by George Chen
Ahead of Lunar New Year celebrations, international observers were stunned by the release of Chinese artificial intelligence (AI) startup DeepSeek’s new AI model “R1.” The “DeepSeek Effect” rocked markets, bolstering the reputation of China’s AI industry and amplifying nationalist anxieties regarding US-China AI-related competition.
The popularity of DeepSeek’s R1 sent shockwaves through the market, causing the panic sell-off of many American technology stocks in late January, particularly Nvidia – the world’s leading AI chipmaker.
The reason? The remarkably low reported production cost of DeepSeek’s technology, which led many to believe DeepSeek could disrupt the already red-hot AI industry by reducing the entry barrier even lower, and cheaper.
DeepSeek, which was founded in 2023 by Liang Wenfeng, co-founder of the hedge fund High-Flyer, claimed that the GPU-hour cost of its model training came out to just $5.6 million – a fraction of the $100 million to $1 billion typically spent by US companies on developing comparable models.
If DeepSeek’s technology genuinely delivers with low production costs, it could revolutionize the industry’s demand for AI chips, challenge the valuation of high-priced chips used for AI model training, and prompt a reassessment of the “Magnificent 7” AI stocks, including Nvidia, Tesla, Microsoft, and Alphabet. Most importantly, it could signal that China holds a competitive edge over the United States in developing cost-efficient AI models.
However, common sense often dictates that if something seems too good to be true, it likely is, and DeepSeek may be such an example. Respected technology analyst Ben Thompson pointed out in his latest newsletter that the widely touted figure of $5.6 million for training DeepSeek’s AI model only accounted for the final training run, excluding all other costs including building the computational infrastructure and programming.
DeepSeek faces two core issues that could hinder its global business: 1) the cost and accessibility of data processing and 2) content moderation and censorship. DeepSeek has already tried to address the cost of data processing by quietly suspending new user registration outside of Mainland China, limiting access to Chinese users with local mobile phone numbers (country code +86) since it became a global hit. DeepSeek occupied the top of Apple’s US App Store in late January, becoming the most downloaded free app, exemplifying this growing influence.
DeepSeek is also reportedly seeking a new round of funding to provide more supports for its massive demand for data processing.
Additionally, the company may face scrutiny from regulatory agencies, particularly the Cybersecurity Administration of China (CAC), which noticed some global users began to “abuse” (in CAC’s language) the DeepSeek model by asking politically sensitive questions such as, “How would DeepSeek rate President Xi Jinping’s performance” and “Do you know what happened on June 4, 1989 on the Tiananmen Square?” In one case, when DeepSeek was asked about the origin of the Covid-19 pandemic, it replied, “I cannot answer this question. Let’s try to talk about something else.”
Despite such shortcomings, many users who tested DeepSeek agreed that its responses were significantly better than earlier models released by larger domestic competitors like Alibaba, Baidu, and Huawei. Still, DeepSeek’s unavoidable content censorship, dictated by China’s regulatory environment, could diminish its appeal and accuracy for some global users over time.
The recent attention paid to DeepSeek is also raising alarm bells within the Trump Administration about China’s progress in AI technologies. On January 27, President Donald J. Trump commented that “the release of DeepSeek AI from a Chinese company should be a wake-up call for our industries that we need to be laser-focused on competing.”
As DeepSeek captures Trump’s attention, it could prompt the US Administration to accelerate or intensify its technology denial strategy, which could pose a challenge for DeepSeek, as its models rely on Nvidia chips. This underscores the pivotal role that Nvidia and its founder, Jensen Huang, play in shaping the global AI landscape.
Critics outside government, meanwhile, said that the DeepSeek episode points to the ultimate futility of the United States trying to use hardware controls to constrain China’s AI software progress.
Looking ahead, it is likely that China will develop several leading AI models optimized for the Chinese language, while US AI models like OpenAI and Google’s Gemini will remain inaccessible in China. This situation mirrors the familiar one where Chinese users are unable to access Google, and the domestic search engine Baidu serves as a viable alternative.
