Here's Why DeepSeek is a Wake-Up Call for AI Titans
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I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg.

It was done very cheaply. So why the crazy amounts of spending that are happening from the U.S. big tech companies? What's happening here is the collapse in the cost of innovation. What this development has shown is the hardware that these companies have procured, they weren't using it efficiently. A lot of question marks around DeepSeek, in particular, how much did it really cost for them to develop this new quote-unquote cheap model that they've self-reported.

The implication is, of course, that things got cheaper, things got more simple, but we'll have to see that manifest itself in the real world. Shocking, a game changer, a Sputnik moment. Just a few of the things that have been said about the Chinese AI startup DeepSeek. The company shot to global fame over a weekend after the launch of its R1 chatbot, seen as a rival to the likes of ChatGPT. But crucially, the company says it used less expensive chips.

So here's why DeepSeek is a wake-up call for the AI titans. Joining me now to discuss Bloomberg's TV anchor Tom McKenzie, a former China correspondent and our resident tech watcher. Thanks for being with us, Tom. First of all, tell me about R1, the product that DeepSeek makes. Is it something that's really comparable to ChatGPT or to Gemini? So on a number of metrics measured by

experts and there are platforms online where you can see how these measurements are displayed and how they categorize these models, then yes, R1 competes with ChatGPT's most sophisticated model, the latest model, the Zero One, but also the models from Gemini and Anthropic. It is up there, top of the list, alongside those kind of players. It is sophisticated.

It is a text-based model and chatbot. You can download it onto your phone. It is not multimodal, so it doesn't produce video. It doesn't produce pictures. But what it does do is reasoning. Like O1 from ChatGPT, it goes through how it comes to its responses and

Unlike O1, it actually displays those for you. So you can see the chatbot processing your question, going through how it's going to get to the answer. And that level of transparency has led to a lot of tech enthusiasts out there who are getting their hands on this thing responding very favorably. And that's led to a lot of optimism and

and some very positive feedback about what this chatbot based on DeepSeek's model can actually do. Now, one thing it can't do is answer an honest question about Xi Jinping and his leadership or what happened in Tiananmen Square in 1989 because it is not allowed to fall foul of Chinese government censorship. So there is that important caveat. OK. All very interesting. What do we know about how it was developed? Well,

What we know is what is claimed by DeepSeek. So they claim that it was developed at a fraction of the cost of some of their competitors, around US$6 million. They claim the model was trained on much older chips, not the most cutting-edge NVIDIA chips, because those are restricted from the Chinese markets. We know that they have VPCs.

very innovative and sophisticated engineers. They've been recruiting talent for the top universities domestically in China, systems engineers. We also know that they put in place an infrastructure and a method of building models called a mixture of experts procedure, which basically is lots of mini models, much easier to put together. And if you align them, you can create these efficiencies. So the engineers, the mixture of experts method that they've used, they say has led them to creating these efficiencies.

building a model much more cheaply using less sophisticated chips and much more quickly. They say they built this model, designed this model within about two months. Now, there are question marks. Microsoft and OpenAI are scrutinizing whether or not DeepSeek actually lent on OpenAI's own model to learn from the outputs from that model that they then fed into the training of the DeepSeek model.

that potentially went over and above what was allowed. That is being scrutinized. And we have to take them on face value when they talk about the chips they're using because we don't know exactly...

how they built this. But if we take them face value, they did this more cheaply, more cost effectively, in a shorter time, and with a slightly different method that created a very efficient and very capable model. Okay, but questions being asked, as you note. More broadly, when we talk about AI up until now, we've mainly been talking about the models developed by American companies,

Is this revealing something that we didn't already know about China's AI industry? How does it compare to what we know out of the US? There is an argument that we've had a blind spot when it comes to the innovation that's coming out of China. There's been a lot of talk about the slowdown in the economy, rightly so. There's been a lot of concern about the real estate market. There's been a lot of concern about a crackdown on technology in recent years out of China.

that has allowed some to overlook the real innovation that is happening in that Chinese market. One of the most competitive places to build and test technology is in the Chinese markets because you have so many people who pile in, they test their products, they fight to the death, and then the survivors come out on top. And if they can compete in the Chinese market, my goodness, they can compete globally. And we've seen that whether it is with drone makers like DGI, whether it's like

TikTok, social media companies like TikTok, or whether it's indeed the solar panel makers of China. Across all those different areas, they compete in the domestic market, they win, and then they go to compete internationally. I haven't even mentioned the electric vehicle makers that are posing a challenge to Europe's EV model now as well. They have the engineers. They have almost double the number of engineers of the US in terms of

AI engineers. They have the data in vast quantities. What they don't have are the most sophisticated chips. If DeepSeek really is an example of how to circumvent that by using older chips, then China has all the ingredients it needs to compete on the global level.

Interestingly, we also saw another Chinese company, Alibaba, coming out with our own model this week that is also as capable as the most sophisticated models coming out of the U.S. So every indication suggests that China is a serious player. And if it hasn't caught up with the U.S. yet...

then it's very, very close to doing that. It does seem like all of a sudden everyone has an opinion on DeepSeek and its breakthrough, even the US president. The release of DeepSeek AI from a Chinese company should be a wake-up call for our industries that we need to be laser-focused on competing to win. So, Tom, what do the AI companies in the US need to be woken up to with this DeepSeek story? Well, interestingly,

it's earnings week as well. So we've been hearing from the CEOs of some of those major players. We've been hearing from Mark Zuckerberg from Meta. We've been hearing from Satya Nadella, CEO of Microsoft. What you're not hearing from them is any walkback on the spend around CapEx, the spend on the chips, the spend on the data centers, the spend on the servers, and the spend on the energy that's needed to power this AI revolution. Because one of the major questions that DeepSeek has posed this week is, is all of that spending worth it? Do we need to spend tens of billions of dollars on

all of that AI infrastructure if a bootstrap company in China with $6 million can produce a model that competes with ChatGPT at a fraction of the price. But the CEOs are not walking back from these investment commitments. In fact, Meta's Mark Zuckerberg, who praised DeepSeat and said there was real innovation there, he's committed to $65 billion of spending this year. He says they're going to be building their own AI agents, and he hopes the Meta

is going to be getting those agents to a billion people by the end of this year and that they'll be leading in that space. Microsoft's Satya Nadella also praising DeepSeek, but his take was this is going to lead to greater adoption of artificial intelligence, it will drive down prices, and longer term that will be good news for Microsoft. Microsoft committing to spend $80 billion this fiscal year on AI infrastructure. Okay, a rude awakening for some, perhaps not for everyone. Tom McKenzie, our Bloomberg TV anchor, thank you very much for joining us.

For more explanations like this from our team of 2,900 journalists and analysts around the world, search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.

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