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Bloomberg Audio Studios, podcasts, radio news.

I'm Stephen Carol and this is here is Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg.

I'm Stephen Carol and this is here is Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg.

It was done very cheaply. So why the crazy amounts of spending that are happening from the US big tech companies.

It was done very cheaply. So why the crazy amounts of spending that are happening from the US big tech companies.

What's happening here is the collapse in the cost of innovation.

What's happening here is the collapse in the cost of innovation.

What this development has shown is the hardware that these companies have procured, they weren't using it efficiently. A lot of question marks around deep Seek, in particular, how much did it really cost for them to develop this new quote unquote cheap model that they've self reported.

What this development has shown is the hardware that these companies have procured, they weren't using it efficiently. A lot of question marks around deep Seek, in particular, how much did it really cost for them to develop this new quote unquote cheap model that they've self reported.

The implication is, of course that things got cheap, that things got more simple, but we'll have to see that manifest itself in the real world. Shocking, a game changer, a Spotnik moment, just a few of the things that have been said about the Chinese AI startup deep Seek. The company shot to global fame over a weekend after the launch of it's R one chatbart, seen as arrival to the likes of Chat GPT, but crucially, the company says it used less expensive chips. So here's why Deep Seek is a wake up call for the AI Titans. Joining me Iwo to discuss Boomberg's TV anchor. Tom mackenzie, a former China correspondent and our resident tech watcher. Thanks for being with us. Tom, First of all, tell me about R one, the product that Deep Seek makes. Is it something that's really comparable to.

The implication is, of course that things got cheap, that things got more simple, but we'll have to see that manifest itself in the real world. Shocking, a game changer, a Spotnik moment, just a few of the things that have been said about the Chinese AI startup deep Seek. The company shot to global fame over a weekend after the launch of it's R one chatbart, seen as arrival to the likes of Chat GPT, but crucially, the company says it used less expensive chips. So here's why Deep Seek is a wake up call for the AI Titans. Joining me Iwo to discuss Boomberg's TV anchor. Tom mackenzie, a former China correspondent and our resident tech watcher. Thanks for being with us. Tom, First of all, tell me about R one, the product that Deep Seek makes. Is it something that's really comparable to.

Chat GPT or to Gemini so on a number of metrics measured by experts, and there are platforms online where you can see how these measurements are displayed and how they categorize these models. Then yes, R one competes with chat gbt's most sophisticated model, the latest model to zero one, but also the models from Gemini and Anthropic. It is up there top of the list alongside those kind of players. It is sophisticated. It is a text based model and chat bop you can download it onto your phone. It is not multimodal, so it doesn't produce video, it doesn't produce pictures, but what it does do is reasoning. Like one from chat GBT, it goes through how it comes to its responses, and unlike O one, it actually displays those for you, so you can see the chat bot processing your question, going through how it's going to get to the answer, and that level of transparency has led to a lot of tech enthusiasts out there who are getting their hands on this thing responding very favorably, and that's led to a lot of optimism and some very positive feedback about what this chatbot based on deep seeks model can actually do. Now, one thing it can't do is answer an honest question about Hi Jinping and his leadership or what happened in Chaneman Square in nineteen eighty nine, because it is not allowed to full foul of Chinese government censorship. So there is that important caveat.

Chat GPT or to Gemini so on a number of metrics measured by experts, and there are platforms online where you can see how these measurements are displayed and how they categorize these models. Then yes, R one competes with chat gbt's most sophisticated model, the latest model to zero one, but also the models from Gemini and Anthropic. It is up there top of the list alongside those kind of players. It is sophisticated. It is a text based model and chat bop you can download it onto your phone. It is not multimodal, so it doesn't produce video, it doesn't produce pictures, but what it does do is reasoning. Like one from chat GBT, it goes through how it comes to its responses, and unlike O one, it actually displays those for you, so you can see the chat bot processing your question, going through how it's going to get to the answer, and that level of transparency has led to a lot of tech enthusiasts out there who are getting their hands on this thing responding very favorably, and that's led to a lot of optimism and some very positive feedback about what this chatbot based on deep seeks model can actually do. Now, one thing it can't do is answer an honest question about Hi Jinping and his leadership or what happened in Chaneman Square in nineteen eighty nine, because it is not allowed to full foul of Chinese government censorship. So there is that important caveat.

Okay, all very interesting. What do we know about how it was developed?

Okay, all very interesting. What do we know about how it was developed?

