Over the Lunar New Year break, China ambushed global markets and claimed its place in the artificial intelligence (AI) universe by launching DeepSeek as its national champion to challenge U.S. dominance.

The news immediately followed the inauguration of U.S. President Donald Trump, whose "America First" policies have centered around a trade war with China that was supposed to make it difficult to catch up to the U.S.' lead in technology. The timing of DeepSeek's proclamation to the world folds neatly into Chinese President Xi Jinping's "Made in China 2025." This grand plan aims to localize imports of critical components and materials by 70 percent this year. It is a politically powerful way for China to remind the world that it has not given up on the tech race, particularly AI. Besides the political points from the announcement, there are key investment implications from the emergence of China's latest disruptor, which comes with structural strengths and weaknesses that will have a lasting impact on investment in the ultraspeculative technology industry.

the past few years, OpenAI and other AI companies have established an unquestioned investor consensus that their business model justifies an almost unlimited need for capital, energy and Nvidia chips. The investment world acceded enthusiastically, betting the house that AI, led by U.S. innovation, will change the world and deserves investments of enormous valuation premiums. Now, the DeepSeek chatbot has shaken the financial world not just for its service quality but also due to its claim that it is multiple times more cost-efficient than its U.S. counterparts; apparently, its large language model process was achieved at a fraction of the cost, meaning a fraction of energy and Nvidia chips are required.

How China caught up with technology that was supposedly unassailable for decades remains to be seen, but it’s a safe bet that it involved a fair amount of "cutting corners." Additionally, China’s state-backed support must be part of the explanation, given the country’s obsession with using technology as the "equalizer" to catch up to U.S. economic dominance.

The fast-follower business model is something we saw from the early stages of the industrial emergence of Japan and South Korea. China's model, however, is even more potent given that U.S. intellectual property laws have a limited impact on mainland China.

While the political implications of DeepSeek are still too early to conclude, it is useful to remember that respect for intellectual property rights was one of the key criteria for China's admission into the World Trade Organization (WTO). Back then, the issue was centered around movies, music CDs and product designs. Since its WTO membership, China begrudgingly adhered to the West's request, but just barely enough to keep its membership intact. In that sense, the debate over DeepSeek as a business model and surrounding politics is not new. Now, however, the stakes are much higher as it involves technology that could define future world leadership and become a pivotal issue of U.S.-China tensions.

Whether DeepSeek's claim that it is 10 times more cost and energy-efficient than its U.S. competition is true remains to be seen. For now, the validity of the claim is secondary to the investment ramifications. In the past, Chinese companies have used state-backed support to fight global incumbents on price to gain market share. Ultimately, China's support for AI technology will have a similarly disruptive impact on AI products by commoditizing the low to mid-end segment. A positive impact is that China's ability to subsidize and spend its way into AI technology will provide cost discipline for incumbents. For consumers, any disruption to a monopolistic structure is good news — even if it is coming from China. A cost-effective, voluminous version is good for inflation and working-class consumers especially those from developing economies. In that sense, consumers should welcome DeepSeek's entry, especially cost-conscious users from emerging nations.

However, it would be premature to assume that the AI boom is ending or that Nvidia as an investment theme is over. DeepSeek is structurally embedded with both weaknesses and strengths relative to U.S. peers. Consistent with fast copy models of the past, quality will remain inferior, albeit cheaper. More importantly, privacy and censorship concerns will be significant factors for developed nations to discount DeepSeek services. On the positive side, DeepSeek can go all out on innovation without being hampered by looming regulatory or ethical debates. With the backing of the Chinese government, DeepSeek (and other emerging disruptors) could get help not just from subsidies but also from regulatory backing, which could prove meaningful in the long run.

There have already been abundant signs of frivolous capital allocation caused by AI fervor, as evidenced by the irreverent rush for talent, dizzying market valuations and investment boom in data centers. The valuation compression may be painful for investment in the short term, but DeepSeek's entry may prevent a much bigger bubble going forward by introducing investment discipline for all involved.

Over the next four years, China will find it difficult to engage in a protracted trade war with the U.S. due to struggles with its domestic economy. Therefore, China's strategy could be to buy time by appeasing the Trump administration under the pretense of finding common ground.

However, simply rolling over and conceding defeat to the U.S. would not be the negotiation strategy that will please Xi. DeepSeek not only saves face for Xi's "Made in China 2025" project but could also give China much-needed bargaining power to bring the U.S. to the negotiation table. Whether DeepSeek acts as a further wedge between the U.S. and China or as a bargaining chip to bring the two countries to a compromise will be a key question in the coming months.

By: DocMemory
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