Chinese AI labs may use free models to sell hardware and undercut Nvidia

The Trojan Horse Strategy

Misha Laskin, the co-founder and CEO of Reflection AI, recently highlighted a potential shift in how Chinese AI labs compete globally. He suggests that these labs may begin offering their high-quality open models for free to international customers. While the software is free, the goal is to create a dependency on the underlying infrastructure required to run those models.

Laskin describes these open models as "Trojan horses for the infrastructure that they bring." He explains that while the model acts as the engine, a company still needs the "car" around it to function. In this analogy, the car represents the physical chips and the data centers that power the AI capabilities.

By giving away the software, Chinese labs can entice countries in regions like the Middle East, Brazil, and various Asian nations to adopt their hardware. This strategy could lead to allied nations becoming locked into Chinese-made infrastructure, creating a significant geopolitical and commercial challenge for Western tech leaders.

Nvidia's Vulnerable Markets

While China is a major focus for many tech observers, Nvidia has already largely accounted for the loss of that market in its financial planning. The company's revenue from China and Hong Kong fell to $19.7 billion in fiscal 2026 from $25.0 billion. Furthermore, CFO Colette Kress stated that there is no China data center compute revenue in the company's forward outlook.

The real risk identified by Laskin concerns the markets outside of the United States and China. These regions account for a portion of Nvidia's fiscal 2026 revenue. If Chinese firms successfully bundle free models with their own chips, they could directly target this specific segment of Nvidia's international business.

Nvidia currently maintains high pricing power, with gross margins rising from 56.9% in fiscal 2023 to 71.1% in fiscal 2026. However, if cheaper Chinese compute enters the market, it could eventually pressure these margins. This is especially concerning for government-level data center deals where cost-effectiveness is a primary concern for buyers.

The Timeline of Competition

Nvidia currently holds a massive advantage because it cannot produce enough chips to meet current global demand. Management has indicated that supply limits will dictate revenue growth through fiscal 2028. Because the company is essentially sold out, the immediate impact of cheaper Chinese alternatives may be delayed for a few years.

Analysts expect Nvidia's revenue to more than quadruple between fiscal 2026 and 2029. However, they also project a sharp slowdown in growth rates after 2028. Specifically, growth is expected to drop from 68.2% in fiscal 2028 to 30.5% in fiscal 2029 as more buyers have the opportunity to choose between different providers.

During this window, Chinese chipmakers are reportedly catching up. For example, some Chinese models are already performing within weeks of U.S. frontier models while costing significantly less. If these cheaper models become widely available just as Nvidia's supply constraints ease, the company could face a difficult transition in maintaining its market share.

Market Sentiment and Outlook

The stock market has already begun to price in some of these long-term risks. Nvidia is currently trading at 17x forward earnings, which is the lowest it has been in five years. This valuation is less than half of its 36x average, suggesting that investors are already anticipating a slowdown in the years ahead.

Despite the risks, some analysts view the current price as an opportunity. They argue that because the slowdown is already priced in, the stock remains attractive. The primary variable to watch is whether a Chinese lab actually wins a major government deal abroad using its own hardware package.

The next major milestone for investors will be Nvidia's report on November 17. This report will provide updated guidance for the January quarter, including specific details on margins. These figures will help clarify how much pricing power the company retains as competition from cheaper Chinese compute begins to loom on the horizon.

Infrastructure Lock-in

The core of Laskin's warning is the concept of infrastructure lock-in. Once a nation or a large corporation integrates a specific set of chips and data centers into their core operations, it is very difficult to switch providers. This creates a high barrier to entry for any new competitor, but it also creates a permanent foothold for whoever provides the initial setup.

If Chinese labs successfully provide the "engine" for free, they can ensure that the "car" they sell becomes the standard. This would mean that even if the software is open, the physical hardware remains proprietary and controlled by Chinese entities. This creates a long-term strategic disadvantage for Western companies trying to maintain a foothold in global AI infrastructure.

For Nvidia, the challenge will be to offer enough value and performance to prevent these international deals from shifting toward Chinese alternatives. As the market moves toward 2028, the competition will likely shift from a battle over who has the best model to a battle over who can provide the most cost-effective and reliable hardware to run them.

The Competitive Landscape

The speed at which Chinese models are improving is a significant factor in this equation. Some reports indicate that Chinese models are now only a few weeks behind the leading U.S. frontier models. Furthermore, some Chinese firms are planning to release the weights for their models, making them accessible to anyone who can provide the necessary compute power.

