China is not competing to build the most advanced AI models. Instead, its strategy focuses on building out physical infrastructure (energy, high-speed rail) and diffusing existing technology to improve the lives of its citizens. It stays current on AI by reverse-engineering Western models rather than leading R&D.

Contrary to common Western assumptions, China's official AI blueprint focuses on practical applications like scientific discovery and industrial transformation, with no mention of AGI or superintelligence. This suggests a more grounded, cautious approach aimed at boosting the real economy rather than winning a speculative tech race.

Instead of competing on frontier models, China's hardware ecosystem is racing to put capable small models (e.g., 27B parameters) on cheap, specialized hardware for consumer devices. The goal is to create standalone intelligent products and sell the physical device, not API access.

While the West obsesses over algorithmic superiority, the true AI battlefield is physical infrastructure. China's dominance in manufacturing data center components and its potential to compromise the power grid represent a more fundamental strategic threat than model capabilities.

Joe Tsai reframes the US-China 'AI race' as a marathon won by adoption speed, not model size. He notes China’s focus on open source and smaller, specialized models (e.g., for mobile devices) is designed for faster proliferation and practical application. The goal is to diffuse technology throughout the economy quickly, rather than simply building the single most powerful model.

While the US outspends China 12-to-1 on compute for LLMs, China invests 42% more in robotics. This focus on "physical AI"—robots that perceive, think, and act—creates a distinct competitive lane where China is building hardware and software advantages over the West.

The dominant U.S. strategy views the AI model itself as the primary source of value capture. In contrast, the Chinese model aims to commoditize the AI model and capture value in complementary layers like advanced manufacturing, robotics, and energy systems.

While the US focuses intensely on foundational AI models, China pursues a broader portfolio approach. Beijing prioritizes the practical deployment of AI in manufacturing alongside major investments in robotics and green technology to build comprehensive industrial capacity.

While the West may lead in AI models, China's key strategic advantage is its ability to 'embody' AI in hardware. Decades of de-industrialization in the U.S. have left a gap, while China's manufacturing dominance allows it to integrate AI into cars, drones, and robots at a scale the West cannot currently match.