The DeepSeek Artificial Intelligence Breakthrough: What Is Really Going On?

This week’s AI news item was the most powerful from that surging field in years.  What on earth happened?

The same day the story broke came out “What to Know About DeepSeek and How It Is Upending A.I.” (Cade Metz, The New York Times, January 27^th).  Immediately, “tech stocks tumbled.  Giant companies like Meta and Nvidia faced a barrage of questions about their future.  Tech executives took to social media to proclaim their fears.  And it was all because of a little-known Chinese artificial intelligence start-up called DeepSeek.”  Word spread that that company had “created a very powerful A.I. model with far less money than many A.I. experts thought possible.”  Veteran technology reporter Metz posed and answered ten questions.  “What is DeepSeek?... A start-up founded and owned by the Chinese stock trading firm High-Flyer,” which “by 2021… had acquired thousands of computer chips from the U.S. chipmaker Nvidia,” and “on Jan. 10… released its first free chatbot app.”  “Why did the stock market react to it now?”  Because DeepSeek released a research paper claiming that while “the world’s top companies typically train their chatbots with supercomputers that use as many as 16,000 chips or more,” its own “engineers said they needed only about 2,000.”  “Why is that important?”  Cost.  “How did DeepSeek make its tech with fewer A.I. chips?”  By “spreading… data analysis across several specialized A.I. models” instead of doing it all together.  “Is DeepSeek’s tech as good as systems from OpenAI and Google?”  Yes, according to “standard benchmark tests.”  “U.S. tech giants are building data centers with specialized A.I. chips.  Does this still matter, given what DeepSeek has done?”  Yes, the additional chips will still be useful for future and peripheral AI purposes.  “Hasn’t the United States limited the number of Nvidia chips sold to China?”  Yes, and that has “forced researchers in China to get creative.”  “Does DeepSeek’s tech mean that China is now ahead of the United States in A.I.?”  No, not in general.

The next day, but probably only hours later, saw “DeepSeek’s Rise:  How a Chinese Start-Up Went From Stock Trader to A.I. Star” (Meaghan Tobin, Paul Mozur, and Alexandra Stevenson, The New York Times).  It was “a business using A.I. to make bets in the Chinese stock market” that “pursued a new opportunity” and “zeroed in on research” on “advanced A.I.”  “Do China’s A.I. Advances Mean U.S. Technology Controls Have Failed?” (Ana Swanson and Meaghan Tobin, The New York Times, January 28^th)?  No, because such limitations had not yet gone into effect when DeepSeek bought their chips.  In contrast, “DeepSeek will not be able to legally purchase the newest generation of A.I. chips that Nvidia is rolling out right now.” 

We got two opposite views on where these stocks are going.  Per Adria Cimino in The Motley Fool on January 28^th, “Nvidia predicted to soar in 2025 thanks to this one thing.”  That reason is innovation, as it may release two new architecture systems before this year is out.  Alternatively, in “I Study Financial Markets.  The Nvidia Rout Is Only the Start,” in the New York Times that day, Mihir A. Desai claimed that “Big Tech is eating itself alive with its component companies throwing more and more cash at investments in one another that are most likely to generate less and less of a return,” and “investors see these companies as a safe bet and have thus stopped demanding significant immediate returns,” resulting in a “massive influx of cheap money.”

What’s going on here?  I have three thoughts that may help us understand.

First, the runup of Nvidia, and other AI stocks to a lesser extent, has long been paper-thin.  Despite all the money involved, only a few people in moderate-sized companies can have huge and sudden impacts.

Second, training AI systems, as well as how AI decides what to say, is a black box.  Even top researchers fail to comprehend exactly how it works, and therefore what it requires.  It is hardly a mature science.

Third, despite the appearance of transparency provided by such things as formal papers, the Chinese government and Chinese society are closed.  We cannot verify, for example, the provenance and originality of DeepSeek’s output, or how much in resources its development actually required.  If the announcement caused $1 trillion in paper assets to disappear, it could be that $500 billion, or more, was due to exaggeration or downright fraud.  Although the amounts of money are unprecedented, this would not be the first time – or the 20^th – that the stock market has been shaken by faulty information.  The technicians at the AI companies will scrutinize DeepSeek’s products and will draw conclusions, but they will not be finished today or tomorrow.  In the meantime, the rest of us need to look before leaping.