This accessibility is what makes the hardware bundle so dangerous for Nvidia. If a developer can download a high-performing Chinese model for free, they only need to find a way to run it. If the most cost-effective way to run that model is on Chinese-made chips, the demand for Nvidia's premium hardware decreases significantly.

Nvidia's ability to maintain its lead depends on its continued innovation and its ability to secure sovereign deals. If it can maintain its lead in performance, it may be able to justify its higher prices. However, the rise of cheap Chinese compute represents a fundamental threat to the company's ability to command premium margins in the long run.

What to Watch Next

The most critical thing to monitor is the movement of international governments in the Middle East and Asia. Any news regarding a sovereign data center deal that includes Chinese hardware would be a major confirmation of Laskin's theory. Such a deal would signal that the "Trojan horse" strategy is working effectively on a global scale.

Additionally, keep an eye on Nvidia's gross margins in their upcoming reports. If margins begin to compress faster than expected as memory costs rise, it could indicate that competition from cheaper Chinese chips is starting to affect pricing. This would be an early warning sign that the 2028 slowdown might arrive sooner than analysts predict.

Finally, watch for any Chinese labs announcing the release of their model weights alongside a subsidized hardware package. If a major lab offers a high-performing model for free while providing a discount on the chips needed to run it, it will create a significant headwind for Nvidia's growth in non-U.S. and non-Chinese markets.

Summary of the Risk

The situation presents a dual challenge for Nvidia: a geopolitical one and a commercial one. Geopolitically, the spread of Chinese infrastructure could limit the reach of Western technology. Commercially, the move toward free models bundled with cheap hardware threatens Nvidia's high-margin business model as supply constraints eventually ease.

While Nvidia is currently the dominant player with a massive backlog of orders, the long-term outlook is complicated by these emerging trends. The market is already reacting to these possibilities by trading at lower multiples, but the actual realization of these risks will depend on how quickly Chinese hardware can reach a level of reliability that satisfies government and enterprise needs.

For the smart investor or observer, the key is to distinguish between current demand and future growth. Nvidia's current success is bolstered by a lack of alternatives, but its future success depends on its ability to stay ahead of a world where the "engine" of AI might be given away for free by its biggest competitors.

The Impact on Sovereignty

Laskin's point about national security adds a layer of complexity to the business news. When a country adopts a foreign nation's AI infrastructure, it is not just a commercial decision; it is a strategic one. If a country's data centers are built on Chinese chips, that nation becomes dependent on Chinese technology for its core AI capabilities.

This creates a situation where governments might be forced to choose between the best available technology and the most politically aligned technology. If Chinese labs can offer a "good enough" model for free, it may be easier for some nations to justify choosing Chinese hardware over Nvidia's premium offerings. This could lead to a bifurcated global AI ecosystem.

For Nvidia, this means that every lost deal in a region like the Middle East or Brazil is a potential long-term loss. Once a country's infrastructure is built on a specific set of chips, it is incredibly difficult to switch. This makes the current competition for international contracts a high-stakes battle for long-term technological influence.

Nvidia's Pricing Power

Nvidia's gross margin is the clearest indicator of its current dominance. Rising from 56.9% in fiscal 2023 to over 70% shows that the company can currently dictate terms to its customers. However, the fact that management expects margins to bottom at 71% to 72% due to rising memory costs suggests that the era of extreme, effortless margin expansion may be reaching its peak.

If Chinese competition introduces a "cheap" alternative, Nvidia will have to decide whether to lower its prices or maintain its premium. If it lowers prices, its margins will shrink. If it maintains its prices, it risks losing customers to the cheaper Chinese bundles. This is the fundamental tension that Laskin's warning highlights for the years ahead.

The ability to maintain pricing power in the face of cheaper competition will be the defining challenge for Nvidia's management. As the market moves toward 2028, the company will need to prove that its hardware provides enough unique value to justify its cost over the increasingly accessible Chinese alternatives.

The Role of Memory Costs

A less discussed but important factor in Nvidia's outlook is the rising cost of memory. Management expects these costs to climb, which will put a natural floor on how high their margins can go. This means that even without Chinese competition, Nvidia's profitability faces some natural headwinds as the cost of the components required for AI chips increases.

