China Decode: How an AI Price War Could Spark a Market Correction

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1:40you want. Do that, doing that, did that, done. Now you can do that, do that with Acrobat. Now you can do that, do that with the all new Acrobat. It's time to do your best work with the all new Adobe Acrobat Studio. The latest Chinese AI sensation, which is called Kimi K2, cost just a fraction of what it would cost to train an AI model in America. It cost about 4.6 million US dollars. That is just a tiny fraction of what OpenAI has been investing in its large language models. Welcome to China Decode. I'm Alice Han. And I'm James King. Well, in today's episode of China Decode, we are discussing whether China is building the Android of AI while the US builds the ultra-premium iPhone, powerful but too expensive to dominate globally.

2:33why the latest spat between Japan and China could reshape the balance of power in the Asia-Pacific region, and how Starbucks and the coffee wars reveal the fierce fight for China's consumer market. All right, let's get right into it. Right now, the biggest story in tech may be the one the US didn't see coming. China's low-cost open-source AI is suddenly everywhere in Silicon Valley. While the US is spending billions of dollars building ever bigger models and data centers and inflating what some analysts say looks like an AI bubble, China is doing the exact opposite, it seems. Cutting prices, opting for open sourcing weights and shipping models that are cheaper, lighter and surprisingly competitive.

3:17And American companies are flocking to them. Airbnb's CEO says his team ditched ChatGPT for Alibaba's QN model because it's quote-unquote fast and cheap. Venture firms are switching to Moonshot's Kimi LLM and developer data show nearly half of the most used models in the US last week were Chinese. Alibaba just slashed prices on its flagship model again as part of a full-blown AI price war and a sign that involution has come to Chinese AI. Former Google CEO Eric Schmidt is warning that most countries may end up using Chinese models simply because they're free. James, we've talked a lot about, I think, Chinese AI over the last few weeks.

4:01And I definitely think I'm very excited to see the models that are coming out of the mainland. But also the fact that the West is catching up to this theme that we've been talking about for a while, which is don't write off Chinese AI. They are going to go for it in a very different model. And I think the recent announcements from these tech companies, some even, I would say, pretty big startups that are using and relying Chinese LLMs is pretty dramatic. And I think it's a different narrative than what we've been seeing in the last few years. I just want to go right into it and see what your take is on this Chinese model of AI and whether or not this kind of Android AI approach to making cheaper, faster, more efficient models is ultimately going to win out in a global race between China and the US of AI?

4:48Yeah, that's a really great question, Alice. I've started to notice just in recent days, actually, that people are using the word bubble with regard to America's AI efforts quite a bit more now. I think in the past they've been reluctant to do that. My own take is that this is still very far from conventional wisdom, and the US-China AI race is going to be a very long-run thing. We can't call it yet. There's going to be many ups and downs and fits and starts. But as things stand right now, I would say that some big names in the US are looking quite bubbly. And I think the key point is this. The bubbly aspects of American AI, as I see it, are made in China, by which I mean that China's approach to AI is to build AI models at a much lower cost than we can find in the US.

5:46Also, the cost of using those Chinese AI models is much lower. And crucially, the performance of the Chinese AI models is kind of just as good or catching up to US standards at the moment. So I think that that is the reason why we saw Eric Schmidt, the former CEO of Google, very recently say, as you've already mentioned, you know, the vast majority of governments and countries who don't have the kind of money that the West has will end up standardizing by using Chinese models, not because they're better, but because they're free. So I think really we're entering a very interesting phase in the US-China AI race.

6:33I should just mention before I pass it back to you, Alice, that there needs to be a little bit of nuance on this. Not all US LLMs are closed source and not all Chinese large language models are open source. So it's a mixed picture. You know, we've got Llama from Meta, we've got Fi from Microsoft and Gemma from Google. All of those are open source. And of course, it's famous that many of the big and successful Chinese models, such as DeepSeek and Q1, as you already mentioned, are open source too. But I just want to make that clear. You know, it's a variegated picture. It's not the case that everything done in China is open source and everything done in the U.S.

