Chinese labs use 'smart distillation,' a sophisticated technique where a frontier model acts as a 'teacher' to guide a smaller model's judgment and data labeling. This is viewed as a legitimate and efficient catch-up method, distinct from simply copy-pasting answers.
Despite being open-source, leading Chinese AI firms are profitable. They generate hundreds of millions in revenue by selling managed services and API access, saving customers the complexity of self-hosting, GPU management, security, and deployment.
To manage high operational costs, some American AI startups adopt a hybrid approach. They build the bulk of their applications on performant, cheaper Chinese open-source models, reserving expensive frontier US models for critical tasks like evaluation and guidance.
In a landmark case in Hangzhou, a court ruled that a company cannot legally replace an employee with AI or use it as a justification for layoffs. This swift regulatory action provides a legal safety net for workers and serves as a calming factor for public anxiety.
Chinese AI models are largely open source not for ideological reasons, but as a pragmatic branding strategy. Open-sourcing their models was necessary to build trust and credibility with Western developers who might otherwise be skeptical of closed, proprietary Chinese technology.
Facing compute and capital shortages, Chinese AI labs don't pioneer frontier research. They wait for Western labs to publish breakthroughs, likening it to 'knowing the answer to the homework,' then work backwards to replicate them, focusing resources on efficient post-training.
Rather than competing to build generalist models, China's leading AI startups (DeepSeq, Moonshot, ZAI, Minimax) have each carved out a niche like coding, agents, or multimodality. This vertical focus is a necessary survival strategy driven by capital, compute, and talent limitations.
AI lab DeepSeek deliberately delayed a major model release to re-engineer its inference capabilities for Huawei's hardware. This served as a strategic signal to the Chinese AI ecosystem, demonstrating the viability of a domestic, non-NVIDIA hardware stack and creating a shared foundation.
While US AI is energy-constrained, China benefits from a modern grid built for recent urbanization. Government-mandated renewable energy projects created vast, cheap power sources, making energy a non-issue for its AI expansion. This was a coincidental benefit, not strategic foresight.