Author: David, Shenchao TechFlow
Early this morning, Wally Liaw, co-founder of Supermicro, was arrested in California.
Supermicro is one of the world's largest AI server manufacturers and a core supply chain partner of Nvidia, having received $13 billion in orders for Nvidia Blackwell chips in a single quarter last year.
Liaw has been with the company since its founding in 1993 and is currently a senior vice president and board member.
The charges against him are:
Smuggling $2.5 billion worth of Nvidia AI chip servers into China through shell companies in Southeast Asia. The maximum sentence is 20 years.
The U.S. Department of Justice has characterized this case as the largest AI chip smuggling case in history.
However, the details of this case are very much like a movie plot.
According to the indictment, Liaw and his accomplices arranged for a Southeast Asian company to act as a "white glove," purchasing large quantities of servers equipped with Nvidia GPUs from Supermicro under the guise of "self-use." Once the servers arrived in Southeast Asia, workers tore off the original packaging, placed them into unmarked boxes, and shipped them to China.
The real goods were shipped away, but Supermicro's compliance team and the U.S. Department of Commerce would periodically inspect the warehouse and scan serial numbers. The warehouse couldn't just be empty.
So they built thousands of fake servers.
The shells were identical to the real ones, but they contained no chips and could not be powered on. They were specifically placed in the warehouse for auditors to see.
Having fake servers wasn't enough; the serial numbers on the packaging also had to match. Workers used hair dryers to heat the serial number stickers on the real packaging, peeled them off completely, and then stuck them onto the boxes of the fake servers...
The auditors scanned the codes, and the system showed everything was normal.
Surveillance footage in the factory captured the hair dryer moment. But the real goods were already on their way to China.
Even more outrageous, on one occasion when Supermicro's own compliance team sent someone to inspect, an accomplice named Sun took photos and videos of the fake servers and sent them to the auditor as "proof" that the "goods were all there."
Another time, when U.S. Department of Commerce export control officials came for an inspection, someone on site directly impersonated a lawyer to receive them...
The main perpetrator, Liaw, is 71 years old and holds Supermicro stock worth $430 million. In theory, he doesn't need the money.
There's another detail in the indictment. A broker once forwarded a news link to Liaw about several Chinese nationals being arrested in the U.S. for smuggling AI chips.
Liaw's reply was a string of crying face emojis, and then he continued with the operation.
After the news was announced, Supermicro's stock fell 13% in after-hours trading. The company stated that Liaw has been suspended, the involved party Sun has been terminated, and sales manager Steven Chang from the Taiwan office is currently at large.
Supermicro was not named as a defendant. The company stated it has a "robust compliance system."
But this is not the first time this company's compliance system has had problems.
$2.5 Billion Chip Smuggling Pipeline
This smuggling chain wasn't built overnight.
The indictment shows that Liaw was very proactive in running the operation. He directly used encrypted communication tools to ask the person in charge of the Southeast Asian company: How many can you take in January? February? March? April? Just give a rough estimate, and then we'll use this number to apply for a chip quota from Nvidia.
So the process was:
First, confirm the demand from Chinese buyers, then use that volume to negotiate a quota from Nvidia, citing "self-use" by the Southeast Asian company. Once Nvidia approved the quota, the servers were assembled in the U.S., shipped to Taiwan, then transferred to the Southeast Asian company, which removed the packaging and shipped them to China.
From clients to supply sources to logistics, Liaw single-handedly managed the entire chain. He wasn't a middleman; he was the co-founder and business development head of Supermicro.
Using his own company's supply chain to smuggle his own company's products.
Between 2024 and 2025, servers worth $2.5 billion flowed out through this pipeline. The indictment says this scale gradually expanded, using the phrase:
Growing increasingly bold.
The boldest single transaction occurred from late April to mid-May 2025. In three weeks, $510 million worth of servers were transferred from the U.S. to China via Southeast Asia.
Why the sudden acceleration? Possibly because Liaw saw a White House statement.
In early 2025, the U.S. government announced a new export control rule for AI products, scheduled to take effect in mid-May, further tightening chip export reviews to regions like Southeast Asia. Liaw forwarded this news to the head of the Southeast Asian company, adding a note:
"We need to speed these up before May 13!"
May 13th was the effective date of the new rule. Before that, the existing loopholes could still be used. So the final three weeks became a mad dash. Volume that usually took months to move was compressed into twenty days.
Meanwhile, Steven Chang from the Taiwan office was responsible for another task: ensuring no one came for a real inspection.
The indictment says he prevented auditors from checking the actual areas where servers were stored in the Southeast Asian data center and specifically arranged for an auditor he called "friendly" to conduct the review.
All the forged documents, fake servers, and hair dryer label transfers were meant to keep this pipeline running uninterrupted. And the speed of the pipeline peaked in the final three weeks.
But Supermicro isn't the only one in the chip smuggling business.
Over the past two years, the U.S. Department of Justice has already dismantled several chip smuggling networks. The scales range from tens of millions to hundreds of millions of dollars, with methods becoming increasingly outrageous. And the identities of the participants have also been escalating.
The Stricter the Chip Ban, the More Respectable the Smugglers
Supermicro isn't the first to be caught.
Looking back two years, the chip smuggling business has undergone three generations of evolution. The identities of the participants have escalated, the methods have become more like legitimate business, and the scale has grown larger.
The first generation was "ant moving."
When the chip ban first came out in 2022, smuggling was still manual labor. International students, tourists, and personal shoppers would carry one or two Nvidia GPUs at a time, hiding them in personal luggage through customs, claiming they were for personal use if stopped.