7:21is closed source. I just want to leave you with one extraordinary statistic, and that is that the latest Chinese AI sensation, which is called Kimi K2, cost just a fraction of what it would cost to train an AI model in America. It cost about 4.6 million U.S. dollars. That is just a tiny fraction of what OpenAI has been investing in its large language models over in the US. But how do you see this, Alice? Do you think that it's too early to call? Or do you think that the American model is looking bubbly and the Chinese model is looking lean and mean? I think that's a great way to phrase it, bubbly versus lean and mean.

8:08I think I'm more in the camp of that kind of narrative, although with the caveat that As we've previously talked about, James, the U.S. has thrown billions of CapEx into the data center rollout, into leading edge LLMs, into the frontier labs and hyperscalers. And as a result, I think is probably going to be further along in the AGI, artificial general intelligence race or super intelligence, as we previously mentioned. But the Chinese model, to your point, James, is leaner and meaner in the sense that, you know, it is doing these models more efficiently, much cheaper to train. What was interesting for me to notice, and you already mentioned it, James, is that not only are they cheaper on the inference costs, but also on the training costs.

8:53I remember meeting Kaifu Lee, the father of AI in China, who wrote that famous book, AI Superpowers, which seems like a lifetime ago, but I highly recommend that read, I believe in 2018. So before this really ramped up as a serious issue. And he had said at the time a year and a half ago that China may not be able to compete on training costs because the U.S. has dedicated a huge amount of CapEx towards training and it has the best data sets and training models in the world. But China can rapidly decrease the inference costs. Now it seems like they've decreased both the inference and training costs.

9:29To your point, the Kimi K2 open source model is just$4.6 million. As you say, that's 1 ,500 times less than what open AI spent on R &D this year. And again, just to follow up on your point, James, so that listeners can appreciate this, I think it's a bit of a misnomer to say that China is leading the way on open source. I've been talking to some AI scientists more recently who've said that actually the majority of the quote-unquote open source models are really open weight, meaning that the underlying code and data set are not freely available, but the weights or the training parameters are. That's the difference between an open weight versus an open source.

10:06But the fact of the matter remains that China is going through what I see as a Cambrian explosion in terms of different LLMs. and we've talked about this theme of involution, of price wars, of excess capacity, of hyper competition. I think this is already starting to be played out in the Chinese context where you have a lot of different LLMs in the race or in the ring. Kimi just overtook QN and DeepSeek very recently in terms of its parameters and performance. I think the fact that China is being used, its LLMs are being used by American companies, is a pretty telling and a compelling sign that consumers are driven by price.

10:50And the fact that these LLMs can be cheaper than their American counterparts, I think, is making them more desirable, even amongst some of these Western companies, which is why I find that the recent talk about Chinese LLMs being competitive is coming at a time in which a lot of people watching Wall Street are very worried about the AI bubble in the US. I think the two of them coexisting as narratives is not a coincidence. One question I do have for you, James, is have you actually used the different models? I've been playing around a little bit across the different models from the US and China, but I want to get a sense of what you've experienced.

11:29Yeah, I have actually. I've used DeepSeek quite a lot. I continue to use DeepSeek quite a lot. Obviously, I've used ChatGPT quite a bit, and I've just started to play around with Kimmy as well. You know, to be honest with you, I'm using it at such a low level that I don't really notice that much of a difference. I'm sort of using it as a dictionary, really, and as a database. So, yeah, I mean, they're all pretty good. but I have noticed that the deep seek results are a little bit skewed away from politically sensitive topics that you might expect from a Chinese LLM. But I haven't noticed anything too egregious, I must say.

12:08But there is this question about security, which is hanging in the background. And I think that a lot of people are concerned by the question of security with regard to Chinese large language models, I should cite an article by the Financial Times just recently that says that Alibaba provides tech support for the Chinese military against targets in the United States. Now, I need to be very careful about this. The claims, which couldn't be independently verified by the FT, were rejected very forcefully by Alibaba. They said that this information leaked from your source is complete nonsense. So that's a very strong denial.

12:52But there is always going to be this issue of security hanging over the Chinese large language models, I think, to users in the West, at least. Yeah, I completely agree. And I think that we should watch the space. I think it's a matter of time before these LLMs get politicized in the same way that semiconductors have been. I actually think that that is a likely outcome. The more that we talk about Kimi and DeepSeek and the more that we worry about an AI bubble in the US, I think the more political backlash there will be against some of these Chinese LLMs. But just to round up this discussion, I thought it was interesting as I looked into Kimi's architecture.

