(Preview) Xi Jinping and China's Tech Companies, The Long-Run Implications of the Chip Ban, and a Pessimistic Outlook for Taiwan

On today’s special crossover Sharp Tech/Sharp China episode, Ben Thompson and Bill Bishop discuss the private enterprise symposium and Xi Jinping's rapprochement with China's tech companies, and the connection between xAI and DeepSeek. Then, an extended debate on the chip ban, including its potential long-term consequences, and whether or not a course correction is possible. Finally, why the situation surround Taiwan is worrisome, and whether Trump is looking to make a deal.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Andrew Sharp?

  Hello and welcome to a free preview of Sharp Tech.

• 0:08Ben Thompson?

  Well, speaking of DeepSeek, one of my sort of thoughts, and I sort of mentioned in passing when writing about it, is that DeepSeek would provide a...

• 0:20Ben Thompson?

  There's going to be some impact, that's going to be hard to know what it is now, but probably significant, on China, and just almost more in the psyche slash belief perspective, where you go back to, these are very hard problems that are needed to solve. It's money's not enough. Incentive is also not enough. You sort of need the belief that we can do this. And is that a good read? Is there a bit where DeepSeek, again, which is a very good model, it's not the leading model, but it is in the class of the leading

• 0:58Ben Thompson?

  models, both V3 and sort of R1, R1 beyond that, has there been sort of this positive, or do you anticipate this sense that, look, yeah, even the stuff that the West is supposed to be the best at, we're just as good?

• 1:15Speaker 02

  Oh, well, DeepSeek really created that view. I mean, there are other models. Alibaba has a model, Apple apparently is going to use it for Apple Intelligence in China, you know, Baidu has a model, but DeepSeek kind of came out of nowhere, and they open sourced it, and then, of course, they, you know, the DeepSeek story, after it percolated for a few days, crashed the US stock markets, crashed Nvidia, and caused quite a real sort of meltup in some of the AI and tech-related stocks that trade in Hong Kong. And it was very much a turning point, I think, from a psychological perspective, in the sense that, yeah, we can do this, and even though we're, you know, we're struggling under this chip blockade, you know, DeepSeek showed that they could find ways to...

• 2:01Speaker 02

  You know, very creative ways to maximize the hardware that they had and build an internationally competitive model. And then they made it, and then they made it open source. So no, everyone's using it. You know, Baidu is integrated. I think Tencent has integrated it. Uh, you know, it's, it's, are you running it yet on your local machine?

• 2:19Ben Thompson?

  Oh, yeah, no, I downloaded, yeah, yeah, or a smaller version. I can't, I don't have a beefy enough hardware to do the full model. But yeah, well, I mean, why, why is it, you know, why is it open? I mean, why is it open source? Is there any sense in the, uh, central government? I mean, I, the, again, people over, overestimate the extent to which the central government knows or cares about. I think DeepSeek may, has made their own decisions all along. Is there a sense that, oh, this is actually really valuable? Should we be open sourcing it?

• 2:49Speaker 02

  So I think, to what you said, I think they, they made their own decisions. You know, they originally were hedge fund. They actually got in a little bit of trouble around, there's a crackdown on quant trading. They were a quant fund and, but they had bought all this hardware, all these

• 3:00Ben Thompson?

  And she's been, is now this is my quant.

• 3:02Speaker 02

  And, well, yeah, right. And, and it's, it's amazing how quickly he's risen. Liang Wenfeng, the CEO was actually, he was at this meeting with Xi on Monday. Uh, he met with the premier like a week, two weeks ago or three weeks ago. Uh, but no, I think, I think they, they just did it. They open sourced it. And now though, I, I think there's a realization that actually this is an incredibly powerful thing for China because it's a, you know, it's a, it's a very good model. It's open sourced. And so anyone, any country, anyone around the world can download it and have this Chinese model running instead of having to, you know, pay up for, you know, pay for Claude or for OpenAI. Or it's, it's a really, it's a, it's a really fascinating way of very quickly the Chinese, at least one Chinese AI model can go global.

• 3:47Ben Thompson?

  Yeah. I mean, the reaction to it's been, been really interesting because I mean, most people, their encounter with it is not downloading it to their local machine and running it. Uh, it, it's using the DeepSeek app, which, uh, but it speaks, I mean, just from like a business perspective, I, I've, you know, I think that OpenAI, number one, I said sort of from the very beginning, the ChatGPT was just accident in many respects, but they're They had achieved the most valuable and difficult thing in tech, which is a consumer brand with like meaningful market share. Part of that is your inevitable end state is advertising. And they need to get there fast so that they can give free users the best possible models.

• 4:30Ben Thompson?

  And people got deep seeks like, wow, this is amazing. It's so much better. Well, yeah, because they weren't paying up for the better sort of open AI models. It wasn't the best, but to a lot of people, it felt like it was. And, uh, and just the, I don't know, like, was the propaganda a fact of deep seek? Was it greater in China or on people in the US in the West?

