How DeepSeek Caught Up in the AI Race

Summary

WSJ What’s News: How DeepSeek Caught Up in the AI Race
Episode Release Date: January 28, 2025
Host: Luke Vargas, The Wall Street Journal

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1. Market Turmoil Amid DeepSeek's AI Breakthrough

The episode opens with Luke Vargas highlighting the significant market volatility triggered by Chinese AI startup DeepSeek's rapid advancements in artificial intelligence. This development has stirred debates on whether DeepSeek poses a threat or offers opportunities to the world's leading tech giants.

• Market Reaction: DeepSeek's progress led to a dramatic fall in Nvidia's stock by 17%, alongside losses in other AI-related stocks and nuclear power companies. The NASDAQ index also plummeted over 3%. However, off-hours trading showed a slight recovery for Nvidia, and US Futures remained flat, suggesting a potential market stabilization.

• President Trump's Commentary: Reflecting on the situation, President Trump remarked on the positive aspects of DeepSeek’s approach:

  “[02:08] Today and over the last couple of days I've been reading about China and some of the companies in China, one in particular coming up with a faster method of AI and much less expensive method. And that's good because you don't have to spend as much money. I view that as a positive, as an asset.”

2. DeepSeek’s Innovative Approach to AI Development

Stu Wu, a reporter for The Wall Street Journal stationed in Singapore, delves into how DeepSeek achieved its breakthrough.

• Efficiency Through Innovation: DeepSeek employed a novel method contrasting traditional AI models like ChatGPT. While ChatGPT functions as a "librarian" that relies on vast pre-read data, DeepSeek operates more like a "detective," sourcing answers in real-time when prompted. This approach, though seemingly energy-intensive per query, proves more energy-efficient and cost-effective in the long run.

  “[00:42] Stu Wu: If you go back to the earlier generations of ChatGPT, think of it like a librarian and it's read all the books. So when you ask it a question it goes, oh, I read that in a book. Here's the answer. Deep Seq found a shortcut. It's more like a detective. It's read a little bit, but when you ask it a question, it'll say, okay, here, let me go find the answer right now.”

• Cost Advantages: DeepSeek developed advanced AI capabilities using earlier generation Nvidia chips, significantly reducing expenses compared to other AI firms.

3. Challenges with US Export Controls and Nvidia's Influence

The discussion shifts to the role of US export controls intended to curb China's AI advancements. Stu Wu explains the loopholes that allowed Nvidia to inadvertently aid DeepSeek.

• Export Control Loopholes: Despite restrictions, Nvidia engineered chips that met the letter of export regulations but still delivered enhanced performance. This unintended loophole enabled DeepSeek to leverage Nvidia's technology, facilitating their AI progress.

  “[04:04] Stu Wu: Yeah, the other one is I think there's this assumption that the US Slapped these export controls that make it hard for US Chip companies sell leading chips to China. That is true, but there's actually been a pretty bumpy road for actually implementing them.”

• Future Implications: The Biden administration has since tightened these controls, reducing the efficacy of previous measures and limiting the power of new chips sold to China.

4. President Trump’s Optimistic Take on AI Competition

Luke Vargas explores President Trump’s perspective, who views the intensified AI competition as a catalyst for efficiency and innovation among American tech leaders.

• Economic Efficiency: Trump suggests that competition from DeepSeek forces US companies to innovate more efficiently.

  “[05:24] Patient Trump: Instead of spending billions and billions, you'll spend less and you'll come up with hopefully the same solution.”

• Industry Response: Silicon Valley acknowledges DeepSeek's innovative methods, recognizing that American firms can adopt similar strategies to enhance their AI training processes.

  “[05:43] Stu Wu: Yeah, a lot of people in Silicon Valley are saying the same thing.”

5. Senate Confirmation of Scott Besant as Treasury Secretary

The episode transitions to significant political developments, focusing on Scott Besant's confirmation as Treasury Secretary and his anticipated impact on President Trump's economic agenda.

