Founded in 2023 by Liang Wenfeng and headquartered in Hangzhou, DeepSeek specialises in developing open-source large language models (LLMs) – advanced AI models trained on vast amounts of data to understand and generate everything from poetry to Java code. Its flagship model, DeepSeek-R1, has garnered significant attention for its performance and cost-efficiency, challenging established Western AIs like OpenAI’s ChatGPT and Google Gemini.

A new AI contender

DeepSeek’s chatbot offers capabilities comparable to leading platforms like ChatGPT but distinguishes itself through its development efficiency. The company claims the model was trained at a cost of approximately $6 million, a stark contrast to the estimated $100 million expenditure for OpenAI’s GPT-4 in 2023. Moreover, DeepSeek-R1 requires only a tenth of the computing power of similar models, highlighting its resource efficiency.

Early users have found that the model performs as well as ChatGPT and Gemini, although many have raised questions about censorship (which will be explored further below). Performance and news headlines have brought a lot of attention as a result, and DeepSeek’s first free chatbot app for iOS and Android platforms surpassed ChatGPT as the most-downloaded free application on the US iOS App Store on 27 January.

Market disruption and economic implications

The swift rise of DeepSeek has had profound effects on global markets. DeepSeek’s open source model and lower development and computing costs undercut a common belief in Silicon Valley that AI can only advance with the input of huge budgets and top-tier chips.

As a result, shares of major technology companies, particularly those heavily invested in AI infrastructure, experienced sharp declines when markets opened on Monday, 27 January. For example, chip manufacturer Nvidia saw its stock price drop by 18% over concerns that DeepSeek’s efficient models could reduce the demand for chips, thereby impacting Nvidia’s future revenue streams.

Strategic implications for countries looking for AI supremacy

DeepSeek’s emergence underscores China’s rapid progress in AI. This has raised concerns about the effectiveness of bans on advanced chip and technology exports to China and prompted discussions about the need for strategic investments to maintain a competitive edge.

The company’s success also challenges long-held stereotypes about Chinese innovation, demonstrating that China is capable of being a leader rather than a follower and producing high-performance, cost-effective AI solutions. Chinese media have widely praised DeepSeek for its small yet formidable team, primarily comprised of young graduates from China’s top universities who have been deeply immersed in the tech field from a young age.

And it is not the only Chinese company purporting to be breaking new ground in the AI field. On 29 January, Alibaba (owner of Taobao, Tmall and Alipay, among others) announced a new version of its Qwen 2.5 AI model that it claims surpasses DeepSeek, OpenAI and Meta’s latest models.

Ethical and regulatory considerations

Despite its achievements, DeepSeek has faced scrutiny over data privacy and censorship concerns. The company’s models reportedly adhere to Chinese censorship laws, avoiding politically sensitive topics, which has raised questions about the ethical implications of such restrictions.

Moreover, there have been allegations that DeepSeek illicitly used OpenAI’s models to train its own through a technique called “distillation”, potentially infringing on intellectual property rights. This has caused some to question DeepSeek’s claims about how it produced its model so cheaply, although it should be noted that models like ChatGPT have also been criticised for infringing on intellectual property rights.

Finally, in the wake of the US Supreme Court upholding a law that could ban TikTok in the US over national security concerns (since being pushed back by an executive order from Trump), some have raised similar questions about DeepSeek’s collection, use and storage of data. As The Guardian reports, DeepSeek’s privacy policy states that the personal information it collects is held on secure servers in China.

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Anyone involved in tech in China has probably visited Zhongguancun,  the major technology hub in Beijing’s Haidian District that’s been dubbed ‘China’s Silicon Valley’. The area’s scientific origins date back to the 1960s, during China’s nascent atomic programme. In later years, thanks to its close proximity to many of the capital’s premier universities, Zhongguancun became home to famous names including Lenovo, Baidu, ByteDance, and more.

Ning Ken is a Beijing-based writer and journalist who has long been fascinated by Zhongguancun. His recent book, Zhong Guan Village: Tales from the Heart of China’s Silicon Valley (ACA Publishing, 2022 and translated by James Trapp) looks at the origins of the area from the viewpoint of a fascinated novelist, the story of some of the big names that have established themselves there, and some musings on what the ‘village’ means to the future of China’s technology sector. Paul French caught up with Ning Ken to talk tech, Zhongguan village and how one goes about telling its stories.

Can you just tell us where Zhongguancun is and how it came to be known as ‘China’s Silicon Valley’?

