China vs. USA – Foundation Collapse

China will only accelerate what is already in progress.

• It appears that it is now Chinese government policy to flood the open-source community with AI models which to me looks like an attempt to turn foundation models into solar panels which China can then dominate by making them cheaper than anyone else.
• In solar panels, China undercut everyone else on price, gained a lot of share, and then consolidated the entire ecosystem in China such that no one else would ever be able to compete.
• A similar strategy may now be underway in AI as it appears that flooding the open source with good quality models for all sorts of uses is now the official policy of the Chinese foreign ministry (see here).
• I place a high level of credibility on this opinion as the National Security Law of China requires that important technology such as AI models receives a license before it can be exported meaning that contribution to the open source community must have explicit state approval.
• This strategy has worked extremely well in solar panels and is underway in the automotive market, but I suspect that this is not going to work in AI.
• There are four reasons for this.
  • First, already commoditising: meaning that the Chinese contributions may end up simply accelerating a trend that was already in place rather than creating something new.
  • This is happening because even as more and more resources are being pumped into training, the performance of models is only increasing incrementally.
  • This is why when one looks at the benchmark charts, all of the models look pretty much the same.
  • If all the models perform to the same level, then developers will be increasingly ambivalent as to which model they use meaning that the price ($/ 1m tokens) to use that model will come under pressure.
  • This has been underway for some time meaning that a flood of Chinese models is likely to do nothing more than accelerate the process meaning no real change to the eventual outcome.
  • Second, distrust: where there is widespread distrust of Chinese software in companies that are not Chinese.
  • This means that even if the models are incredibly cheap to operate there will be a price insensitive wariness about putting a Chinese model inside a private corporate cloud.
  • The fact that the models are available on open-source means that the source code is available and can be screened for backdoors and loopholes but I am not sure that this is going to make much difference.
  • This is because at tens or hundreds of billions of parameters in size, finding a tiny back door that sends data to China will be like trying to find a needle in a haystack.
  • Third, moving control point: which means that foundation models are not going to be very important as the emerging AI industry matures.
  • As a result, even if the Chinese were to take control of foundation models and everyone began using them as their starting point, it would not allow the Chinese to take control of the AI industry as it has in solar panels.
  • This is because, by that time, foundation models would simply be the operating system of AI with all of the value creation happening in the services created on top of them or in a combination of different services for specific use cases.
  • Fourth. Not better or cheaper: The solar panel industry ended up in China as China produced cheaper panels and then once it had control of the industry, was able to make them better.
  • This is not dissimilar to what is going on in electric vehicle batteries where there is real innovation in reducing the charging time required for lithium batteries.
  • However, Chinese AI models in the open source are no cheaper than their Western counterparts (free) and tests indicate their performance is similar and not better.
  • Furthermore, I have doubts about whether they will be cheaper to train and run as the methods pioneered by DeepSeek seem to be spreading like wildfire in China meaning that they are not that hard to replicate.
  • Hence, I think Western companies will soon be able to replicate these methods, meaning that open-source models from Meta, Mistral, and so on will be equivalent or better in terms of running costs.
• The net result is that a rinse and repeat of the solar panel strategy is not going to work, although it is likely to accelerate the commoditisation that is already underway, put pressure on pricing, and perhaps bring forward the time when there is a correction in AI company valuations.
• I think that many companies will be very wary of using Chinese-created software in their networks and for their business operations.
• There will also be very little pressure to do so as Western variants will be just as good or better and cost the same or perhaps less due to their ability to access cutting-edge silicon.
• Hence, if rinse and repeat is the strategy of the Chinese state, I think that in this case, it is not going to work.
• However, I continue to think that self-sufficiency is a policy that is going to continue to be aggressively pursued meaning that the Balkanisation of the Internet of which RFM and Alavan Independent have written often is still very much on the cards.
• Two incompatible networks generate much less value than one large one and so the long-term growth of the entirety of the technology sector will be lower for everyone.
• This is best avoided if possible but, at the moment, with no rapprochement in sight or likely, this remains little more than a pipe dream.