DeepSeek Shows China Playbook for Even Bigger US Shock on Chips

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(Bloomberg) — 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.

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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.

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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 Holdings Ltd.’s WeChat to ByteDance Ltd.’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 Inc.’s Google and Meta Platforms Inc.

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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 Corp. and Advanced Micro Devices Inc. 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.

Xi has poured billions of dollars into making a breakthrough in advanced semiconductors, part of his wider Made in China 2025 push to make the nation a leader in emerging technologies. Research by Bloomberg Economics and Bloomberg Intelligence shows that the broader effort has largely been a success, pushing China’s manufacturing prowess to historic heights as the nation becomes dominant in producing goods like electric vehicles, batteries and solar panels.

Although Chinese companies such as Huawei Technologies Co. have made progress in producing AI chips, as of now those parts are less powerful than the ones produced by Nvidia. And the lack of access to high-end chips, particularly after the Biden administration tightened trade controls, still poses a major hurdle to China’s development.

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In 2023, Huawei introduced a smartphone with a 7-nanometer chip — something the US thought was unfeasible for Chinese firms to manufacture with less-advanced chipmaking technology. Yet while that phone was hailed as a breakthrough — and spurred patriotic memes on social media as its release coincided with then-Commerce Secretary Gina Raimondo’s visit to the country — since then the firm has struggled to make advancements toward 5nm chips, while rivals like Apple Inc. and Samsung Electronics Co. have moved on to 3nm. 

It remains uncertain if DeepSeek, which released its new model just as Donald Trump was inaugurated, will be able to continue accessing the high-end chips that led to its current product. Liang Wenfeng, the company’s 40-year-old founder, has cited US export controls as a hindrance to the company’s future growth.

On Monday, President Trump said DeepSeek’s R1 release “should be a wake-up call for our industries that we need to be laser-focused on competing to win.” He also lauded the model as a “positive development” that could allow for less expensive AI advancements across the board.

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While DeepSeek’s advance is positive for China’s economic transition away from property toward high-tech growth drivers, it may also spur American lawmakers to redouble efforts to stop the nation from getting the most advanced technology. The same data security concerns that led legislators to take action against TikTok may also lead to similar action against DeepSeek.

Michelle Giuda, chief executive officer at the Krach Institute for Tech Diplomacy at Purdue, told Bloomberg TV that it was essential for the US to maintain “a really strong defense” with tighter export controls. At the same time, she added, the US needs to catch up with China in producing talented engineers if it’s going to stay ahead in the tech race. 

Engineers Needed

“It’s a game changer in the sense that all we should do is double down American efforts to move faster, smarter, and maybe more cheaply on how we innovate in artificial intelligence,” she said, adding that China graduated more than twice as many engineers as the US in 2020. “Unless we have the engineers to build and design the data centers, to design more advanced AI, we are not gonna be able to be the world capital of AI.”

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For now, it looks like China remains several generations behind in chipmaking equipment. Beijing recently advised state-linked organizations to use a new homemade lithography machine with a resolution of 65nm or better — far from the 8nm resolution of ASML’s best machines. Still, China recently publicized a patent application from Shanghai Micro Electronics Equipment Group Co., known as SMEE, for an EUV lithography machine — which, if it came to market, would be the only one in the world to compete with those produced by ASML.

Other Chinese companies are also making progress despite US export controls. Canada-based consultancy TechInsights said in fresh research that chipmaker ChangXin Memory Technologies Inc. has demonstrated advanced manufacturing techniques that haven’t previously been seen on the Chinese market, while Yangtze Memory Technologies Co. has also become more competitive against the industry leaders. 

After DeepSeek’s revelation, China has shown it has the potential to continue surprising the world with even bigger breakthroughs.

“Bunch of talented 22-year-olds without access to the world’s best chips, without access to Nvidia chips, seem to have created something that’s even better than even the best companies in the Western world have done,” Tony Haymet, the Australian government’s incoming chief scientist, told reporters on Tuesday in Canberra.

“It shows you how disruptive technology can be,” he added. “And how quickly things can happen.”

—With assistance from Yian Lee, Ben Westcott and Newley Purnell.

(Updates with report on other Chinese tech advances)

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