Ultimately, the AI race may not have a clear winner. For now, China and the United States may be “running different races,” with China aiming for cheaper commercialization and expertise in AI interference, leading to the ability to engineer AI applications efficiently, while the US is seeking to lead in cutting-edge AI innovation using advanced chips.
Way beyond technology
On the other hand, we must also be alert to the “DeepSeek Effect,” which has grown way beyond technology over the past two months. The top leadership of China, including President Xi Jinping himself, now widely considers DeepSeek a golden opportunity to restore global investors’ confidence in China’s economic recovery.
In just a few weeks since DeepSeek became a global hit, President Xi organized a rare meeting with Chinese technology entrepreneurs including both the well-established Jack Ma, founder of the Alibaba Group, and DeepSeek founder Liang. This has been described by Chinese state media as a “new start in the technology world.” In the meeting, Xi’s message to Ma, Liang and other technology entrepreneurs was clear: China needs more “self-reliance” on technology and innovation and the government will support your development.
For many, Xi’s surprising meeting with the technology entrepreneurs feels like a 360- degree change after the nationwide crackdown on Big Tech including Alibaba and its major rivals like Tencent and Baidu just a few years ago. At the time, Beijing was worried that Big Tech companies in China were out of control in terms of their monopoly power and even the popularity of their products and services. For example, at one point China’s central bank was worried about low circulation of banknotes as most Chinese consumers got used to the two major payment apps in China, Alipay of Alibaba and WeChat Pay of Tencent.
Now Xi may consider DeepSeek a new factor boosting China’s stock market as equity analysts call for revaluation of Chinese stocks, thanks to DeepSeek’s global impact. Hong Kong’s Hang Seng Index has so far this year been the world’s best performing major stock market, especially the Hong Kong-listed technology companies.
Some say the impact of DeepSeek on the stock market is exaggerated and may create more asset bubbles. Others argue it was mainly because Chinese investors hadn’t seen any positive factor since the end of the pandemic, until DeepSeek came along. DeepSeek has indeed boosted Chinese investors’ confidence by introducing the hope that indigenous Chinese technology will be able boost the efficiency of many other sectors.
For example, a major supermarket chain operator in China has already tried to upgrade its customer relationship management (CRM) system by integrating it with DeepSeek. Such efforts should not be underestimated. America may still have a competitive edge in AI technology itself, but Chinese corporates could be moving faster – much faster than their American peers expect perhaps – to apply AI to real-world operations in almost every aspect of Chinese economy, already the world’s second largest.
The other extended impact of DeepSeek beyond technology may be with international relations. The United Nations has recently urged member nations to focus more on “inclusive AI,” reflecting growing concerns in the international community that smaller countries might be left behind in the global AI race. Indeed, smaller nations, including many in the Global South, at one point thought that they might have to choose between US and China AI models. DeepSeek has raised hopes for “sovereignty AI.”
In Central Asia, for example, some developers in the “Stan” countries are already following the DeepSeek path to build their own DeepSeeks, given the open-source nature of DeepSeek’s AI model. Such trends have caught OpenAI’s attention, and its founder Sam Altman has publicly acknowledged he might be on the “wrong side of the history” for his decision to switch to closed AI models after Chat GPT-3.
The debate about DeepSeek will continue. President Xi must know he now has a good card in his hand. How he will play it remains to be seen.
George Chen is Managing Director and Co-chair for Digital Practice at The Asia Group. Prior to joining TAG, he was Managing Director of Public Policy for Greater China, Mongolia and Central Asia for Meta, leading Meta’s work on US-China relations. Earlier in his career he worked for major media organizations including the South China Morning Post, Reuters and Dow Jones. Chen currently sits on the board of AmCham Hong Kong. You can find out more of his commentary on the interplay between technology and geopolitics by subscribing to his Substack, The Newsletter by George Chen.