DeepSeek shows China playbook for even bigger US Shock on chips

Published Wed, Jan 29, 2025 · 11:17 AM

The success of DeepSeek’s new AI model points to how China might eventually achieve an even bigger technological breakthrough in the face of US export curbs: Producing its own cutting-edge chips.

As tech leaders and politicians marvel at DeepSeek’s apparent ability to build an innovative AI model without spending nearly as much as rivals in the US, a development that roiled markets on Monday, the question now is how exactly the Hangzhou-founded company pulled it off – and what it means for American efforts to stay ahead of China in the tech race.

While much remains unclear, such as the exact chips DeepSeek used and whether it has enough on hand to further develop its AI models, its success highlights some of China’s key advantages. The country has a deep pool of highly skilled software engineers, a vast domestic market and government support in the form of subsidies as well as funding for research institutes. It also has a pressing necessity to find a way to do more with fewer resources.
“China has an obvious advantage in IT talent, both in terms of the sheer number and labor cost,” said Liu Xu, a research fellow at the National Strategy Institute of Tsinghua University, which is helping to spearhead China’s AI push. “The biggest resource for China is the country’s vast demand – as one of the world’s most populous nations and as a gigantic manufacturing hub.”

In many ways, DeepSeek is an example of China at its best. From Tencent’s WeChat to ByteDance’s TikTok, Chinese developers have crafted world-leading apps for consumers, pioneering new modes of communication and ecommerce along the way. DeepSeek’s R1 model is now set to challenge similar products from OpenAI, Alphabet’s Google and Meta Platforms.

China, however, is still playing catchup in the hardware space – the main focus of US export controls in recent years. The US has banned China from buying the most advanced AI chips from Nvidia and Advanced Micro Devices. It has also blocked President Xi Jinping’s government from obtaining ASML Holding NV’s extreme ultraviolet lithography (EUV) machines, which are essential to producing high-end chips.

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