Thanks to the huge success of DeepSeek, tech innovation in China is now a top priority

Since the launch of the latest chatbot from Chinese AI company DeepSeek a month ago, China has been experiencing an AI hype. Young and old have downloaded the app. “My father uses it too,” says 41-year-old You Tianlong, who works at a university in southern China. During the recent Chinese New Year holiday, the chatbot was the favorite topic of conversation. Because there were so many users at the same time, the server often couldn’t handle it. “Everyone was excited that we could develop such a good AI tool despite all the restrictions the US has imposed on China, and without access to the best chips.”

DeepSeek surprised the world last month with the high quality of its R1 model, a generative AI trained in a cheaper way by using chips sparingly. Due to US export restrictions, Chinese companies have limited access to the most advanced semiconductors. The innovation did not come from a large state-owned company, but was developed by a start-up with money that CEO Liang Wenfeng earned in the financial sector, without government support.

DeepSeek's success also led to a political discussion in China, about the role of the state in China's economy. Under the current leadership, government control was actually strengthened. But the Chinese government is happy to embrace the DeepSeek phenomenon. Last Monday, a graciously smiling President Xi Jinping shook Liang's hand. The forty-year-old, bespectacled programmer looked a bit intimidated.

The handshake came during a rare meeting between President Xi and CEOs of some of China's top private companies, particularly in the tech sector. The message: China's private sector has Beijing's backing — and tech innovation is a top priority.

Stands at a distance

DeepSeek also came as a surprise in China. In recent years, researchers in China have been deeply concerned about the impact of US export restrictions on AI innovation in the country. Without access to advanced chips, China would struggle to keep up with innovation in Silicon Valley. “But DeepSeek has completely changed that narrative,” says Jinghan Zeng, who studies China’s AI strategy at Lancaster University and was “like almost everyone in China” surprised by the company.

According to Zeng, the success should not be attributed to the Chinese state. The state may have all sorts of plans to make China a superpower in the field of artificial intelligence, but in practice innovation is difficult to plan, also in China. DeepSeek was not in any of the plans. "All major digital tech companies in China are private companies. This is not a victory of a state strategy, but a success of China's private sector."

The company is based in Hangzhou, a megacity southwest of Shanghai in one of China's most prosperous regions. Other famous Chinese private companies, such as Alibaba, also have their headquarters there. People discuss the secret of the city's success online. Many point to the local government, which does not interfere too much with companies, but does help where it can, for example in the area of ​​good infrastructure.

Chinese sayings

It is understandable that the Chinese government is incorporating the unlikely success into its propaganda, says Professor Zeng. "That is what any government would do." Moreover, it does indeed reflect positively on the current economic climate. Apparently, the government has done certain things well. But it is important that the right conclusions are drawn from this. "The government should keep a bit more distance and create good preconditions for innovation in the legal, commercial, financial and technological areas. Not now by putting billions of state aid on this. That is not the lesson that DeepSeek teaches us."

The private sector could use the positive signal from the central government last week. Parts of the sector have been hit hard in recent years as Beijing has imposed stricter regulations, particularly in tech and real estate. State-owned enterprises have had an easier time.

The past year has also seen a lot of unrest in the sector due to arrests. More than 80 executives of listed companies will face detentions in 2024, often related to financial conflicts rather than actual violations of the law. Lacking money, local governments struggling to cope with China’s ailing economy are clamping down on private companies with heavy fines or prison sentences for entrepreneurs who inconvenience the government, such as by demanding unpaid bills.

Last week's meeting should give Chinese businesspeople the sense that the central government disapproves of such practices and recognizes the crucial role of private companies — which account for about 60 percent of China's GDP — in China's economy. At the same time, that appreciation is especially for companies that seek to align with national priorities in technological innovation and competition with the United States. "The private sector is desirable, but within the confines of the state," economic analyst Lizzi Lee writes in Foreign Policy .

An example of this is the recent transformation of tech giant Alibaba. Since 2020, CEO Jack Ma has kept a low profile, after a temporary disappearance that was seen as a political warning to the outspoken business leader. In those years, the company has also changed, from an e-commerce leader to a company that also focuses heavily on cloud computing and artificial intelligence. It is precisely this infrastructure that is important for the future of China's own AI systems, which will require a lot of computing power. Alibaba is thus making itself useful to the strategic priorities of the Chinese government – ​​and Jack Ma was allowed to join the table in Beijing for the first time in five years last week. On Monday, Alibaba pledged to invest "at least" 380 billion yuan (50 billion euros) in the coming years in the development of artificial intelligence and cloud storage.

New ideas

Meanwhile, DeepSeek’s R1 model is beginning to slowly change Chinese society in the same way ChatGPT-4 did in Europe. ChatGPT is blocked in China, and many people are now discovering the benefits of generative AI for the first time. “Previous Chinese chatbots felt too much like talking to a robot,” says Ding, a primary school teacher in Qingdao. “But DeepSeek is really good. It gives you new ideas.”

He now also uses the app in his literature lessons. “A few days ago, my students and I gave DeepSeek instructions for a poem about spring, which he had to write in the style of the Chinese poet Du Fu . Something beautiful came out of it. DeepSeek also really knows a lot about the Chinese language and history.”

More and more companies and government agencies are also integrating the chatbot into their products. Brands like Huawei, Xiaomi and Lenovo have already switched over, and even the rival chatbot app Yuanbao from the big tech company Tencent has integrated DeepSeek's model, which can reach a large audience even faster.

But with the rapid adoption of generative AI comes concerns about the risks. What will AI do to the labor market, for example? The competition in the Chinese job market is already fierce even without the large-scale use of AI. You, the university employee, is watching with dismay. “Chinese society is so competitive. If there is a new way to accelerate yourself, people will grab it with both hands.”

"It's inevitable," he adds resignedly. "But we've been in a social transformation for decades. We're used to rapid change."