Some hid chips in boxes of live lobsters, others strapped them to their bodies under fake pregnancy bellies.
In Shenzhen's Huaqiangbei, these chips had a complete after-sales industry chain. Specialized workshops repaired broken cards and disassembled chips, handling over 500 per month, charging $1,400 to $2,800 per chip. After repair, they were sold to data centers and AI startups.
Smugglers at this stage had no companies, no documents; they relied on human effort and courage. The amounts per transaction were small, but every little bit helped.
The second generation began using companies, selling dog meat under a sheep's head.
In late 2025, the U.S. Department of Justice dismantled a smuggling network codenamed "Operation Gatekeeper." The main perpetrator was a man living in Houston named Alan Hsu, 43 years old. He used a company under his name to purchase Nvidia chips in bulk from Lenovo and ship them to a warehouse in New Jersey.
This company was called Janford Realtor, registered as a real estate company.
It never conducted a single real estate transaction.
After the chips arrived at the warehouse, workers tore off the original Nvidia labels and stuck on the name of a fictional company—"SANDKYAN." They were then transshipped via Malaysia and Thailand, eventually entering China. The entire network moved over $160 million in goods in eight months.
The most dramatic moment in this case occurred during the takedown. FBI agents secretly infiltrated the New Jersey warehouse beforehand and quietly removed all the GPUs inside. The smugglers discovered the goods were missing, thought they had been stolen, and sent people to the warehouse to "redeem" them.
The ransom was negotiated to $1 million, and the person who came to collect was arrested on the spot by the FBI.
The third generation is represented by professionals like those at Supermicro.
No longer fake companies, no longer middlemen, but the co-founder of a listed company personally running the operation.
No need to buy chips from others; their own company is a core supplier to Nvidia. No need to forge buyer identities; they use the company's own supply chain, own customer relationships, and own quotas to apply for chips, then internally bypass their own company's compliance team.
From ant moving to fake real estate companies, to Silicon Valley listed company executives. The three generations of smugglers have only one thing in common:
The end buyers are all in China, and the chips are all Nvidia's.
The difference is, the person carrying a backpack through customs in 2022 was gambling with their freedom. The person sitting in a Silicon Valley office running the operation in 2026 is gambling with a company worth tens of billions of dollars.
Every time the ban is upgraded, the profit from smuggling jumps a step, and the status of those willing to enter the game also jumps a step.
So how profitable is this business really?
The Black Market Price of a Chip
Why can't chip smuggling be stopped? The answer lies in the price.
According to multiple overseas media reports, the selling price of Nvidia's high-end GPUs on the Chinese black market is generally about 50% higher than the official U.S. channels. The ban created a price difference, the price difference created profit, and the profit created smugglers.
Demand is rigid. Ray Wang, an analyst at semiconductor analysis firm SemiAnalysis, said in an interview with CNBC:
Over 60% of China's top AI models currently still run on Nvidia hardware. Training a large model requires thousands of high-end GPUs; you can't start work even one short.
This means Chinese AI companies don't just "want to buy" Nvidia chips; they "must buy" them.
Image source:GamersNexus in-depth investigation of the Huaqiangbei chip market
What about the supply side?
After chips leave Nvidia's factory, they pass through distributors, system integrators, and server manufacturers. Every link is a potential entry point for smuggling. U.S. export controls primarily restrict the sales and shipping step, relying on buyers to self-declare the end user.
Once the chips leave the U.S., the subsequent steps rely largely on self-policing.
A Financial Times report last year estimated that in just the three months after April 2025, over $1 billion worth of embargoed chips flowed into China through various channels. Industry insiders estimate the entire black market's monthly turnover could be on the order of $1 billion...
And ironically, the U.S. government's own policies have been wavering.
Last December, the Justice Department high-profile announced the dismantling of the Operation Gatekeeper smuggling network, arresting several suspects. But on the same day, Trump announced on Truth Social: Allowing Nvidia to sell H200 chips to China.
Later, the U.S. government opened another loophole, allowing Nvidia to sell the less powerful H20 chips to China, on the condition that Nvidia pay 15% of the sales revenue to the U.S. government.
Cracking down on smuggling on one hand, selling it themselves on the other, and even taking a cut. This makes the entire ban system difficult to explain.
You tell a chip broker that smuggling is illegal, and he might reply: The government is selling it too, they just call it "conditional export."
The deeper paradox is that Nvidia is now the world's highest-valued company, with a market cap of $4.3 trillion. The more advanced its chips, the greater the demand, the higher the black market premium, and the more lucrative the smuggling becomes.
A Hair Dryer Can't Blow Away Demand
What signal do people inside chip companies see when the government itself is both cracking down on smuggling and approving exports?
The protagonist of this article, Supermicro, also helped Musk build the Colossus AI computing cluster in 122 days and received $13 billion in Nvidia Blackwell orders last quarter.
The people who build the servers and the people who smuggle the servers are the same group.
A $2.5 billion smuggling case ultimately failed because of a hair dryer. Surveillance footage captured workers using a hair dryer to peel off labels; it's now posted on the U.S. Department of Justice website for anyone to see.
In the same week Liaw was arrested, Nvidia CEO Jensen Huang publicly stated that the company is facing a backlog of $1 trillion in chip orders.
A trillion dollars in demand is sitting there, and the black market premium is sitting there.
Perhaps the next person willing to pick up a hair dryer won't have to wait long.