When you combine rising memory costs with the potential for cheaper Chinese competition, the pressure on Nvidia's margins becomes twofold. The company will be squeezed from above by the costs of production and from below by the price sensitivity of international customers. This makes the next few years a critical period for the company's financial health.

Investors who are looking at the 17x forward earnings multiple are essentially betting on how well Nvidia can navigate these pressures. If the company can innovate its way around memory costs while maintaining its lead in performance, it may be able to sustain its growth. If not, the slowdown predicted by analysts could be even more pronounced.

Conclusion on the Outlook

The situation described by Misha Laskin is a warning about the long-term sustainability of the current AI hardware boom. While Nvidia is the clear leader today, the landscape is shifting toward a model where software is commoditized and hardware becomes the primary differentiator. Chinese labs are positioning themselves to win this hardware battle by giving away the software.

For the smart reader, the takeaway is that the AI industry is moving into a phase of infrastructure competition. The initial excitement over model capabilities is being replaced by a more practical focus on costs, scale, and reliability. Nvidia's ability to stay ahead in these areas will determine its success in the coming years.

The market is already reacting to these risks, but the full impact will be felt as supply constraints ease. By watching the margins and the types of international deals Nvidia wins or loses, we can get a clearer picture of whether the narrative of inevitable dominance is shifting.

Summary of the Risk

To summarize, the risk to Nvidia is a pincer movement. On one side, Chinese labs are developing high-quality models that can be given away for free. On the other side, Chinese chipmakers are working to produce cheaper hardware that can run those models efficiently. Together, these two factors could create a compelling package for international buyers who are looking for alternatives to Nvidia.

Nvidia's current dominance is protected by its massive lead in production and its high-performance hardware. But as the market matures and supply catches up, the cost-effectiveness of Chinese alternatives will become a more significant factor. If Chinese firms can successfully lock in international customers with this bundle, Nvidia's growth outside of the US and China could be significantly hampered.

The market is already pricing in a slowdown, but the severity of that slowdown will depend on how quickly Chinese hardware can reach a level of reliability that satisfies government and enterprise needs. For now, Nvidia remains the standard, but the "Trojan horse" of free models and cheap chips is a credible threat to its long-term global expansion.

The Impact on Sovereignty

Laskin's point about national security adds a layer of complexity to the business news. When a country adopts a foreign nation's AI infrastructure, it is not just a commercial decision; it is a strategic one. If a country's data centers are built on Chinese chips, that nation becomes dependent on Chinese technology for its core AI capabilities.

This creates a situation where governments might be forced to choose between the best available technology and the most politically aligned technology. If Chinese labs can offer a "good enough" model for free, it may be easier for some nations to justify choosing Chinese hardware over Nvidia's premium offerings. This could lead to a bifurcated global AI ecosystem.

For Nvidia, this means that every lost deal in a region like the Middle East or Brazil is a potential long-term loss. Once a country's infrastructure is built on a specific set of chips, it is incredibly difficult to switch. This makes the current competition for international contracts a high-stakes battle for long-term technological influence.

Nvidia's Pricing Power

Nvidia's gross margin is the clearest indicator of its current dominance. Rising from 56.9% in fiscal 2023 to over 70% shows that the company can currently dictate terms to its customers. However, the fact that management expects margins to bottom at 71% to 72% due to rising memory costs suggests that the era of extreme, effortless margin expansion may be reaching its peak.

If Chinese competition introduces a "cheap" alternative, Nvidia will have to decide whether to lower its prices or maintain its premium. If it lowers prices, its margins will shrink. If it maintains its prices, it risks losing customers to the cheaper Chinese bundles. This is the fundamental tension that Laskin's warning highlights for the years ahead.

The ability to maintain pricing power in the face of cheaper competition will be the defining challenge for Nvidia's management. As the market moves toward 2028, the company will need to prove that its hardware provides enough unique value to justify its cost over the increasingly accessible Chinese alternatives.

The Role of Memory Costs

A less discussed but important factor in Nvidia's outlook is the rising cost of memory. Management expects these costs to climb, which will put a natural floor on how high their margins can go. This means that even without Chinese competition, Nvidia's profitability faces some natural headwinds as the cost of the components required for AI chips increases.

When you combine rising memory costs with the potential for cheaper Chinese competition, the pressure on Nvidia's margins becomes twofold. The company will be squeezed from above by the costs of production and from below by the price sensitivity of international customers. This makes the next few