Data Center Computing Market Dynamics

LLM Development Trends

Our industry checks suggest several key trends impacting the data center market:

1. The capabilities gap between open-source and closed-source language models is narrowing significantly, potentially to within 1-2 months, based on observed performance of models like Claude 3.6/GPT4.5 versus DeepSeek /Qwen and other open models.
2. The perception of an insurmountable computing gap between US and Chinese AI development is being challenged through various innovations including:
   • Using GRPO to reduce supervised model training compute requirements
   • MLA implementation to decrease memory dependencies
   • Introduction of Flash MLA to further reduce memory requirements
   • Adoption of INT8 or FP8 to lower training/inference costs
3. Market reaction to ChatGPT competitors has been asymmetric:
   • Chinese cloud providers aggressively increasing H20 orders (up to 1 million units in H1 2025)
   • North American providers showing relatively muted response with focus on optimizing existing compute clusters
   • NVIDIA restarting production of Hopper-series GPUs indicates demand profile shifts
4. Public vs. private cloud segments exhibit different compute demand characteristics:
   • Chinese public cloud limited to H20 and domestic chips due to compliance requirements
   • Private cloud segment showing strong demand for AI PC-integration with consumer GPUs (RTX 4090) demonstrating excellent price-performance for lower-concurrency inference workloads

Long-term Market Structure Changes

Our analysis suggests fundamental shifts in compute architecture priorities:

1. NVIDIA's historical competitive advantage in scale-up architectures (NVLink) is being challenged:
   • Traditional focus on tensor parallelism (TP) for large model training
   • Memory pooling across GPUs for large models
   • However, newer developments including model distillation, MLA memory optimization, and sparse architectures are reducing the necessity for massive scale-up capabilities
2. Total compute market projection for 2025:
   • Approximately 10 million GPU-equivalent units
   • NVIDIA: 5.5 million units (50-60% market share)
   • Google TPU: 180-200k units
   • Trainium2: 150-200k units
   • Meta's Meta 3.0: 30-40k units (production beginning Q2 2025)
   • ByteDance chip: 10k units in 2025, potentially 100k units in 2026 （may face regulatory challenges, subject to change)
3. 2025 compute market outlook remains relatively stable:
   • Leading providers (except Microsoft) maintaining strong capex plans
   • No significant structural risks identified
4. 2026 market dynamics expected to shift:
   • Capital expenditure growth possibly moderating to 10-15% (down from previous 25-30% estimates)
   • Market transitioning from supply constraints to balanced supply-demand
   • More competitive landscape with multiple accelerator options including TPU, AWS in-house, Meta chips, and Chinese domestic solutions
   • Increasing pricing pressure on NVIDIA across market share, ASP, and gross margin