By now the whole world has heard of DeepSeek, the Chinese startup whose AI breakthrough has just shaved hundreds of billions of dollars off global stocks.
Its R1 model is notable for rivaling OpenAI's 01 in performance at a fraction of the financial and computing cost. It’s also become one of the world’s favorite new apps, with nearly 2 million downloads in the past week.
That said, here are four things to know about DeepSeek.
First, the stock market rout was deep but it was narrow, impacting the AI chip and server sector – Nvidia, Broadcom and Ciena seem to have taken the biggest hits. Nvidia broke records in losing $593 billion in market cap, although it rebounded in early Tuesday trading.
Among the big investors in AI, Microsoft and Google were sold down, as was Softbank Group – one of the co-investors in the $100 billion Stargate plan - but both Amazon and Meta were marked higher.
Second, the claims that this is an unintended consequence of US chip restrictions are rather fanciful. It is also too early to argue that this represents a failure of existing controls.
Disdainful
DeepSeek has been running Nvidia H800 chips, which were built to circumvent October 2022 export controls, this blog post by Lennart Heim and Sihao Huang points out.
The latest AI export rules are only three months old, so have had no meaningful effect. Looking ahead, they argue that the biggest impact of these restrictions is likely to be not on individual models but on AI ecosystems.
The chief factor in DeepSeek's new models is in fact not chips but the philosophy of its founder Liang Wenfeng.
Liang is quite disdainful of Chinese entrepreneurs' approach of imitating US tech and leaving the big breakthroughs to foreigners. As the local jargon has it, western firms excel at 0 to 1, China succeeds at 1 to 100.
Liang is aiming to get to AGI. That means DeepSeek is a research project without a business model or short-term revenue goals and is open to testing fundamentally different approaches.
And while its achievement has won plaudits from US rivals as well as in China, others point out costs of AI training are continuing to plummet.
According to Ethan Mollick, a professor at the Wharton School of the University of Pennsylvania: "Costs for GPT-4 level intelligence dropped by 1000x in the last 18 months. A 95% price drop in reasoning models seems not to be something that will break the labs."
Third, DeepSeek's breakthrough is a leap forward for China's AI, but it's not a triumph for the Chinese government.
Chinese authorities have spent a Great Wall of cash on AI, but none of it has gone to DeepSeek. It has been funded by High-Flyer, the quantitative investment firm that Liang co-founded.
DeepSeek was begun as a side project two years ago and up to now it has been as independent of the government as any Chinese organization can be.
That may be changing, starting with the announcement of R1, which was timed for inauguration of the new president, just as Huawei unveiled its mobile chip breakthrough during Commerce Secretary Raimondo's China visit 16 months ago.
Liang's reward for his ingenuity was an invitation to a government panel session with Premier Li Qiang last week. As a hands-on developer it's not how he wants to spend his time, but he may no longer be able to avoid the timesuck of official duties and glad-handing.
Fourth and finally, for those who remember the bandwidth and dotcom bubbles, it's hard not to see the sell-off and the potential rethink of future investments as a welcome corrective. In the late 1990s billions of dollars were sunk into businesses with no revenue and in building out huge increments in fiber capacity.
The Nasdaq 100 doubled in 1999 in the dotcom boom, then sank in 2001 and 2002. Since the start of 2023, just following the launch of ChatGPT, the index has once again more than doubled.
As Wall Street figure Ray Dallio told the Financial Times (paywall applies), as with the internet in the late '90s, AI is "a major new technology that certainly will change the world and be successful. But some people are confusing that with the investments being successful."