Chinese chip companies and artificial-intelligence developers are building up their arsenal of homegrown technology, backed by a government determined to win the AI race with the U.S. 

The latest example: China’s biggest cloud-computing company, Alibaba, has developed a new chip that is more versatile than its older chips.

Nvidia shares dipped 1% while Alibaba shares gained 1% on the news.

Alibaba was long one of the biggest customers of American AI-chip leader Nvidia. Now it and other chip designers are filling the void left after Nvidia ran into regulatory barriers to selling its products in China.

Industry insiders say China remains far from being able to make chips that can rival the most advanced American products, which Washington bars China from importing. Chinese factories are hobbled by U.S. restrictions on access to cutting-edge chip-making technology.

Still, companies are coming up with substitutes for Nvidia’s H20 chip, the most powerful AI processor it is allowed to sell in China. President Trump in July allowed Nvidia to resume H20 exports to China, but soon after, Beijing told companies not to buy the chips for now, citing potential security risks that Nvidia says don’t exist.

In July, Shanghai-based MetaX rolled out a new chip that it said could serve as a replacement for the H20. The chip has bigger memory than the H20, boosting its power for some AI tasks, although it consumes more electricity. MetaX said Wednesday it was preparing for mass production of the chip.

Another would-be Nvidia rival, Beijing-based AI-chip designer Cambricon Technologies, had a breakout April-June quarter, posting revenue of $247 million on robust orders of its AI-chip Siyuan 590. The company’s stock price has risen so fast that the company warned investors Thursday not to get so exuberant. Shares fell 6% Friday but Cambricon’s market capitalization still exceeds $87 billion.

Alibaba, founded by internet pioneer Jack Ma, is sometimes compared with Amazon.com because its biggest business is e-commerce, but it makes much of its money from the lower-profile business of cloud-computing services—running applications and storing data for customers on remote computers. Alibaba competes with Amazon Web Services, Microsoft and Google for cloud business, particularly in Asia.

Corporate customers are increasingly demanding AI services, and Alibaba Chief Executive Eddie Wu has said “AI plus cloud” is one of Alibaba’s two engines of growth alongside e-commerce. In February, Alibaba said it would invest at least $53 billion over the next three years in the area. It also has one of the world’s highest-rated AI models, called Qwen.

The rapid adoption of AI across China’s economy is creating a big demand for inference—when AI programs tap their training to deliver output such as a smartphone voice assistant’s answers. Inference typically doesn’t require the most advanced chips.

Previous cloud-computing chips developed by Alibaba have mostly been designed for specific applications. The new chip, now in testing, is meant to serve a broader range of AI inference tasks, said people familiar with it.

The chip is manufactured by a Chinese company, they said, in contrast to an earlier Alibaba AI processor that was fabricated by Taiwan Semiconductor Manufacturing. Washington has blocked TSMC from manufacturing AI chips for China that use leading-edge technology.

One challenge for Alibaba and other local players relying on Chinese chip factories is getting enough supply. These factories, which use older foreign machines and less powerful homegrown equipment, have struggled to increase capacity.

MetaX, the Shanghai startup, is getting around the bottlenecks by using an earlier-generation technology to make its new chip, people familiar with the product said. MetaX combines two smaller chips to make up for the loss of performance. 

Beijing has spent more aggressively to build a self-sufficient AI supply chain, including an $8.4 billion AI-investment fund announced in January.

The flag-bearer for Beijing’s push is Huawei Technologies and its Ascend AI chips. Earlier this year, Huawei showed off a computing system that integrates 384 Ascend chips. Some analysts said the machine, although a power hog, was more powerful on some metrics than Nvidia’s top-of-the-line system containing 72 Blackwell chips.

By combining chips, “we can achieve comparable computing results to the most advanced standards,” and “there’s no need to worry about the chip problem,” Huawei founder Ren Zhengfei told the Communist Party’s main newspaper in June.

Even within China, Huawei’s privileged status is raising some hackles. Many engineers are accustomed to the software and tools that accompany Nvidia’s chips. Huawei, subject to U.S. sanctions, didn’t design its chips to work with the Nvidia platform, whereas Alibaba’s new chip will be compatible with it, meaning engineers can repurpose programs they wrote for Nvidia chips.

Private-sector cloud companies including Alibaba have refrained from bulk orders of Huawei’s chips, resisting official suggestions that they should help the national champion, because they consider Huawei a direct rival in cloud services, people close to the firms said.

China’s biggest weakness is training AI models, for which U.S. companies rely on the most powerful Nvidia products. Alibaba’s new chip is designed for inference, not training, people familiar with it said.

Chinese engineers have complained that homegrown chips including Huawei’s run into problems when training AI, such as overheating and breaking down in the middle of training runs. Huawei declined to comment.

DeepSeek, a Chinese startup with models challenging OpenAI’s, recently prompted a stock rally in China by suggesting in a cryptic comment on social media that its software innovations could combine with improved Chinese-made chips to train some AI models.

Kevin Xu, founder of AI-focused fund manager Interconnected Capital, wrote on a blog that such adaptations may allow Chinese AI developers to narrow the gap with the U.S. “sooner than most people think, credibly challenging Nvidia and the American AI stack both at home and abroad.”