Last week, shortly before the start of the Chinese New Year, when much of China shuts down for seven days, the state media saluted DeepSeek, a tech startup whose release of a new low-cost, high-performance artificial-intelligence model, known as R1, prompted a big sell-off in tech stocks on Wall Street. China Central Television showed footage of DeepSeek’s bespectacled founder, Liang Wenfeng, meeting with Premier Li Qiang, the second-highest-ranking official in the Chinese government. A few days earlier, China Daily, an English-language news site run by the Chinese Communist Party, had hailed DeepSeek’s success, which defied U.S. restrictions on the export of high-performance semiconductor chips used to train A.I. models, as “not an isolated phenomenon, but rather 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 new A.I. model, which the company claimed “outperforms” competing products 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. OpenAI said it was “reviewing indications that DeepSeek may have inappropriately distilled our models.” The Chinese company claimed it spent just $5.6 million on computing power to train one of its new models, but Dario Amodei, the chief executive of Anthropic, another prominent American A.I. firm, described this achievement as merely “an expected point on an ongoing cost reduction curve,” which U.S. firms would soon match. Amodei did acknowledge the novelty in a Chinese firm being “first to demonstrate the expected cost reductions,” and he argued that DeepSeek’s progress makes “export control policies even more existentially important than they were a week ago.”
Such comments demonstrate that how you see the DeepSeek story depends partly on your vantage point. 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 and originally from France, moved to Hong Kong in 1997, shortly before the United Kingdom restored control of the former British colony to China. He has lived there ever since, analyzing and writing about China’s remarkable transformation into the world’s second-largest economy and its biggest exporter of goods. On Monday, the day Nvidia, 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 a commentary entitled “Another Sputnik Moment” to his firm’s clients, which include investment banks, hedge funds, and insurance companies around the world. (The term “Sputnik moment” had first been applied to DeepSeek by the Silicon Valley venture capitalist Marc Andreessen.) 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.” In our conversation, he reiterated this argument and said imposing the export restriction on China had been a big mistake, because “it forced them to be very focused.”
The battle that Gave referred to started in 2018, when the Trump Administration banned the export of some key components for semiconductors to a Chinese telecommunications company and chipmaker, citing national-security grounds. The Biden Administration strengthened these restrictions several times, particularly as they applied to the most powerful chips made 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 firm says it developed both models using lower-end Nvidia chips that didn’t violate the U.S. export bans.
“Did DeepSeek happen in spite of the restrictions, or did it happen because of the restrictions?” Gave asked me. To answer his own question, he dived into the past, bringing up the Tiger 1, a German tank deployed during the Second World War which outperformed British and American models despite having a gasoline engine that was less powerful and 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 seem to have included limiting the number of calculations that DeepSeek-R1 carries out relative to comparable models, and using the chips that were available to a Chinese company in ways that maximize their capabilities. 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” large language model “on a joke of a budget.”
Although the theory that imposing resource constraints spurs innovation isn’t universally accepted, it does have some support from other industries and academic studies. A 2014 study of Swiss manufacturers found evidence to support the hypothesis. More recently, in a study of U.S. software startups published in December, two researchers at Harvard Business School and the University of Texas at Austin found firms that didn’t receive any outside funding until later in their development tended to “engage in a greater amount of experimentation with technologies, and also were more likely to carry out more significant changes to their technology stacks.”
The evidence is far from definitive; the intuitive counterargument is that having ample access to technical and financial resources facilitates more experimentation than conditions of scarcity. But, in any case, Gave insists that many Westerners have been greatly underestimating the ability of Chinese firms to innovate, rather than merely copy. He said that this tendency was now evident in many industries, including nuclear power, railways, solar panels, and electric vehicles, 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. But the fact remains that BYD is here. And it’s a better car at a cheaper price.” Elon Musk 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,” Gave added.
I asked him what policy guidance he would give to 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 reality that China is now leapfrogging the West in 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 real estate. We need to be an industrial superpower.’ ”
Gave’s argument is that this strategy has already succeeded, and the emergence of DeepSeek is the latest and most dramatic evidence. His manner during our conversation was serious but also 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. This seemed to intrigue him rather than worry him. “When it comes to China, there is an emotional response that makes it hard for people to accept simple facts,” he said. ♦
