The Geopolitical Toll on AI Chip Profits: Assessing the Long-Term Viability of Nvidia and AMD in China

The U.S.-China tech rivalry has reached a pivotal inflection point, with artificial intelligence (AI) semiconductors at its core. For companies like Nvidia and AMD, the 15% revenue-sharing agreement with the U.S. government—secured to resume AI chip exports to China—represents a calculated gamble. This arrangement, while unlocking access to a critical market, introduces a complex interplay of geopolitical risk, regulatory uncertainty, and margin compression. Investors must now weigh these factors to assess the long-term viability of U.S. semiconductor leadership in a world where technology is both a commodity and a weapon.

The 15% Agreement: A New Paradigm in Export Controls

The Trump administration's 15% revenue-sharing deal with Nvidia and AMD is unprecedented. By granting export licenses for advanced AI chips like the H20 and MI308 in exchange for a financial stake in their China sales, the U.S. government has effectively monetized its export control policies. This model, described by analysts as an “indirect tariff at source,” shifts the focus from purely security-driven restrictions to a transactional approach that balances economic and strategic interests.

For Nvidia and AMD, the agreement allows them to retain 85% of revenue from a market that contributed $17 billion and $6.2 billion in sales, respectively, in 2024. However, the 15% cut—equivalent to $3.5 billion annually for combined sales—reduces operating margins, particularly for AMD, which historically has lower gross margins than Nvidia. While both companies have signaled their intent to adjust pricing strategies, the long-term profitability of this arrangement remains uncertain.

Regulatory and Legal Risks: A Constitutional Quagmire

The agreement's legality is under scrutiny. Legal scholars argue that the 15% revenue-sharing model resembles an unconstitutional export tax, violating the U.S. Constitution's Export Clause, which prohibits the federal government from taxing exports. The 1998 Supreme Court case United States v. United States Shoe Corp. established that even a 0.125% ad valorem charge on exports is unconstitutional. If challenged, the arrangement could face judicial pushback, potentially invalidating the export licenses and creating regulatory instability for the companies.

Moreover, the deal risks normalizing the use of export controls as a revenue-generating tool, a precedent that could erode the credibility of U.S. trade policy. Critics, including Rep. John Moolenaar (R-MI), warn that this approach could incentivize future administrations to prioritize financial gains over national security, undermining the integrity of export control frameworks.

China's Response: Market Access vs. Strategic Autonomy

China's reaction to the agreement is equally critical. While the country has long sought access to advanced U.S. AI chips, it has also raised security concerns about “backdoors” in Nvidia's H20 and AMD's MI308. Chinese state media has criticized the chips as “neither environmentally friendly, nor advanced, nor safe,” signaling a coordinated effort to discourage adoption. At the same time, domestic alternatives like Huawei's Ascend chips are gaining traction, with estimates suggesting they now capture 20-30% of the Chinese AI chip market.

For Nvidia and AMD, the challenge lies in balancing market access with the risk of China accelerating its self-reliance in semiconductor production. The 15% levy may also deter Chinese buyers, who could opt for domestic alternatives to avoid the added cost. This dynamic could limit the long-term upside of the agreement, particularly if geopolitical tensions escalate or China imposes retaliatory measures.

Investor Confidence: A Calculated Trade-Off

Despite these risks, investor sentiment has remained cautiously optimistic. Following the announcement of the agreement, both Nvidia and AMD saw short-term stock dips (0.35% and 0.3%, respectively), but shares quickly recovered as investors focused on the strategic value of reentering the Chinese market. Analysts like Angelo Zino of CFRA Research argue that the incremental revenue from China outweighs the margin impact, especially given the companies' strong gross margins (exceeding 70% for Nvidia).

However, the long-term outlook hinges on three key factors:
1. Regulatory Stability: Will the 15% agreement withstand legal challenges, or will future administrations revise the terms?
2. Market Dynamics: Can Nvidia and AMD maintain pricing power in China despite the revenue-sharing requirement?
3. Geopolitical Shifts: How will U.S.-China relations evolve, and will China's push for domestic chip production reduce demand for U.S. semiconductors?

Strategic Implications for U.S. Semiconductor Leadership

The 15% agreement underscores a broader trend: the U.S. government's willingness to leverage trade policy as a tool for both economic and strategic influence. While this approach has allowed Nvidia and AMD to retain a foothold in China, it also highlights the fragility of U.S. semiconductor leadership in a multipolar world. For investors, the key question is whether the companies can adapt to an environment where geopolitical risks are increasingly baked into corporate earnings.

In the short term, the agreement appears to be a net positive for both firms, as it mitigates the risk of losing the Chinese market entirely. However, the long-term viability of U.S. semiconductor dominance will depend on the ability to navigate regulatory, legal, and geopolitical headwinds. Investors should monitor quarterly reports for signs of margin compression, regulatory changes, and shifts in China's procurement strategies.

Investment Advice: Balancing Risk and Reward

For investors, the 15% agreement presents a nuanced opportunity. While the revenue-sharing model introduces margin pressure and regulatory uncertainty, it also provides access to a market that is critical for AI innovation. Given the strategic importance of semiconductors in the global tech race, Nvidia and AMD remain well-positioned to capitalize on long-term growth, provided they can navigate the geopolitical landscape.

Recommendation:
- Buy for investors with a long-term horizon who are comfortable with moderate geopolitical risk.
- Hold for those prioritizing margin stability over market access.
- Avoid for risk-averse investors or those seeking immediate profitability without exposure to regulatory volatility.

In conclusion, the 15% revenue-sharing agreement is a microcosm of the broader U.S.-China tech rivalry. For Nvidia and AMD, it represents a high-stakes bet on the resilience of their business models in an era where geopolitical strategy and corporate profitability are inextricably linked. Investors who can navigate this complexity may find themselves well-positioned to benefit from the next phase of the AI revolution.