We have featured articles from Louis-Vincent Gave who has been bullish about Chinese economic and technological progress to balance the generally negative narrative from western media. It is only appropriate we feature his piece on DeepSeek, the Chinese AI company which stunned the world by showcasing its AI model reportedly built on meagre resources, yet delivering outcomes similar to those from the likes of OpenAI, Google and Meta which are armed with infinitely larger resources.
Chinese technological prowess is being gradually appreciated given its global leadership in electric vehicles, renewable energy, consumer electronics, pharma API, etc. Yet AI was considered far too cutting edge for the world to expect a Chinese breakthrough. One person who perhaps didn’t have much doubt was Gave.
“The arrest of Huawei’s chief financial officer Meng Wanzhou in Canada in 2018, and the ensuing United States ban on high-end semiconductor exports to China, transformed Donald Trump’s “trade war” into a “tech war”. At the time, the US clearly felt it had a comparative advantage in technology, and that if it had to fight a battle against China, then picking tech as the battlefield made good sense.
In September 2021, US commerce secretary Gina Raimondo, declared that: “If we really want to slow down China’s rate of innovation, we need to work with Europe”. As a result, Europe was roped into a cold war most European businesses – not least ASML, supplier of some of the world’s most advanced chipmaking machines – would have rather avoided.
Since then, China has pulled ahead in 5G (even announcing a 6G satellite-to-earth breakthrough at the beginning of January), high-speed rail (with new trains going 450 km/h), electric vehicles (triggering the imposition of new trade barriers by the US and Europe), batteries (more trade barriers), and drones.
Given that China now graduates more science, technology, engineering, and mathematics students each year than the rest of the world combined, fighting a tech battle against China always seemed a short-sighted strategy. With all its capital and human resources, why wouldn’t China be able to catch up with – and perhaps eventually surpass – the West’s technological advances?”
But the broader point from Gave’s article is DeepSeek potentially catalysing the bursting of the AI bubble:
“…the release of DeepSeek undermines one of the core tenets of the AI bull market: that spending tens, if not hundreds, of billions of dollars will build ever-bigger moats for US mega-cap tech stocks. DeepSeek just shredded this belief. It now looks as if the hundreds of billions spent by the giants of US tech is essentially so much capital that will never see any returns: the “metaverse” fiasco all over again, only larger.
This marks an important shift in market narratives. Essentially, DeepSeek has taken a hot needle to the AI bubble, and the air will now be leaking out. This possibility raises the question whether the deflation of the AI bubble will remain a concentrated market phenomenon, with names like Nvidia coming back down to earth in isolation, or whether it will impact the broader market, with a lower Nasdaq, a weaker US dollar and stronger US treasuries.”
Gave takes us through a history of the US tech rally over the past couple of decades leading to the question:
“Has AI reached a dot-com moment? At the end of the 1990s, hundreds of e-commerce platforms were funded by eager VCs. When Pets.com and others started to fail in 2000, and dot-com companies started to run out of money, companies like Lucent and Sun Microsystems that had extended credit to fast-growing customers suddenly found themselves in deep trouble on two fronts. First, their former clients were fire-selling their new equipment for cents on the dollar. Second, the clients stopped making the payments they owed. Balance sheets and income statements came under assault at the same time. Could history repeat, but this time with failing VC-funded AI companies selling the high-priced chips they were rushing to buy just months before on the fear of shortages?”
In conclusion, he brings up a couple of interesting points:
“…I would like to highlight that one of the odd things about the AI bull market has been its capital intensity. Up until a couple of years ago, one of the main attractions of tech companies (along with strong growth) was the “capital-light” nature of their business models. But AI turned this on its head. All of a sudden, the market seemed keen to buy semiconductor companies on triple-digit multiples, based on the premise that the tech world would now have a capital intensity higher than a steel plant or an oil refiner.
On the positive side, DeepSeek seems to bring things back to what tech should be: open-source and capital-light. This is ironic since it is coming out of China, where the popular perception is that growth is always capital-intensive and policy is anything but open-source! Perhaps most importantly, DeepSeek destroys the idea that although having a few tech titans controlling the broader tech ecosystem might be socially pernicious, at least it makes for technological progress and ensures that the US remains technologically dominant. In this latest Sputnik moment, the tech war between China and the US, between open-source and closed-system, and between capital-light and capital-intensive models has just taken a very interesting turn.”
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