• 4:53Speaker 02

  That's a great question. I think in China, what's interesting is how it's, it's really so quickly changed the market because now all these other companies that were trying to charge for their models, now they have to go free too. So it's not at all clear what the business model is around these, around these models in China now.

• 5:08Ben Thompson?

  Oh, that's a question in the US too. Don't worry.

• 5:11Speaker 02

  Well, at least in the US, they're, you know, OpenAI has revenue, right? You know, Anthropic has revenue with subscriptions. Not, not enough to pay for, you know, not enough to cover their costs. But, but so, you know, but I do think it was interesting, you know, I'm, I'm a fairly skeptical person. I'm curious, you know, the, the sudden surge on social media of deep seek, like on X and in the app store. Uh, I do wonder how much of that was really totally authentic and how much of that was inorganic.

• 5:35Ben Thompson?

  Yeah, I know you mentioned that. I, I feel like it was pretty authentic. I think, I think the meta bit about, because the reality is, is V3 came out over Christmas, which was actually a lot, you know, they, they documented a lot. So they've been publishing papers and models for several years. So this wasn't out of nowhere by any means. And then I think V3 had some of those cost estimates, which again, were totally twisted and warped by everyone driving their own agenda. They were very clear in the paper, the cost they published was for the specific training run. It wasn't for all the experimentation and all the R and D and all those sorts of things. And they never said otherwise. Like people are trying to paint it. They're trying to trick people. It's like, did you read the

• 6:20Ben Thompson?

  paper? They're like, the paper? Is very clear and lists all the things that that cost did not include. And and so but so V three comes out. That's the one that actually had that dollar figure, the six million dollars or whatever it was.

• 6:33Speaker 02

  Six million or so, yeah.

• 6:35Ben Thompson?

  And it was a very, very good model that was very, very cheap. And then R one comes out and I think it was a combination of people hadn't used reasoning models yet because they were paywalled. So number one, it was people's first access to this reasoning model. Number two, the UI for DeepSeek was better because or the UX, I should say, because it actually laid out its thinking. And if that was the first time you use a reasoning model and you see the model like talking to itself and trying to figure out the answer, it's kind of charming. It's like, oh, look at my little, my little AI friend is is trying to help me out and figure this out, which OpenAI did not expose for competitive reasons. And and they're like, we're, you know, we're not going to list what we're doing.

• 7:19Ben Thompson?

  So you had a double whammy of it was behind a paywall and it was behind a competition wall or whatever you you might want to be. Then you layer on the general sort of angst about China, that that China, at least we have AI. That's our great hope. And then the bit that we're spending billions and billions of dollars. The stock market is resting on this investments of billions and billions of dollars. Is this all sort of kaput? And I think all those just created a perfect storm. It just became a current thing for a weekend. We've seen that happen before. I think it, I think just that there were so many factors that made sense for this to explode

• 8:01Ben Thompson?

  that I'm inclined to give the benefit of the doubt to it being organic as opposed to inorganic.

• 8:07Speaker 02

  Okay, well, I was, it was, I think it's some mix, but I will, I will defer to you on that. I think that's a, you made a pretty compelling case. I will say what's interesting, right, is, you know, DeepSeek, they disrupted, obviously, you know.

• 8:20Speaker 02

  Stock prices here.

• 8:21Ben Thompson?

  And to be clear, Nvidia's almost backed up to where they were. So I mean, it was a very much a current thing.

• 8:27Speaker 02

  But, but, but, but the disruption was, they also disrupted the Chinese AI market, which is really interesting, right? So this is where they went. They disrupted globally. And frankly, I think, good for them. I think the US AI companies needed to be disrupted. They were really fat and happy.

• 8:40Ben Thompson?

  Oh, yeah. No, I mean, the, the, people were comparing to OpenAI pricing. That's because their margins were super large. Like, the pricing's already come down. They've already gotten more aggressive, I think, in releasing things. They, the, the 4.0 update over the weekend appears to be significantly reduced in terms of sort of the, the HR voice in like scolding you for, for, it's just, it's more open. And I, I think we're seeing actually a pretty compelling competitive response. And by the way, like, Google has models out there that are even cheaper and arguably just as good or better. So it's not, again, it was just this perfect, everyone's perception got, it was a bubble that got pricked.

• 9:25Ben Thompson?

  But it wasn't, if you were paying attention, it wasn't totally shocking. Now, I hesitate, I almost feel bad saying that because DeepSeek deserves so much credit. And the engineering they did was amazing. And the, and all their work, if you go back two years and read their papers, I haven't read all of them, but I've read three or four of them. It's really good stuff and some genuine breakthroughs that are going to be, or have been adopted globally. But like, that almost sort of makes the point. It's like, the, the myth of AI has always been a bit different than the reality. But the reality is also fairly spectacular and not fully appreciated either. So there, there's just this crazy mishmash.

