Why SK Group Chairman Believes Nvidia’s Business Model Could come Under Serious Threat ?

"When there was no more gold, the sellers became unable to sell pickaxes," he added, warning that without profitable applications, the AI boom could vanish just as the gold rush did.

Introduction

At the recent 47th Korean Chamber of Commerce and Industry (KCCI) Jeju Forum, Chey Tae-won, Chairman of KCCI and SK Group, issued a stark warning regarding the future of Nvidia’s business model. In his speech, Chey compared the current AI boom to the California Gold Rush of the mid-1800s, suggesting that Nvidia’s dominant market position could be threatened if competitors like AMD and Arm start offering high-quality chips at lower prices.

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Gold Rush:

At the recent 47th Korean Chamber of Commerce and Industry (KCCI) Jeju Forum, Chey Tae-won, Chairman of KCCI and SK Group, issued a stark warning regarding the future of Nvidia’s business model. In his speech, Chey compared the current AI boom to the California Gold Rush of the mid-1800s, suggesting that Nvidia’s dominant market position could be threatened if competitors like AMD and Arm start offering high-quality chips at lower prices.

Chey likened the AI boom to the California Gold Rush, drawing parallels between the prosperity of tool makers during the gold rush and the current success of companies like Nvidia. He pointed out that just as pickax and jeans makers thrived during the gold rush, Nvidia has seen unprecedented growth due to the surging demand for AI chips.

“Nvidia will likely remain one of the top corporations by capitalization over the next three years, much like how pickax and jeans makers prospered during the peak of the gold rush,” Chey stated. However, he cautioned that the sustainability of this boom is uncertain. “When there was no more gold, the sellers became unable to sell pickaxes,” he added, warning that without profitable applications, the AI boom could vanish just as the gold rush did.

AI Profitability is Crucial: The success of Nvidia’s business model is heavily reliant on the continued profitability of AI investments.

Competitive Pressure: Competitors like AMD and Arm could capitalize on any downturn by offering high-quality, lower-priced chips.

Market Bubble Risk: The current AI boom is reminiscent of the California Gold Rush, and there’s a risk of a speculative bubble bursting.

Impact on Hardware Investment: A decline in AI profitability could lead to reduced investment in specialized AI hardware, directly affecting Nvidia’s market position.

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Why?

Nvidia’s Core Product: Nvidia primarily produces Graphics Processing Units (GPUs) that excel at performing the complex calculations required by AI algorithms.

AI Driving GPU Demand: The rapid advancement and adoption of AI across industries (from autonomous vehicles to data centers) has led to a surge in demand for high-performance GPUs.

Profitability is Key: For AI projects to continue expanding, they need to demonstrate a return on investment (ROI). If AI projects become less profitable or if companies reduce spending on AI due to economic downturns or other factors, demand for Nvidia’s GPUs could decline.

In essence, Nvidia’s fortunes are closely linked to the overall health and growth of the AI industry. If AI investments prove to be highly profitable, Nvidia stands to benefit immensely. However, if the profitability of AI projects wanes, it could pose a significant challenge to Nvidia’s business model.

Rising Costs and Potential Market Saturation

The cost of training AI models is increasing exponentially, posing a significant challenge for the industry. According to Dario Amodei, CEO of Anthropic, current AI models undergoing training cost around $1 billion, with future models potentially costing up to $100 billion by 2025. These escalating costs have raised concerns among industry analysts, including those at Goldman Sachs, who question whether the massive investments in AI will ultimately be profitable.

Goldman Sachs has expressed concerns about the sustainability of the AI boom, with some staff suggesting that AI is overhyped and may not deliver the expected returns. If the AI market does implode, investments in specialized hardware, such as Nvidia’s GPUs, could plummet, potentially jeopardizing the company’s market position.

Nvidia’s AI-Driven Success

Nvidia has solidified its position as a technology titan, recently surpassing all but two companies in market capitalization.

This surge stems from record sales of data center GPUs in 2023, propelling Nvidia to become the world’s most valuable company last month.

Despite a recent market correction, Nvidia remains the third most valuable corporation globally, buoyed by the ongoing expansion in AI technologies.

Chey Tae-won drew an analogy to the California Gold Rush of the 1800s, likening the current AI boom to a modern-day gold rush.

Just as pickax makers thrived during the gold rush, Nvidia has flourished amid the AI surge,” Chey remarked.

However, he cautioned that the scenario might not be sustainable indefinitely. “When the gold ran out, the demand for pickaxes plummeted,” he said. Chey warns that without a profitable model for AI technologies, the current boom could dissipate similarly.

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Potential Challenges for Nvidia

Despite these concerns, Nvidia is unlikely to face immediate collapse. The company has a robust portfolio beyond AI, including a strong foothold in the gaming industry.

Nvidia’s GPUs are renowned for their high performance, and the company is well-positioned to continue catering to a variety of markets.

However, the threat posed by competitors is a real concern. Nvidia’s competitors, including AMD and Intel, are making significant strides in the GPU market.

AMD, for instance, is closing the gap with Nvidia in terms of GPU performance, though its supersampling technology, FSR 3.0, is still considered inferior to Nvidia’s DLSS 3.5. Intel is also making inroads with its Arc GPUs and XeSS supersampling technology, presenting additional competition.

The Future of AI and Nvidia’s Role

The ongoing investments by major AI companies like Microsoft, Amazon, Google, and OpenAI in their own hardware research pose another challenge for Nvidia.

As these companies develop and refine their own AI acceleration technologies, Nvidia could face increased competition that might impact its market dominance.

Nevertheless, Nvidia’s business model strength lies in its ability to deliver unparalleled performance, and its products remain highly sought after.

The company’s resilience in adapting to changing market conditions and technological advancements will be crucial in maintaining its leadership position.

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Conclusion

Chey Tae-won’s comments at the KCCI Jeju Forum underscore the precarious balance between the soaring costs of AI development and the need for profitable returns.

While Nvidia’s Business Model remains a leading force in the tech industry, the evolving landscape of AI and increasing competition present significant challenges.

As the industry continues to grow and innovate, Nvidia’s ability to navigate these challenges will determine its future success.

Kumar Priyadarshi
Kumar Priyadarshi

Kumar Joined IISER Pune after qualifying IIT-JEE in 2012. In his 5th year, he travelled to Singapore for his master’s thesis which yielded a Research Paper in ACS Nano. Kumar Joined Global Foundries as a process Engineer in Singapore working at 40 nm Process node. Working as a scientist at IIT Bombay as Senior Scientist, Kumar Led the team which built India’s 1st Memory Chip with Semiconductor Lab (SCL).

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