with the law.
Some hacker gets an exploit, which is inevitable.
It's not a if, but it's a when. And then if they were able to go and shut down all the GPUs in the world from that, like that would be horrible and really mess up a lot of AI companies, mess up a lot of innovation.
So I think NVIDIA just like doesn't see a lot of pros to their own company in this.
So they're pretty opposed to it. They say that's not sound policy.
It's an overreaction that would irreparably harm America's economic and national security interests.
So yeah, NVIDIA, to say the least, is not thrilled with that particular prospect.
So we'll see what ends up actually happening to curb the smuggling that is happening right now.
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