• 10:07Speaker 02

  No, it's interesting. I mean, again, I think, I, I think that, you know, the US, the Silicon Valley firms should thank DeepSeek for a lot of what they did, right? Because ultimately, even though the, you know, the OpenAI, Anthropic, they, you know, XAI, they could buy as many as video chips as Nvidia can make. Won't they be able to make their models run much more efficiently and much better if they learn from DeepSeek?

• 10:28Ben Thompson?

  Well, so this is the interesting thing with Grok. Grok 3 just came out this week. Uh, it appears to be the state of the art model, at least, uh, the only O3 may be better, but O3 is this very distinct sort of thinking, sort of model that, that OpenAI, I think, is not going to ever release directly. It is in deep research, which is incredible and, uh, you know, has very clear flaws, to be clear, but is a very like, this is, this is a, at least for someone like me, this is a, I, I know the people who program have felt this way for a while because AI has made such a difference there, but a very visceral, like, yeah, there's a lot of jobs that are really screwed, uh, looking forward, you know, and,

• 11:09Ben Thompson?

  uh, so, so it, it's a state of the art or state of the art adjacent model. And what's incredible about XAI is it was founded 19 months ago. And now they have a state of the art model and it's almost the inverse. It's the flip side of the DeepSeek story, which is it's incredible, these optimizations DeepSeek did. They completely rethought how you do sort of a mixture of experts architecture, which is definitely better for inference, but it had all this training overhead and they just sort of changed how you do the training to be able to, to scale that much more gracefully because of their bandwidth limitations and they couldn't handle too much overhead and

• 11:49Ben Thompson?

  because they were, and I also believe, by the way, they were using H800s, they weren't using H100s, like, cause they did so many things with how they designed the model that speaks of, this is a company struggling with bandwidth limitations, which was the exact

• 12:04Speaker 02

  And they said that, I mean, they've said that CEO is sad, other employees are sad, their biggest constraint is chips.

• 12:10Ben Thompson?

  Right, which I think is totally, it totally lines up with the way the model is designed. So I, I actually think DeepSeek has been, again, with China, with everyone in general, you should be skeptical. But this is another case where I actually, I believe them, I, I, everything around this story sort of lines up, winds up with that. But XAI comes in and they deliver the state of the art model in 19 months. And a big part of that is they have, they've raised $16 billion or $12 billion and they bought a whole bunch of Nvidia chips and they wired them all together. And how could they do that? Because they had access to the chips and also Nvidia, one of their big differentiators is all the networking stuff they do where they make it easy and plausible to tie a ton of chips

• 12:55Ben Thompson?

  together to get this sort of performance. And so you can look at American AI companies and say, wow, why didn't you do this optimization? On the other hand, if you look at it from a comparative advantage perspective, it's like, I always mock big companies like trying to copy a startup. Like a startup invents something and they're like, oh, we can do that too. And then you get like Facebook releasing like the poke application. It's like, why are you, why are you, inventing something's really hard. You're almost capturing lightning in a bottle. When you're small and a startup, you do it because that's the only way to do it. And by the way, most startups fail.

• 13:36Ben Thompson?

  If you're a big company, you have large amounts of cash. You can de-risk by just going and buying the startup. Go and buy the people inventing it, bring it in-house, or in the case of Facebook, the way that, you know, poke was a response to Snapchat. What they actually did is, okay, we'll just rip off stories and put it in Instagram and basically stop snapping in his track. And it's a, it's a, it's a, it's not very glamorous, but it's actually recognizing your advantage. And I think that's what we saw with XAI. Did they do the, the grunt work of a deep seek to heavily optimize around a limited number of chips with low bandwidth? No, they just bought a bunch of chips because they had a bunch of money, but it also got them where they wanted to go,

• 14:20Ben Thompson?

  right? And so it's, XAI and deep seek have totally different approaches, but that, both of those approaches are rational, given their circumstances. And that in itself, I think is an interesting takeaway.

• 14:35Speaker 02

  And then one of the questions, right, is going forward, you push out a year or two years, if DeepSea continues to not have access to the best Nvidia chips and effectively can only buy Huawei's Ascend chips, whereas XAI or OpenAI can keep buying the better Nvidia chips, do you start seeing a real separation?

• 14:54Ben Thompson?

  I mean, that is the big question. There's a couple of concerns that I have about this, and I think we've talked a bit about this offline.

• 15:05Speaker 02

  Yes.

• 15:06Ben Thompson?

  So let's buckle up and sort of get into it.

• 15:08Andrew Sharp?

  All right, and that is the end of the free preview. If you'd like to hear more from Ben and I, there are links to subscribe in the show notes, or you can also go to sharptech.fm. Either option will get you access to a personalized feed that has all the shows we do every week, plus lots more great content from Stratechery and the Stratechery Plus bundle. Check it out, and if you've got feedback, please email us at [email protected].