Suitcases of drives, rented servers abroad: How China’s AI firms are evading US chip crackdown

Chinese AI companies dodge US chip curbs (File Image)

To bypass U.S. restrictions on advanced AI chips, Chinese companies are adopting innovative strategies, including processing data overseas, according to a report by The Wall Street Journal.

Four Chinese engineers traveled from Beijing to Malaysia, each carrying a suitcase with 15 hard drives containing 80 terabytes of data for training an AI model, the WSJ report cited.

Engineers in Malaysian data center, utilized approximately 300 servers equipped with Nvidia’s advanced chips to develop the AI model, which they later brought back to China.

This comes after US has tightened export rules on high end AI chips to China citing national security as concern.

According to the WSJ report, Chinese AI developers have been able to substitute domestic chips for the American ones in some cases. While others try to smuggle AI hardware into China through third countries. But now people in the industry say that has become more difficult in recent months, in part because of U.S. pressure.

Chinese companies are trying some further options: bringing their data outside China so they can use American AI chips in places such as Southeast Asia and the Middle East the report cited.

The tactics are pushing the boundaries of U.S. export restrictions. Thea Kendler, who oversaw export controls at the Commerce Department during the Biden administration, noted, “This was something we were consistently concerned about,” in reference to Chinese firms remotely using advanced American AI chips.

The Biden administration proposed country-specific caps on American chip purchases to curb such activities, aiming to limit sales to countries like Malaysia that serve Chinese demand. However, in May, the Trump administration scrapped these caps, citing unnecessary regulatory burdens on U.S. companies like Nvidia. Instead, it issued guidance urging firms to take steps to prevent their AI chips from being used to train Chinese AI models.

The operations of Chinese companies in Malaysia takes place with a lot of planning, engineers reportedly send over eight weeks optimizing data sets in China before transferring them. They fly physical hard drives into Malaysia as transferring large volumes of data online could take months

Last July, the company initially worked through a Singaporean subsidiary but later registered a Malaysian entity to avoid increased scrutiny after Nvidia and its vendors intensified end-user audits.

To avoid suspicion at Malaysian customs, the engineers split their hard drives across four suitcases, a change from bundling them into one suitcase the previous year. They recently returned to China carrying several hundred gigabytes of model parameters that guide the AI system’s output.

Southeast Asia is emerging as a growing hub for such activities, with data centers expanding rapidly. Jones Lang LaSalle estimates that data-center capacity in Singapore, Malaysia, Thailand, and Indonesia approaches nearly 2,000 megawatts, rivaling Europe’s largest markets.

Malaysia’s AI chip imports from Taiwan surged to $3.4 billion in March and April, surpassing its total for 2024. Meanwhile, the Middle East is also becoming a key destination for Chinese AI developers, with Nvidia recently announcing major chip sales to Saudi Arabia, Qatar, and the UAE.

(with agency inputs)