In 1949, Zhongguancun was a small village in the northwest of Beijing, near the Old Summer Palace, Peking University, Tsinghua University, and several other famous universities. At that time, there were only a few dozen farming families living there. In the 1950s, the government decided to establish a ‘science city’ in Zhongguancun. It would be a university town, under the encouragement of the government. The campuses were mostly packed into the northwest of Beijing, with eight colleges along a narrow road called Xueyuan Road. In addition, the first batch of scientific research institutes and the Chinese Academy of Sciences were established. Consequently, Zhongguancun has become one of the most talent and knowledge-intensive areas in the world, laying the foundation for its claim to be the “Silicon Valley of China”.

You decided to visit and explore this ‘capital of innovation’ on the edge of your hometown of Beijing. What excited you about the place and what did you find when you first went there?

The idea of Zhongguancun becoming China’s Silicon Valley emerged after the reform and opening up era began. First, Zhongguancun seized the opportunity in the early 1980s offered by Deng Xiaoping’s reforms. They built an “Electronics Street” that I was excited to see at the time. Then they created the high-tech industrialisation zone that became the progenitor of many other high-tech zones in China. Since then, Zhongguancun has continually seized the opportunity of the emergent knowledge economy and become an important base for national scientific and technological economic innovation. Secondly, Zhongguancun offered tech firms preferential treatment, not least allowing them to locate in the political centre of China – Beijing – and collaborate with the dozens of colleges and universities and hundreds of scientific research institutions nearby.

Zhongguancun seems to be so much more closely linked to the government, the People’s Liberation Army (PLA), and the big universities than America’s Silicon Valley. Is that true, or is it just more obvious in China?

The connection with the government and the nearby universities is pretty obvious. In 1988, Deng Xiaoping proposed that “science and technology are the first productive force”. That same year, China’s State Council approved the establishment of the first high-tech industrial development pilot zone in China – the Beijing New Technology Industrial Development Pilot Zone – based largely on Zhongguancun’s “Electronics Street”.

Zhongguancun also has the big advantage of the Zhongguancun Business Division, which established the so-called Talent Green Channel to promote internal and external exchanges of high-level talents – a key policy towards becoming the “Silicon Valley of China” and bringing in smart and clever people from all over China to Beijing.

After spending so much time in Zhongguancun, what is your opinion of how far advanced Chinese innovation is compared to Europe and America?

Recently, I was on a plane reading Deborah Perry Piscione’s book about Silicon Valley, Secrets of Silicon Valley: What Everyone Else Can Learn from the Innovation Capital of the World. Piscione says: “Reports on the ability of the rising giant of the East to become the new global hub of innovation are conflicted.” And it is true that there are some problems with Zhongguancun. Compared to San Francisco, the immigrant talent pool is thin, and many potential foreign workers consider the quality of life in Beijing to be questionable.

But Lenovo – which has its headquarters in Zhongguancun – is now poised to overtake one of the original Silicon Valley icons, Hewlett-Packard, as the largest PC maker in the world. This would be the first time in the past several centuries that a Chinese company has been number one in a global technology sector. At the same time, the real Silicon Valley has moved onto other areas of dominance in search engines, social media, and big data. Apple’s fastest-growing market for its innovative products is China. It would seem that Chinese companies have “overtaken the past of Silicon Valley, but not yet its future”.

How much do you think Silicon Valley USA inspired Zhongguancun?

I know that Silicon Valley has inspired Zhongguancun. I think the biggest difference between the two is their beginning stages, their origins. At least in the beginning stage, the first thing for Zhongguancun was not science and technology, innovation or the technology market. Rather, it was intellectual liberation during Deng Xiaoping’s early reforms. It was the early individuals in Zhongguancun who broke free from the ropes of the system and led the whole of China to break the shackles of various traditional ways of doing things. I think this is something that Silicon Valley did not have to think about and so cannot be compared with Zhongguancun. This is probably true of innovation in the UK too.

What is the future for Zhongguancun and what areas of development are prioritised – AI, biotech, fintech? What can we expect from Zhongguancun over the next decade?

In my book Zhong Guan Village, I emphasise the spirit of “entrepreneurship, innovation, perseverance and determination to forge ahead” that exists in Zhongguancun, and also emphasised the human benevolence, generosity, magnanimity, rationality and gentleness I found there. These two parts together are what makes and has made Zhongguancun so successful, and I think they are also the universal values of mankind. China is now very complicated and has become more complex than ever before, and nowhere is this clearer than in Zhongguancun.

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Andrew Collier’s China’s Technology War: Why Beijing Took Down its Tech Giants (Palgrave Macmillan, 2022) discusses the political and economic context of China’s tech “crackdown”. Collier was previously the President of the Bank of China International USA, BOC’s US investment arm, and is currently an analyst with Global Source Partners. Paul French caught up with Collier for a closer look at the roots of the tech war, Beijing’s reasons for the restrictions, and where the battle lines are drawn as 2022 ends.

