Nvidia Corp. has dramatically ramped up production of its H20 artificial-intelligence chips, placing an order for an additional 300,000 units with Taiwan Semiconductor Manufacturing Co. last week, as demand from Chinese customers surges beyond initial expectations. This move comes amid a thawing in U.S.-China tech relations under the new administration, allowing Nvidia to resume sales of the H20, a chip designed to comply with American export restrictions while still delivering high performance for AI tasks.

The order supplements Nvidia’s existing inventory of 600,000 to 700,000 H20 chips, according to sources familiar with the matter. Chinese tech giants, including Alibaba Group Holding Ltd., Tencent Holdings Ltd., and ByteDance Ltd., are driving this demand, snapping up the chips to power large-scale AI inference operations. These companies have reportedly placed billions in orders, highlighting the H20’s edge over local alternatives like Huawei Technologies Co.’s Ascend 910 series, which struggle with software compatibility and multi-GPU scaling.

Rising Demand Amid Geopolitical Shifts

Analysts at Jefferies estimate that Chinese demand for H20 chips could reach 1.8 million units in 2025, far exceeding current supply and creating a significant shortfall. This surge is fueled by the rapid adoption of advanced AI models in China, where domestic chips lag in efficiency for tasks like natural language processing and recommendation engines. Nvidia’s CUDA software ecosystem provides a seamless integration that local options can’t match, giving the H20 a competitive moat despite U.S. curbs on more powerful models like the H100.

The resumption of H20 sales follows high-level talks between Nvidia CEO Jensen Huang and U.S. officials, including a meeting with President Trump. As reported by Reuters, these discussions tied chip exports to broader negotiations on rare earth minerals, a critical resource for semiconductor production. This policy shift reverses an April directive that required licenses for H20 sales, effectively halting them until recently.

Production Challenges and Supply Chain Implications

However, scaling up isn’t without hurdles. Nvidia has informed Chinese customers of limited initial supplies, per a report from The Information, which first detailed the additional TSMC order. Production obstacles, including TSMC’s capacity constraints amid global chip shortages, could delay fulfillment. Posts on X from industry watchers, such as those highlighting ByteDance’s multi-billion-dollar orders, underscore the urgency, with sentiment pointing to a potential $5 billion quarterly revenue boost for Nvidia from China alone.

This demand wave has ripple effects across the semiconductor market. Rivals like Advanced Micro Devices Inc. are positioning their open-platform chips as alternatives, while TSMC stands to benefit from increased orders. According to CNBC, the H20’s resurgence could solidify Nvidia’s dominance in AI inference, where it outperforms competitors by up to 50% in certain benchmarks.

Strategic Outlook for Nvidia and Beyond

Looking ahead, Nvidia plans to introduce more advanced China-compliant chips, as Huang indicated in recent statements. This strategy not only taps into a market potentially worth $50 billion in the near term but also mitigates risks from U.S. export volatility. Yet, analysts warn of ongoing tensions; a potential ban on even the H20, floated earlier this year, could disrupt this momentum.

For industry insiders, the H20 saga illustrates the delicate balance between innovation and geopolitics. Chinese firms’ pivot to Nvidia underscores gaps in domestic tech self-sufficiency, while bolstering U.S. leverage in trade talks. As per insights from AInvest, this could drive Nvidia’s long-term growth, projecting market share gains in Asia’s AI sector through 2030. The order signals confidence, but sustained access to China will depend on diplomatic maneuvering.