Thread by @JChengWSJ

Chinese AI Companies Dodge U.S. Chip Curbs by Flying Suitcases of Hard Drives Abroad—Engineers carry data to countries where Nvidia chips are available, frustrating Washington’s aims
@raffaelehuang @lizalinwsj
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@raffaelehuang @lizalinwsj KUALA LUMPUR—In March, four Chinese engineers flew to Malaysia from Beijing, each carrying a suitcase packed with 15 hard drives. The drives contained 80 terabytes of spreadsheets, images and video clips for training an artificial-intelligence model.
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@raffaelehuang @lizalinwsj At a Malaysian data center, the engineers’ employer had rented about 300 servers containing advanced Nvidia chips. The engineers fed the data into the servers, planning to build the AI model and bring it back home.
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@raffaelehuang @lizalinwsj Since 2022, the U.S. has tightened the noose around the sale of high-end AI chips and other technology to China over national-security concerns. Yet Chinese companies have made advances using workarounds.
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In some cases, Chinese AI developers have been able to substitute domestic chips for the American ones. Another workaround is to smuggle AI hardware into China through third countries.
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But that has become more difficult as U.S. pressure ramps up. That in turn is pushing Chinese companies to try a further option: bringing their data outside China so they can use American AI chips in places such as Southeast Asia and the Middle East.
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The maneuvers are testing the limits of U.S. restrictions. “This was something we were consistently concerned about,” said Thea Kendler, who oversaw export controls during the Biden years, referring to Chinese companies remotely accessing U.S. AI chips.
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Layers of intermediaries typically separate the Chinese users of American AI chips from the U.S. companies—led by Nvidia—that make them. That leaves it opaque whether anyone is violating U.S. rules or guidance.
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The Biden administration proposed in its final days to set country-specific caps on purchases of American chips—a move that would have made it harder for countries such as Malaysia to serve Chinese demand.
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Kendler said overseas buyers of U.S. chips would have had to agree to national-security conditions limiting use of the chips, and such restrictions could have included a bar on Chinese companies accessing them.
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The Trump administration said in May it would scrap the proposed country caps. However, it issued guidance warning U.S. companies that they need to take steps to prevent customers from using U.S. AI chips to train Chinese AI models.
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At the Chinese AI developer, the workaround take months of preparation, say people involved. Engineers thought it fastest to fly physical hard drives with data into the country, since transferring huge volumes of data over the internet could take months.
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Before traveling, the company’s engineers in China spent more than eight weeks optimizing the data sets and adjusting the AI training program, knowing it would be hard to make major tweaks once the data was out of the country.
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The Chinese engineers had used the same Malaysian data center last year, working through a Singapore subsidiary. As scrutiny rose, the Malaysian data center last year asked the Chinese company to work through a Malaysian entity, to attract less attention.
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The Chinese company registered an entity in Kuala Lumpur, Malaysia’s capital, listing three Malaysian citizens as directors and an offshore holding company as its parent, according to a corporate registry document.
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To avoid raising suspicions at Malaysian customs, the Chinese engineers packed their hard drives into four different suitcases. Last year, they traveled with the hard drives bundled into one piece of luggage.
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They returned to China recently with the results—several hundred gigabytes of data, including model parameters that guide the AI system’s output. The procedure, while cumbersome, avoided having to bring hardware such as chips or servers into China.
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In February, Singaporean authorities accused three people of lying about the ultimate destination of Nvidia servers worth millions of dollars that they had procured. Lawyers for the three didn’t respond to requests for comment.
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Singapore authorities have said that while they aren’t legally obliged to enforce other countries’ export controls, they won’t condone businesses using their association with Singapore to avoid the controls.
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