DeepSeek is the tip of the iceberg

The foundation for Chinese technology leadership

DeepSeek has caused quite a stir in the AI field in the last few weeks. Unitree’s humanoid robots are showing some incredible feats in embodied intelligence. Two 6^th generation stealth fighter prototypes were unveiled in December.

Naturally many people have identified these as demonstrating China is rapidly catching up and surpassing the west in the race to dominate future technologies.

If so, what is the source of these technological breakthroughs? Are they accidental flukes of luck or a forebearer of more to come?

The foundation of these innovations are several fold – human capital, research/industrial ecosystem, and government investment.

First, China’s vast human capital is finally being released. Within a couple of generations, malnutrition (which stunts brain development) has been all but eliminated in China; most children now graduate from high school, and roughly 60% (13 million annually) go on to university. A third of college students study STEM subjects, compared to 6% in the US. And China’s best universities are now ranked as highly as those in the West (see my article “who has the best universities” on Nature Index university rankings).

Pavel Durov, the founder of Telegram, attributed China’s rapid AI advancements to its highly competitive education system, pointing out China’s consistent excellence in global math and programming competitions.

Not only does China produce the world’s largest STEM work force, but critically, unlike in the West, China’s STEM graduates gravitate towards jobs in engineering, design, technology, and basic research rather than in finance and the virtual economy.

Charlie Munger, one of the wisest investment sages, said of America’s finance culture: “I regard the amount of brainpower going into money management as a national scandal. […] We have armies of people with advanced degrees in physics and math in various hedge funds and private-equity funds trying to outsmart the market. […] It’s crazy to have incentives that drive your most intelligent people into a very sophisticated gaming system.”

DeepSeek itself is an interesting example of how pivot from finance to engineering can produce wonders. DeepSeek grew out of a quantitative computer-trading hedge fund that was hit by a government crackdown on computer-driven high-speed trading a few years ago.

DeepSeek has tapped into the vast ecosystem of Chinese tech talent. Few in the west have heard of CATL, Deep Robotics, iFlytek, SMIC, Pony.ai, BrainCo but those are some of the world’s best companies in battery, robotics, autonomous driving, chip manufacturing, lidar, and brain computer interfacing technologies.

Second, Chinese technological development doesn’t just benefit from the large talent pool. Equally important, these engineers and researchers have a massive industrial ecosystem to play with — a contrast with deindustrialised US. China’s focus is to foster the physical and intellectual proximity between industry and research that breeds real advances.

In April 2022, Sun Ninghai, the director of the Institute of Computing Technology at China’ Academy of Sciences, gave a lecture to the 200-odd strong standing committee of China’s National People’s Congress, which comprises some of the most senior government leaders. He warned that China must not go down America’s path of “contempt for the real economy” and diversion of IT talent into the “virtual economy” — consisting of virtual reality, the meta-universe, blockchain, and the like.

Sun argued the US has neglected making useful physical goods, with the percentage of jobs in manufacturing falling dramatically since 2000. Far too much intellectual energy has gone into the false economy of financial speculation or virtual tech that doesn’t produce tangible goods. For example, Google and Facebook’s revenue comes mostly from advertisements (77% and 98% respectively), while Amazon’s revenue comes mainly from selling Chinese goods, which make up 70% of the products listed on the ecommerce site.

By contrast, Sun urged China to apply its AI innovation to the “real economy”. This means integrating AI algorithms into physical products across industries. The idea is to build AI innovation into China’s successful manufacturing and export-based model, bolstering the government’s existing efforts to surpass the US technologically in as many industrial categories and supply chains as possible.

Thirdly, the Chinese government has been investing heavily in science and technology. Chinese R&D expenditure reached $496 billion in 2024, 8.3% growth from 2023; China’s R&D intensity (ratio of R&D expenditure to GDP) has reached 2.8%, representing 27% global total.

According to the American Association for the Advancement of Science, Chinese has been the No.1 in global patent filings every year since 2015. The US National Science Board reports that the number of science and engineering articles published annually by top science journals from 2003 to 2022 increased 10-fold in China vs. 33% in the US.

China’s innovations are already coming in thick and fast. From Huawei’s superior 5G, the PLA’s world-leading hypersonic missiles, DJI’s drones, Unitree’s humanoid robots, to third-generation superconducting quantum computer Origin Wukong and Tsinghua University’s Neural Electronic Opportunity (NEO) brain-computer interface, China’s technological advances are broad-based and accelerating.

China is also conducting the leading-edge nuclear fusion research. In January, the Experimental Advanced Superconducting Tokamak at the Institute of Plasma Physics in Hefei set a world record by sustaining a plasma temperature exceeding 100 million degrees Celsius for 1,066 seconds, or nearly 18 minutes. If China could invent cold fusion, that would be the ultimate Sputnik moment.

The pace of innovation from China will continue to accelerate and eventually return China to global technological leadership which it enjoyed for millenniums before the 18^th century.

China has entered its golden era of innovation.