What we know is what is claimed by deep Seek. So they claim that it was developed at a fraction of the cost of some of their competitors, around six million US dollars. They claim the model was trained on much older chips, not the most cutting edge in video chips, because those are restricted from the Chinese markets. We know that they have very innovative and sophisticated engineers. They've been recruiting talent for the top universities domestically in China systems engineers. We also know that they put in place an infrastructure and a method of building models called a mixture of experts procedure, which basically has lots of mini models much easier to put together, and if you align them, you can create these efficiencies. So the engineers, the mixture of experts method that they've used, they say has led them to creating these efficiencies, building a model much more cheaply, using less efistigated chips, and much more quickly. They say they built this model, design this model within about two months. Now there are question marks. Microsoft and open ai are scrutinizing whether or not deep Seak actually lent on open AI's own model to learn from the outputs from that model that they then fed into the training of the deep Seat model that potentially went over and above what was allowed. That is being scrutinized, And we have to take them on face value when they talk about the chips they're using, because we don't know exactly how they built this. But if we take them on face value, the more cheaply, more cost effectively, in a shorter time and with a slightly different method, that created a very efficient and very capable model.

What we know is what is claimed by deep Seek. So they claim that it was developed at a fraction of the cost of some of their competitors, around six million US dollars. They claim the model was trained on much older chips, not the most cutting edge in video chips, because those are restricted from the Chinese markets. We know that they have very innovative and sophisticated engineers. They've been recruiting talent for the top universities domestically in China systems engineers. We also know that they put in place an infrastructure and a method of building models called a mixture of experts procedure, which basically has lots of mini models much easier to put together, and if you align them, you can create these efficiencies. So the engineers, the mixture of experts method that they've used, they say has led them to creating these efficiencies, building a model much more cheaply, using less efistigated chips, and much more quickly. They say they built this model, design this model within about two months. Now there are question marks. Microsoft and open ai are scrutinizing whether or not deep Seak actually lent on open AI's own model to learn from the outputs from that model that they then fed into the training of the deep Seat model that potentially went over and above what was allowed. That is being scrutinized, And we have to take them on face value when they talk about the chips they're using, because we don't know exactly how they built this. But if we take them on face value, the more cheaply, more cost effectively, in a shorter time and with a slightly different method, that created a very efficient and very capable model.

Okay, got questions being asked, as you know, more broadly, when we talk about AI open on now we've mainly been talking about the models developed by American companies. What is this revealing something that we didn't already know about China's AI industry? How does it compare to what we know out of the US.

Okay, got questions being asked, as you know, more broadly, when we talk about AI open on now we've mainly been talking about the models developed by American companies. What is this revealing something that we didn't already know about China's AI industry? How does it compare to what we know out of the US.

There is an argument that we've had a blind spot when it comes to the innovation that's coming out of China. There's been a lot of talk about the slowdown in the economy rightly, so, there's been a lot of concern about the real estate market. There's been a lot of concern about a crackdown on technology in recent years out of China. That has allowed some to overlook the real innovation that is happening in that Chinese market. One of the most competitive places to build and test technology is in the Chinese markets because you have so many people who pile in, they test their products, they fight to the death, and then the survivors come out on top. And if they can compete in the Chinese market, my goodness, they can compete globally. And we've seen that, whether it is with drone makers like DGI, whether it's like TikTok, social media companies like TikTok, or whether it's indeed the solar panel makers of China. Across all those different areas, they compete in the domestic market, they win, and then they go to compete internationally. I haven't even mentioned the electric vehicle makers that are posing a challenge to Europe's EV model now as well. They have the engineers, They have almost double the number of engineers of the US in terms of AI engineers. They have the data in vast quantities what they don't have, and the most sophisticated chips. If Deep Sea really is an example of how to circumvent that by using older chips, then China has all the ingredients it needs to compete on the global level. Interestingly, we also saw another Chinese company, Ali Baba, coming out with model this week that is also as capable as the most sophisticated models coming out of the US. So every indication suggests that China is a serious player, and if it hasn't caught up with the US yet, then it's very very close to doing that.

