Last year, shortly before the start of the Chinese New Year, when much of China shuts down for seven days, the state media saluted DeepSeek, a software company whose discharge of a new low-cost, high-performance artificial-intelligence design, known as R1, prompted a huge sell-off in tech stocks on Wall Street. China Central Television showed images of DeepSeek’s mustachioed leader, Liang Wenfeng, meeting with Premier Li Qiang, the second-highest-ranking established in the Chinese government. A few days previously, China Daily, an English-language information site run by the Chinese Communist Party, had hailed DeepSeek’s success, which defied U. S. restrictions on the import of high-performance semiconductor chips used to teach A. I. models, as” not an isolated phenomenon, but more a reflection of the broader vibrancy of China’s AI ecosystem”. As if to reinforce the point, on Wednesday, the first day of the Year of the Snake, Alibaba, the Chinese tech giant, released its own fresh A. I. design, which the company claimed “outperforms” competing items from U. S.companies like OpenAI and Meta “almost across the board”.

Alibaba’s claims haven’t been independently verified yet, but the DeepSeek-inspired stock sell-off provoked a great deal of commentary about how the company achieved its breakthrough, the durability of U. S. leadership in A. I., and the wisdom of trying to slow down China’s tech industry by restricting high-tech exports —a policy that both the first Trump Administration and the Biden Administration followed. Speaking at the World Economic Forum, in Davos, Satya Nadella, Microsoft’s chief executive, described R1 as” super impressive”, adding,” We should take the developments out of China very, very seriously”. Elsewhere, the reaction from Silicon Valley was less effusive. According to OpenAI, it is “reviewing indications that DeepSeek may have improperly distilled our models.” The Chinese company claimed to have spent only$ 5.6 million on computing power to train one of its new models, but Dario Amodei, the CEO of Anthropic, another well-known American A. I. company, described this achievement as merely” an expected point on an ongoing cost reduction curve,” which U. S. companies would soon match. According to Amodei, the novelty of a Chinese company being the first to demonstrate the anticipated cost savings is “even more existentially significant than they were a week ago.”

These remarks demonstrate that your perspective on the DeepSeek story is a factor in your decision-making. To get an unofficial view from the other side of the Pacific, I arranged a Zoom call with a longtime China watcher, Louis-Vincent Gave, a co-founder of Gavekal, a Hong Kong-based financial services company. Gave, who is fifty years old and is originally from France, relocated to Hong Kong in 1997, just before the United Kingdom handed China back control of the former British colony. He has lived there ever since, researching and writing about China’s remarkable development as the world’s second-largest economy and nation’s top exporter of goods. On Monday, the day , a U. S. semiconductor company that produces the high-end chips most American A. I. firms rely on, lost more than half a trillion dollars in market value, Gave circulated entitled” Another Sputnik Moment” to his firm’s clients, which include investment banks, hedge funds, and insurance companies around the world. Silicon Valley venture capitalist Marc Andreessen’s initial use of the phrase” Sputnik moment” was originally used to describe DeepSeek. Given China’s formidable strength in computer engineering and basic scientific research, Gave’s piece said, “fighting a tech battle against ( it ) always seemed a short-sighted strategy”. He once more made up his defense and said that China’s imposing the export restriction had been a big mistake because it had made them “very focused” during our conversation.

The conflict that Gave cited started in 2018, when the Trump administration cited national security concerns as the cause of the Trump Administration’s ban on the export of some important semiconductor components to a Chinese telecommunications company and chipmaker. The Biden Administration increased these restrictions several times, particularly in regards to the most potent chips produced by Nvidia. In announcing the latest set of rules, last month, just a week before Trump’s second Inauguration, then Commerce Secretary Gina Raimondo said,” The U. S. leads the world in A. I. now, both A. I. development and A. I. chip design, and it’s critical that we keep it that way”. By then, though, DeepSeek had already released its V3 large language model, and was on the verge of releasing its more specialized R1 model. The company claims to have created both models using affordable Nvidia chips without violating the U.S. export bans.

