California better wake up to the DeepSeek threat

(This is my latest column in the Orange County Register. Please subscribe online for just $1 for six months here.)

California better wake up to the DeepSeek threat.

Released last week, the Chinese company’s website claimed its new R1 artificial intelligence model sported “performance on par with OpenAI-o1.” OpenAI is the San Francisco-based company headed by Sam Altman. Its main product is ChatGPT.

DeepSeek’s release touted it included, “Fully open-source model & technical report.” I used DeepSeek for a generic explanation of what that means: “a machine learning model and its accompanying documentation that are made publicly available.” In other words, programmers can check it and play around with it. Unlike OpenAI and other proprietary AIs.

Notably, the New York Times reported DeepSeek “used only a fraction of the highly specialized computer chips” America’s top AI companies use. To protect America’s lead in the AI race, the U.S. government, under both former President Joe Biden and new President Donald Trump, has limited the number of top microchips sold to China “like those made by Silicon Valley firm Nvidia.”

DeepSeek evidently innovated in response to those constraints. DeepSeek also claimed it cost only $6 million to train its AI model, compared to $100 million for ChatGPT’s latest model.

On Monday, Nvidia’s stock crashed 17%, losing a record $589 billion, in response to the news of DeepSeek. Palo Alto-based Broadcom dropped 15% and other AI-centric companies also were hit with massive selloffs.

I certainly am not giving advice on stocks or AI. My point is economic and political: Chinese competition is rushing like a rocket at AI companies in Silicon Valley and state and local governments better make it easier to thrive here, not through subsidies, but through cheaper energy and lower regulations and taxes.

CalMatters reported that for the first quarter of 2024 Nvidia paid $7.45 billion in income taxes, up 22 times from $328 million in 2023. About a quarter of the 2024 windfall, nearly $2 billion, went to the California state government.

But anticompetitive tax rates risk driving tech and AI companies out of California. Elon Musk’s xAI, connected to his X platform, last July moved to Texas, along with his SpaceX rocket company.

The political environment is also such that politicians keep overregulating a sector that needs to be able to innovate. Last September Gov. Gavin Newsom signed into law restrictions on AI-created “deepfake” political content from large social media platforms. Although almost certain to be overturned in the courts, the action showed he, and the state, are unfriendly toward tech freedom.

And just last week the office of Attorney General Rob Bonta sent a letter to OpenAI asking about its conversion from nonprofit to for-profit status, a concern properly of the federal Securities and Exchange Commission.

Then there’s electricity, which AI gulps like the California government does tax dollars. This state’s electricity costs more than double the national average. Three Mile Island in Pennsylvania, closed after a 1979 nuclear disaster, is reopening exclusively to sell electrons to Microsoft’s AI. And xAI is building what Musk calls a “Gigafactory of Compute” in Memphis, which grabs its electricity from the federal Tennessee Valley Authority.

I asked DeepSeek where its city, Hangzhou, gets electricity. It said it didn’t have specifics for that city. But for all China in 2023, estimates are coal 55%, oil 20%, natural gas 8% to 10%, renewables 15% to 20% and nuclear 2%-3%. And the city “is part of China’s push toward cleaner energy and reduced reliance on coal.” Basically, they put industry first, renewables second, and still are big on coal.

The California Energy Commission for 2023 lists our in-state generation: natural gas 45%, renewables 37.5%, hydro 14%, nuclear 2.7% and coal a minuscule 0.12%.

As the 2026 gubernatorial election approaches, look to see if any Democratic gubernatorial candidate breaks from the pack and backs policies keeping AI companies in the state. That would include tax cuts, cutting back overregulation and a major push toward nuclear power as a reliable energy source.

Look to whom the Silicon Valley contributions go. A year ago the tech bros shifted to the pro-AI Trump. If no Democrat is pro-AI, campaign cash could flow to a Republican candidate for governor in California. In two years AI might give us our first GOP governor since the Terminator.