On 21 January, US President Donald Trump appeared with OpenAI’s Sam Altman, Oracle’s Larry Ellison and Softbank’s Masayoshi Son to announce a $500 billion artificial intelligence (AI) project. “This monumental undertaking is a resounding declaration of confidence in America’s potential under a new president,” Trump declared. Not to be outdone, Son said this amounted to the dawn of a “golden age.”
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Less than a week later, the loss of a trillion dollars in market capitalization suffered by tech companies on 27 January alone on US stock markets appears to be some kind of bizarre celestial retribution.
Investors grew nervous about the competitive challenge posed by the Chinese startup DeepSeek, which has developed highly efficient large language models that appear to match its American counterparts using 2,000 chips versus 16,000.
It then went one better and published a paper, detailing its methods. On 10 January, DeepSeek’s first free chatbot app was released and has since quickly become the most popular free app on Apple’s app store.
It is not perfect.
As with China’s other tech companies, DeepSeek keeps all criticism of the Chinese Communist Party off limits, but few users will care about such censorship if its AI models work almost as well as their US counterparts at a fraction of the cost or for free.
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As a tech analysis in the New York Times observed, “DeepSeek described a way of spreading data analysis across several specialized A.I. models—what researchers call a “mixture of experts” method—while minimizing the time lost by moving data from place to place… DeepSeek’s research paper raised questions about whether big U.S. companies could maintain a significant lead in A.I. Many experts believe that A.I. technology will become a commodity.”
Perhaps we will see a golden age of low-cost AI use by corporates and individuals everywhere, but the short-term implications for the shares of chip-maker Nvidia and a other companies that seemed to lead the AI race have been catastrophic.
Nvidia’s one-day fall on 27 January was the largest in stock market history. As Bill Bishop, who edits the authoritative China newsletter, Sinocism, observed this week, “Who had a [Chinese] AI firm possibly popping the US AI stock bubble on their “black swan/grey rhino” list?”
There are many lessons here.
The DeepSeek example could be used as a case study to question what I have lamented in World Apart as a global pandemic of faddish industrial policy. Just because other countries are doing it does not make a subsidy raj in India for mostly large companies good policy.
An even more important lesson is that governments are rarely able to pick winners. The corollary is that using high tariffs against international competitors, for instance, almost always undermines domestic economies.
In interviews with labour-intensive exporters in India, I have repeatedly heard complaints from small and medium sized exporters that New Delhi’s higher tariffs on intermediate inputs undermine their competitiveness. Decades ago, it was often said that tariffs on steel imports to the US paved the way for Toyota and others to upend Detroit’s gas-guzzling cars.
There is some speculation that DeepSeek’s ability to create large language AI models with a fraction of the expensive chips used by US companies is the result of US government efforts to keep high-end chips away from Chinese companies.
While some suspect that DeepSeek had hidden access to such chips, it likely simply found a workaround. Last week, its founder is reported to have said to Premier Li Qiang that US export controls are a “bottleneck” for Chinese tech companies.
The success of DeepSeek, set up by a hedge fund trader in China, also billboards the huge strides China has made in the past several years in fields such as electric cars, green technologies and now AI.
The notion that China makes low-end products while India can corner high value-added exports and services is wishful thinking. Even China’s unfancied labour-intensive exports benefit from the increasing use of robots in its factories, efficient logistics management and hyper-efficient ports and customs clearance.
Add to that the know-how of Taiwanese and Hong Kong firms that have been managing complex supply chains for almost half a century, and it amounts to a huge lead for China over its competitors that ‘Make America Great Again’ and ‘Make in India’ cheerleaders alike seem to overlook.
In Breaking the Mould, a book published in 2023 (shorturl.at/Yfc0q) and co-authored by former RBI governor Raghuram Rajan, the authors rightly critique the central and Gujarat state government’s plans to offer massive subsidies to a US company to build a semiconductor plant in Gujarat. They calculate this equates to a subsidy of ₹3.2 crore per assembly and testing job in a plant expected to create 5,000 jobs.
Such vanity manufacturing projects are an expensive sideshow, however.
This week’s events underline that we live in a world being remade by China and the US, for good or for ill, at a rapid pace.
Also Read: What America’s technology denial and China’s AI success imply for India
China’s economy has problems of weak demand and over-investment. But, as Bishop observes, “Making their work open-source is a brilliant move by DeepSeek, and whatever the Trump Administration decides about export controls, it will likely cause an even greater split over AI between the US and its close friends and the rest of the world, especially the Global South.”
The author is a Mint columnist and a former Financial Times foreign correspondent.
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