” Did DeepSeek happen in spite of the restrictions, or did it happen because of the restrictions”? Gave asked me. In response to his own question, he went back in time and brought up the Tiger 1, a German tank used in World War II that outperformed British and American models despite having a gasoline engine that was less potent and less fuel-efficient than the diesel engines used in British and American models. ” I think you could find hundreds of examples through history of necessity being the mother of invention,” he said. ” You build a ten-foot wall, I’ll build an eleven-foot ladder. China’s just done this, and everybody is acting surprised”.

Some people in the U. S. tech industry have made similar comments. In a post on X, Pat Gelsinger, the former chief executive of Intel, wrote,” Engineering is about constraints. The Chinese engineers had limited resources, and they had to find creative solutions”. These workarounds appear to have included using the chips that were available to a Chinese company to maximize their capabilities and limiting the number of calculations DeepSeek-R1 performs in relation to comparable models. In another post on X, Andrej Karpathy, a prominent computer scientist who was a co-founder of OpenAI and a former director of A. I. at Tesla, said that DeepSeek was “making it look easy” by training a “frontier-grade” “on a joke of a budget”.

Although the idea that imposing resource constraints encourages innovation isn’t widely accepted, it does receive some support from academic research and other sectors. A 2014 study of Swiss manufacturers found evidence to support the hypothesis. More recently, two researchers from Harvard Business School and the University of Texas at Austin discovered that companies that didn’t receive any outside funding until later in their development were more likely to “engage in a greater amount of experimentation with technologies” and to “many significantly change their technology stacks.”

The argument is that having ample access to technical and financial resources makes for more experimentation than conditions of scarcity, despite the evidence being unproven. Gave contends that many Westerners have been significantly underestimating the ability of Chinese companies to innovate rather than simply copy. He said that this tendency was now evident in many industries, including nuclear power, railways, solar panels, and , where the Shenzhen-based BYD has overtaken Tesla as the biggest E. V. producer in the world. In fact, Gave drew a direct comparison between A. I. and the auto industry. ” I’ve heard all the criticisms that, if it wasn’t for OpenAI, DeepSeek couldn’t happen, but you could say exactly the same thing about car companies”, he said. ” BYD wouldn’t be here without Tesla. Sure, of course. However, it is still true that BYD is present. And it’s a better car at a cheaper price”. might strenuously dispute that final assertion, but there can be no doubt that the sudden arrival of DeepSeek, following on the heels of the rise of BYD and other Chinese E. V. manufacturers, has raised some awkward questions. ” It’s a wake-up call to the West that there is no industry that is one-hundred-per-cent safe”, Gave said. In the American A. I. industry, he went on, the belief had been that if you invested enough in A. I. hardware, you could create a big moat and a lasting monopoly. ” That belief has been exploded as well”, Grave added.

I questioned him about what policy guidance he would give the new administration in Washington. ” My job isn’t to tell policymakers what to do”, he said. ” My job is to say, Well, this is happening, how do we make money out of it”? Still, Gave did offer some indirect advice. The first thing is to acknowledge the fact that China is now industry after industry, he said. In his opinion, this success reflects some fundamental features of the country, including the fact that it graduates twice as many students in mathematics, science, and engineering as the top five Western countries combined, that it has a large domestic market, and that its government provides extensive support for industrial companies, by, for example, leaning on the country’s banks to extend credit to them. ” They said,’ No more lending to . We need to be an industrial superpower. ‘&nbsp”,

Gave’s claim is that this tactic has already been successful, and that DeepSeek’s launch is the most recent and most impressive proof. His attitude during our conversation was both serious and wry. He noted that, when he posts his arguments about China’s economic progress on YouTube, as he occasionally does, they attract comments that he is spouting C. C. P. propaganda. He seemed to find this interesting rather than alarming. There is an emotional response in China that makes it difficult for people to accept simple facts, he said. &nbsp, ♦