“Will China’s Strategies Disrupt the U.S. Tech Industry?”

Updated On: March 25, 2025 11:26 am

China’s Open-Source AI Strategy Poses Risks for U.S. Tech Companies

In a recent post, Balaji Srinivasan presents a compelling argument about China’s approach to artificial intelligence (AI). For context, Srinivasan, the former CTO of Coinbase, is recognized for his technical insights and reliable predictions in technology trends.

Srinivasan’s observations were sparked by a question on X regarding China’s strategy of making its new AI models freely available.

What’s the best explanation you’ve heard for why China is leaning so hard into open source? It’s now an official position from the foreign ministry apparently.

— Damien Ma (@damienics) March 22, 2025

Below, Srinivasan outlines his perspective, followed by insights on its potential implications for investors.

Response by Balaji Srinivasan on X

AI Overproduction Strategy

China aims to commoditize complementary technology by significantly increasing the availability of open-source AI models within the next few months. This will cover a wide range of applications, including computer vision, robotics, and image generation.

The rationale appears to be that China seeks to reduce profitability in AI software products, as its revenue primarily comes from AI-enabled hardware. The overarching goal may be to replicate their past successes in manufacturing: that is, to copy, enhance, scale, and ultimately undercut Western counterparts with lower prices.

While it’s uncertain if this will succeed, here’s the reasoning behind this strategy:

China observed that the introduction of DeepSeek resulted in a temporary market cap reduction of around $1 trillion for U.S. tech companies.
The nation’s strength lies in producing and exporting tangible goods rather than software.
China’s ability to dominate markets by exporting at massive scale has previously weakened foreign competitors, evident in the automotive sectors affecting German and Japanese manufacturers.
China is aware that its reputation as a copycat nation hampers its global standing. With DeepSeek, achieving the number one spot in AI might now be realistic and a matter of national pride.
DeepSeek has gained significant traction in China, and its open-source design allows for quick integration across various levels of society, including local governments and lesser-known firms, leading to a wave of sharing results on platforms like WeChat.
The founder of DeepSeek, Liang Wengfeng, has reportedly met with both Xi Jinping and Li Qiang, gaining significant resources for future development.

By combining these factors, it seems China views this as an opportunity to challenge U.S. tech companies, elevate its global status, stimulate its economy, and decrease profits in AI software worldwide. Instead, China plans to profit from affordable, high-quality AI-enhanced hardware ranging from smart homes to autonomous vehicles.

Ultimately, China’s strategy may mirror its previous successes, characterized by studying, replicating, optimizing, and driving competitors into the ground with low pricing and volume.

Finally, while it remains uncertain how their move will affect the application layer of AI, companies developing closed-source models may find it challenging to recover their substantial fixed costs when high-quality open-source models are readily accessible.

It is indeed surprising that a nation known for its censorship is now embracing open-source AI. This points to a broader trend: China is willing to adopt methods that might previously have been considered Western, such as open-source principles, if they bolster its ambitions.

Interestingly, some censorship features are integrated into the DeepSeek AI models, but these restrictions can be easily bypassed outside of China. This suggests that China may prioritize its internal focus over external opinions, provided they don’t interfere with its domestic policies.

In summary, my cautious observation is that China may be advancing in software development at a faster pace than the West is improving in hardware.

Investment Implications

Consider Investing in China

The strategy of China providing free AI may undermine AI software firms, but it could benefit companies that utilize AI, particularly those within China. Investors might want to consider increasing their exposure to Chinese markets if they currently have minimal investments. Recently, two Chinese ADRs ranked among the top ten in our system, leading us to initiate options trades on each.

Cautiously Approach Nvidia

Among U.S. firms, Nvidia Corporation NVDA appears most vulnerable to the effects of China’s push for open-source AI. For investors willing to take risks, shorting Nvidia could be a strategic move, particularly if the stock rallies to $130, which may provide an optimum entry point for selling.