There is an argument that we've had a blind spot when it comes to the innovation that's coming out of China. There's been a lot of talk about the slowdown in the economy rightly, so, there's been a lot of concern about the real estate market. There's been a lot of concern about a crackdown on technology in recent years out of China. That has allowed some to overlook the real innovation that is happening in that Chinese market. One of the most competitive places to build and test technology is in the Chinese markets because you have so many people who pile in, they test their products, they fight to the death, and then the survivors come out on top. And if they can compete in the Chinese market, my goodness, they can compete globally. And we've seen that, whether it is with drone makers like DGI, whether it's like TikTok, social media companies like TikTok, or whether it's indeed the solar panel makers of China. Across all those different areas, they compete in the domestic market, they win, and then they go to compete internationally. I haven't even mentioned the electric vehicle makers that are posing a challenge to Europe's EV model now as well. They have the engineers, They have almost double the number of engineers of the US in terms of AI engineers. They have the data in vast quantities what they don't have, and the most sophisticated chips. If Deep Sea really is an example of how to circumvent that by using older chips, then China has all the ingredients it needs to compete on the global level. Interestingly, we also saw another Chinese company, Ali Baba, coming out with model this week that is also as capable as the most sophisticated models coming out of the US. So every indication suggests that China is a serious player, and if it hasn't caught up with the US yet, then it's very very close to doing that.

It does seem like all of a sudden everyone has an opinion on deep Seek and its breakthrough. Even the US President.

It does seem like all of a sudden everyone has an opinion on deep Seek and its breakthrough. Even the US President.

The release of deep Seek AI from a Chinese company should be a wake up call for our industries that we need to be laser focused on competing to win.

The release of deep Seek AI from a Chinese company should be a wake up call for our industries that we need to be laser focused on competing to win.

So, Tom, what do the AIA companies in the US need to be woken up to with this deep Seek story?

So, Tom, what do the AIA companies in the US need to be woken up to with this deep Seek story?

Well, interestingly, it's earnings week as well, so we've been hearing from the CEOs of some of those major players. We've been hearing from Mark Zuckerberg from Meta, We've been hearing from sati In adell At, CEO of Microsoft. What you're not hearing from them is any walk back on the spend around CAPEX, the spend on the chips, the spend on the data centers, the spend on the servers, and the spend on the energy that's needed to power this AI revolution. Because one of the major questions that Deep Seek has posed this week is is all of that spending worth it? Do we need to spend tens of billions of dollars and all of that AI infrastructure? If a bootstrap company in China with six million dollars can produce a model that competes with Chat GBT at a fraction of the price. But the CEOs are not walking back from these investment commitments. In fact, Mark Zuckerberg, who praised deep Seat and said there was real innovation there. He's committed to sixty five billion dollars of spending this year. He says they're going to be building their own AI agents, and he hopes the Meta is going to be getting those agents to a billion people by the end of this year, and that they'll be leading in that space. Microsoft Satiy and Nadella also praising deep Seek, but his take was this is going to lead to greater adoption of artificial intelligence. It will drive down prices, and longer term that will be good news for Microsoft. Microsoft committing to spend eighty billion dollars this fiscal year on AI infrastructure.

Well, interestingly, it's earnings week as well, so we've been hearing from the CEOs of some of those major players. We've been hearing from Mark Zuckerberg from Meta, We've been hearing from sati In adell At, CEO of Microsoft. What you're not hearing from them is any walk back on the spend around CAPEX, the spend on the chips, the spend on the data centers, the spend on the servers, and the spend on the energy that's needed to power this AI revolution. Because one of the major questions that Deep Seek has posed this week is is all of that spending worth it? Do we need to spend tens of billions of dollars and all of that AI infrastructure? If a bootstrap company in China with six million dollars can produce a model that competes with Chat GBT at a fraction of the price. But the CEOs are not walking back from these investment commitments. In fact, Mark Zuckerberg, who praised deep Seat and said there was real innovation there. He's committed to sixty five billion dollars of spending this year. He says they're going to be building their own AI agents, and he hopes the Meta is going to be getting those agents to a billion people by the end of this year, and that they'll be leading in that space. Microsoft Satiy and Nadella also praising deep Seek, but his take was this is going to lead to greater adoption of artificial intelligence. It will drive down prices, and longer term that will be good news for Microsoft. Microsoft committing to spend eighty billion dollars this fiscal year on AI infrastructure.

Okay, a rude awakening for some, perhaps not for everyone. Tom McKenzie, our Blimberg TV anchor, thank you very much for joining us for more xp like this from our team of twenty nine hundred journalists and analysts around the world. Search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This is Here's why I'll be back next week with more thanks for listening

Okay, a rude awakening for some, perhaps not for everyone. Tom McKenzie, our Blimberg TV anchor, thank you very much for joining us for more xp like this from our team of twenty nine hundred journalists and analysts around the world. Search for Quick Take on the Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This is Here's why I'll be back next week with more thanks for listening