• Scott Besant’s Stance: Besant is a proponent of extending tax cuts, which face expiration. He emphasizes the necessity of rein in the deficit through spending cuts rather than tax hikes, aiming to balance economic growth with fiscal responsibility.

  “[08:12] Chelsea Delaney: Besant said in his confirmation hearing that he does want to see those tax cuts extended. And if they aren't extended, that would be pretty detrimental to a lot of Americans.”

• Tariff Policies: Positioned as a moderating force, Besant supports tariffs but advocates for a balanced approach, which has garnered him favor among investors seeking stability.

6. Trump Administration’s Freeze on Foreign Aid

A controversial move by the Trump administration involves freezing nearly all foreign aid, causing significant disruptions to various programs.

• Immediate Impact: The executive order mandates a three-month halt on foreign assistance, affecting humanitarian programs, counterterrorism efforts, and weapons financing. This pause has left vital programs in jeopardy, with aid workers and officials expressing deep concern over potential global repercussions.

• Government Response: Agencies like the State Department have been inundated with waiver requests, but specific details about exceptions or affected programs remain unclear.

  “[07:09] Stu Wu: So when I talk to national security folks in Washington, they're not that concerned right now because they said, hey, look, this is too early to tell.”

7. Surge in ICE Arrests and Mass Deportation Efforts

The administration's aggressive stance on immigration has led to a notable increase in arrests conducted by Immigration and Customs Enforcement (ICE).

• Rising Arrest Numbers: Recent data shows ICE making nearly 1,000 arrests on Saturday and 1,200 on Sunday, a significant uptick from the average of 310 daily arrests during the final year of the Biden administration.

• Mass Deportation Goals: This surge aligns with Trump's campaign pledge to execute the largest mass deportation in US history, targeting individuals with criminal backgrounds, including minor offenses.

  “[09:06] Luke Vargas: Trump is looking to make early progress on his campaign pledge to carry out the largest mass deportation in US History with his team targeting immigrants in the country illegally with criminal backgrounds, including minor offenses.”

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Conclusion

The episode of WSJ What’s News provides an in-depth analysis of DeepSeek's pivotal role in the AI race, its market implications, and the broader economic and political landscape shaped by recent US policies. From innovative technological advancements and market volatility to significant political appointments and controversial administrative actions, the episode paints a comprehensive picture of the current events influencing global and domestic arenas.

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For those looking to stay informed on the latest business and political developments, this episode of WSJ What’s News offers valuable insights and expert commentary.

Transcript

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[Luke Vargas]

Markets stabilize after yesterday's sell off, even as the interest continues to swirl over how China's Deep Seq managed to catch up in the AI race.

[Stu Wu]

If you go back to the earlier generations of ChatGPT, think of it like a librarian and it's read all the books. So when you ask it a question it goes, oh, I read that in a book. Here's the answer. Deep Seq found a shortcut. It's more like a detective. It's read a little bit, but when you ask it a question, it'll say, okay, here, let me go find the answer right now.

[Luke Vargas]

Plus, the Senate approves Scott Besant as Treasury Secretary and the Trump administration ramps up its deportation efforts. It's Tuesday, January 28th. I'm Luke Vargas for the Wall Street Journal and here is the AM edition of what's news, the top headlines and business stories. Moving your world today is fresh competition from Chinese AI startup Deepseek, a curse or a blessing for the world's largest tech companies. Yester delivered a bloodbath for chipmaker Nvidia, the global leader in AI chips, as its stock fell 17%. Other AI stocks also saw big losses, as did nuclear power companies banking on electrifying the AI revolution and the NASDAQ as a whole skidded more than 3%. But a new day could be delivering a change in perspective. Nvidia is ticking higher in off hours trading, US Futures are flat. And President Trump last night, despite calling deep seek a wake up call, identified a potential silver lining in its rise.

[President Trump]

Today and over the last couple of days I've been reading about China and some of the companies in China, one in particular coming up with a faster method of AI and much less expensive method. And that's good because you don't have to spend as much money. I view that as a positive, as an asset.

