DeepSeek triggers global AI spending rethink

January 29, 2025 (MLN): DeepSeek has triggered a dramatic rethink on artificial intelligence spending around the world, except perhaps in China.

The startup's impressive low-cost model showcases the country's innovation prowess.

Yet it also spotlights how U.S. curbs on high-end chips hold back the world's second-largest economy in the global technology race.

For Beijing, the smartest way forward is to keep pouring money into breaking the West's chokehold on advanced semiconductors, as Reuters reported.

The Hangzhou-based upstart stunned the world with its latest R1 model that is just as powerful as offerings from the likes of OpenAI and Meta Platforms but is cheaper to run.

As investors digested the implications of inexpensive AI, nearly $600 billion in market value was wiped out from chipmaker Nvidia alone.

U.S. officials questioned the efficacy of tech sanctions imposed by Washington to slow China's progress in the industry and called on Donald Trump's new administration to tighten export curbs.

How the Republican president, who on Monday DeepSeek's model a "wake-up call" for his country, responds will now be key.

On one hand, DeepSeek's breakthrough suggests sanctions accelerated creativity in the People's Republic.

Chinese firms, from Huawei to Alibaba, have devised clever workarounds.

Tech analyst Ben Thompson of Stratechery argues that "all of the decisions DeepSeek made in the design of this model only make sense" because it could not use Nvidia's top-of-the-line offering.

Even so, the chips DeepSeek used have been banned in China since 2023.

That means compatriots hoping to replicate its success face even tougher constraints today.

In a rare last year, the company's founder Liang Wenfeng said that while money has never been a problem for the startup, bans on advanced chips are.

In short, China has the talent and resources, but the biggest constraint is in its access to high-end processors.

It is here that Beijing is funneling billions of dollars to help homegrown champions like Huawei and the $55bn Semiconductor Manufacturing International build domestic alternatives.

The pair have racked up some important wins, including mass-producing a 7-nanometre smartphone chip back in 2023 that many thought was out of their reach.

DeepSeek shows there are no shortcuts.

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