We often see the phrase “China’s tech war” in newspapers, but perhaps we could start with how the restrictions on the growth of China’s technology sector and its major players came about and why?

The Chinese argue that the tech crackdown was just “regulatory catchup” by central government ministries worried about excessive market power. However, the start of the new policies occurred just days after Jack Ma gave a speech in Shanghai accusing the government of being out of touch and inept. There has been a real concern that wealthy companies with widespread popular appeal could pose a threat to the dominance of the Communist Party. Note how the other well-capitalised sector of the economy – real estate developers – have also been taken down. In both cases, there is a regulatory argument, but the implementation has been chaotic, and jobs have been lost at a time when China’s economy is facing headwinds.

The restrictions on Chinese technology companies are often linked to the Party’s ‘common prosperity’ slogan. How does common prosperity impact tech?

The common prosperity slogan has been around for decades, but Xi Jinping has made it a central plank of his policies. In essence, it is a call to more equitably distribute income and withdraw from pell-mell economic growth. It also harkens back to the more hardcore days of Maoism when cultural signifiers were important, and ideology ruled. However, laudable as it might appear, attacking large corporations for excess profits and market dominance cannot alone achieve more equality. China needs to engage in a fundamental restructuring of its tax base and excessive reliance on infrastructure investment. China’s consumption is 30% of GDP compared with 70% in the US. Giving consumers more power over the purse would require the partial dismantling of the state sector, which Xi Jinping appears reluctant to do. I view common prosperity as a populist slogan but no more.

Could you outline the major areas of heightened regulation affecting tech? The focus on data, financial risk, antitrust and Ant Financial offering loans for smaller banks seems to have created what you term ‘an uneven regulatory environment’. How disruptive is this for the sector right now?

The tech crackdown affected most sectors of what is termed the “platform economy.” Online education, transport (like Didi) and financial intermediation have all become targets of the crackdown. I would argue that the key issue for the Chinese leadership is size: how to allow the platform economy to grow – but not too much.  Ant Financial became a very successful lender of consumer funds to small businesses across China. The central bank accused Ant of engaging in risky practices, but the IMF published a paper showing that Ant had a bad loan rate about one-third the size of many of the country’s brick-and-mortar banks. The real risk was that Ant was getting too large and was starting to siphon credit from the state banks, which are the source of cheap credit for China’s giant state firms.

In your book, you say, ‘the technology crackdown, and related policies like common prosperity, do not help the economy move forward, but instead put roadblocks in its place.’ Does this mean that the once rapidly growing “platform economy” is now left in the doldrums in China for the foreseeable future?

China is in desperate need of a new growth engine to replace its historical reliance on cheap labour from women and rural-to-urban migration, along with the excess use of debt for growth. The platform economy provided millions of jobs in food delivery, online taxis and education, among other industries. Many of those jobs are gone. There’s no doubt that some of these jobs were badly paid and provided few worker benefits, but careful regulation could have resolved these problems. Instead, Xi Jinping has turned to a huge push to “hard tech,” such as semiconductors. There is some logic to this policy given the rising US sanctions on technology exports. But many of these state semiconductor and other hard tech funds are squandering capital and leading to excessive competition between provinces. Given its high corporate debt, China can ill afford to waste funds for meagre benefits

In one of the final chapters of your book, you ask ‘How long will the policies regarding China’s technology sector continue?’ Right now, at the end of 2022, where do you see the state of play?

The tone in Beijing is shifting as Xi Jinping extends his term as head of the Party and it appears the government has won its war against the tech giants. We aren’t seeing major support for the platform economy but a modest relaxation of strict controls. However, the same concerns about the power of private capital will make the sector more cautious about investments and slow down the rate of growth. I don’t see a massive turn back unless the semiconductor funds go broke or the employment situation becomes more dire, which is quite possible.

A strategist at a significant Chinese investment bank argued this December that policymakers in Beijing are now trying to relax the leash they put on the tech sector. The analyst pointed to new video game licenses being issued and the fining of Ant Group being a sign they want the case closed and to move on. What do you think of this analysis going into 2023?

China is concentrating its firepower on the semiconductor industry. The country rightly sees the loss of semiconductors from the West as a substantial blow to China’s tech ambitions, especially for large companies like Huawei. The leadership views the platform economy as less important for China’s future (despite the advantages to consumers, which it claims to support), because services are aimed at consumers while semiconductors support infrastructure and exports. Any relaxation will be modest at best, particularly since the threat remains of a domestically popular tech entrepreneur challenging the Party’s dominance.

If you are a British company invested in China’s tech industry, or thinking to get involved, call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research and analysis services could help.

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