[Luke Vargas]

As our ASA Fitch reported on the PM edition of what's News yesterday, Deepseek managed to create an advance to AI with earlier generation Nvidia chips at just a fraction of the cost of what other AI firms have spent doing the same work. And Despite US Export controls designed to contain China's AI Advance Journal reporter Stu Wu is in Singapore. Stu, alongside your colleague Rafael Huang, you have pulled back the curtain. Now even more on how deepseek did all of this. What did you manage to learn?

[Stu Wu]

Okay, I think there are two big reasons why Deepseek pulled this off. The first is a genuine innovation. So they use this new method. So if you go back to the earlier generations of ChatGPT, think of it like a librarian. ChatGPT is sitting in a library and it's read all the books. So when you ask it a question, it goes, oh, I read that in a book. Here's the answer. So what Deepseek did was something different.

[Luke Vargas]

And to be able to do that, you've got to have read all the books. Pretty labor intensive.

[Stu Wu]

Yeah, just think about that. You got to sit there, you got to show the ChatGPT all these books. It uses a lot of computing power and time and electricity that costs money. So Deep Seek found a shortcut. What it does is that instead of a librarian, it's more like a detective. It's read a little bit. But what it does is that when you ask it a question, it'll say, okay, here, let me go find the answer right now. So actually it expends more energy while it's answering the question, rather than reading all the books before. But I talked to some researchers in Silicon Valley and they said this is actually a much more energy efficient way of doing things in the long run. This could just. Just use a fraction of the time, energy and cost of doing this. So they really found an innovative shortcut.

[Luke Vargas]

All right, so that's one of the two reasons, Stu.

[Stu Wu]

Yeah, the other one is I think there's this assumption that the US Slapped these export controls that make it hard for US Chip companies sell leading chips to China. That is true, but there's actually been a pretty bumpy road for actually implementing them. So the Biden administration tried to do this in 2022, and it restricted one certain parameter of the chip. It turns out that parameter could have been overcome. And that's exactly one of the companies, Nvidia, did. They designed this chip that, yes, it met the parameters of these export controls, but they compensated by increasing the power of the chip in other ways. So what happened was that Nvidia was able to design this chip and sell it to China. Even though it complied with export controls, it was still a lot more powerful than the US Government wanted to be. So, yes, there were expert controls, but they weren't that effective at that time, it took about a year for the Biden administration to close that loophole.

[Luke Vargas]

I guess that raises some big questions for the us, for the Trump administration, about what to do with these export controls going forward.

[Stu Wu]

That's right. So when I talk to national security folks in Washington, they're not that concerned right now because they said, hey, look, this is too early to tell. Deepsea used those pretty powerful Nvidia chips two, three years ago, but you really have to wait another year or two to figure out whether these export controls really work, because the export controls didn't really get ramped up until more recently. And as Nvidia makes more powerful chips nowadays, the lag or I guess the advantage that American companies have against Chinese companies will just grow over time.

[Luke Vargas]

Stu, what then about the argument from President Trump that this new competition in AI is a net positive seeming to address tech leaders? Yesterday he said that, quote, instead of spending billions and billions, you'll spend less and you'll come up with hopefully the same solution, end quote. Is that realistic?

[Stu Wu]

Yeah, a lot of people in Silicon Valley are saying the same thing. So, yes, Deepseek found this new way of doing AI that's really innovative and it uses a fraction of the energy to do it, but there's nothing stopping American companies from doing it the same thing and getting more efficient at training their own AI models. They published the research paper giving away some of their secrets so they can just follow the same thing and get better at training their own models.

[Luke Vargas]

And in terms of this Deepseek advance being a benefit to other tech players, I don't know to what extent this was maybe just an attempt to save face, but on a day in which Nvidia saw more than half a trillion dollars written off their market cap, a spokesperson for them yesterday sort of tried to spin all of this as a positive.

[Stu Wu]

Yeah, it's really ironic because what enabled Deepsea to succeed so well was that Nvidia did design these chips that pushed the limits of the export controls without going over the line to give Deepseek all this computing power. And what they said was that Deepseek did something really amazing and they did so using our chips that did not break any export controls that were fully compliant. So it is a weird situation. They lost all that money, but they think maybe in the long run this is a good thing and, hey, maybe.

[Luke Vargas]

Their export compliant chips become their hot new thing.

[Stu Wu]

Maybe. Yeah. But after this loophole when they made these super powerful export control compliant chips, the US Government came down and said, we're going to tighten this loophole. So now the chips that Nvidia does sell to China legally are a lot weaker.

[Luke Vargas]

Journal reporter Stu Wu in Singapore. Stu, thanks so much as always.

[Stu Wu]

Thanks, Luke.

[Luke Vargas]

And in market news today, as we mentioned, stock futures are pointing to a calmer trading session to come, though it will be a busy one for earnings, with updates due from Boeing, General Motors and Lockheed Martin before the opening bell, with Starbucks and LVMH following this afternoon. Coming up, we'll head to Washington as the Senate confirms President Trump's treasury secretary pick. And federal agencies scrambled to respond to a pair of orders limiting financial assistance programs and foreign aid. We've got those stories and more after the break. The Senate confirmed Scott Besant as Treasury secretary yesterday, putting the longtime investor at the center of President Trump's efforts to cut taxes, fight inflation and impose stiff tariffs on imports. WSJ reporter Chelsea Delaney has more on what we can expect from Besant in overseeing Trump's economic agenda.

[Chelsea Delaney]

So in Trump's first term, he cut taxes. A lot of those tax cuts are expected to expire at the end of this year. And Besant said in his confirmation hearing that he does want to see those tax cuts extended. And if they aren't extended, that would be pretty detrimental to a lot of Americans. And particularly he focused on the impact that would have on small businesses. The flip side of that is he wants to get spending under control. So he does want to rein in the deficit. And spending cuts are how they're going to get there, not tax rises. The other major thing is tariffs. So there's a lot of discrepancy between Trump's economic advisers on how aggressive they want to be on those. Besson is seen as a more moderating force. He is supportive of tariffs, but this is one of the things that has made him popular among investors, is that he is seen as taking a more middle of the road approach to tariffs.

[Luke Vargas]

Changing gears A Trump administration order freezing almost all foreign aid has prompted widespread confusion. That's left things like humanitarian programs, counterterrorism efforts and weapons financing in sudden limbo. The directive on Friday said that the State and the U.S. agency for International Development should not provide foreign assistance until a high level review of the programs is completed. The three month pause has stunned US Officials and aid workers who said that interruption in the roughly $60 billion foreign aid budget for this year could severely damage vital programs globally and could cost lives. And they have flooded the State Department with requests for waivers. A State Department spokeswoman didn't respond to questions about which waivers might be granted, the specific programs that are being paused, or the implications abroad. At the same time, the White House has ordered executive departments and agencies to broadly pause federal grants, loans and other financial assistance programs pending in administration review. That's according to a memo sent yesterday and reviewed by the Journal. It wasn't immediately clear whether the memo only paused financial assistance related to executive orders that President Trump signed during his first week in office or all current federal financial assistance programs. And US Government data shows that daily arrests of immigrants in the country illegally appear to be increasing nationwide, with U.S. immigration Customs Enforcement, or ICE, making nearly 1000 arrests on Saturday and 1200 on Sunday. That is after daily arrests during President Trump's first days back in the White House were in line with the average number seen during the final year of the Biden administration, when ICE arrested approximately approximately 310 people a day. Trump is looking to make early progress on his campaign pledge to carry out the largest mass deportation in US History with his team targeting immigrants in the country illegally with criminal backgrounds, including minor offenses. And that's it for what's news for this Tuesday morning. Today's show was produced by Kate Bullivant. Our supervising producer was Daniel Bock, and I'm Luke Vargas for the Wall Street Journal. We will be back tonight with a new show, and until then, thanks for listening.