13:29One of the reasons that it is more efficient than the American LLMs is that it uses this thing known as the mixture of experts design, whereas ChatGPT and some of these other LLMs are using a dense model. This mixture of experts' design only utilizes certain parameters when created, and a dense model uses them all. And apparently, the Kimi K2 is over a trillion parameters, but it will only use about 32 billion at a time. And this points to, I think, one last note that I'll end on, is it points to the example in which Chinese AI is, at a research level, evolving in a very, very different way. And so the more that I think about this space, and I'm trying to read up very quickly because it's changing so quickly.

14:10I see that sort of whole evolution of two very, very different species of AI that I think is happening right now between China and the US. Okay, we'll be back with more after a quick break. So stay with us.

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15:52So don't leave your career to chance. Take action and own your future with a professional coach in your corner. Go to strawberry.me slash unstuck to claim a special offer. That's strawberry.me slash unstuck. Well, welcome back. Tensions are well and truly boiling in East Asia. China and Japan are locked in a fiery diplomatic clash over Taiwan, with threats, insults, and even references to beheading now making the headlines. And it all started when Japan's new Prime Minister, Senai Takeichi, said a Chinese attack on Taiwan could trigger a Japanese military response. This is a rare explicit stance from a sitting leader, and Beijing responded swiftly, summoning ambassadors, issuing warnings of a crushing defeat if Japan intervenes, and lashing out in state media, calling Takeichi a quote-unquote evil witch and warning Chinese citizens to avoid travel to Japan.

16:49The spat highlights more than just the issue of Taiwan, it also involves historical grievances, territorial disputes, and Japan's shifting security posture. Japan, America's key ally in the region, may increasingly act as a deterrent while the U.S. pulls back. And Takahichi's hard line could boost her actual standing at home and abroad, even with conservative American allies. James, I think that this is giving me 2010 deja vu all over again when we had the Senkaku Island incident. We had the rare earths embargo for a couple months in Japan. We had a lot of everyday Chinese citizens boycotting Japanese goods, burning Japanese goods, looting Japanese stores.

17:34And I'm not surprised, frankly, that China has reacted in a pretty aggressive manner. And I wouldn't be surprised if everyday Chinese boycott Japan entirely as they've done in the past anytime there has been an anti-Japan or hyper-nationalist movement. It's no surprise that Chinese airlines announced over the weekend that they would allow all passengers to cancel or change Japan-bound flights free of charge after Beijing basically urged the citizens to avoid visiting Japan. This comes at a time, I think, where Trump is clearly trying to pull back from US commitments in the region. Japan, I think, is sitting there pretty worried about the state of affairs, given that it relies so heavily on the deterrence that the US offers, and that Japan is not a nuclear power, which we'll get into in just a bit.

18:27I certainly would be nervous sitting in this region at a time where politically both sides want to play hardball. But what's your take on this, James, having lived in the region for quite a bit of time? Yeah, I mean, I've lived in Japan and China and Taiwan and, you know, the countries that are in play. It's amazing to me how quickly this has escalated. It's gone from zero to 60 or zero to 120 in what feels like a very short period of time. You know, I woke up on Sunday morning to see on my social media feeds three Chinese warships steaming towards the Senkaku Islands, which are territory disputed by Japan and China.

19:08It really was quite dramatic. And I think it's important for the West as well, particularly for the United States, because, of course, Japan is America's leading ally in Asia. Japan also plays host to several US military bases, and these are really major. The Yukoska Naval Base, just near Tokyo Bay, is the home port for the U.S. 7th Fleet. And there's a large number of U.S. ships there. And it also has the nuclear powered aircraft carrier called the USS George Washington. This is one of the, you know, the premier ships in the U.S. Navy. So any kind of a flare up between Japan and China, especially if it has a military dimension, which this one very clearly does, is a big issue for Washington.

19:59And I imagine it's quickening pulses all over the US, just as it is for you and I. Of course, the Japanese side is now trying to de-escalate. They have sent over Masaaki Kanai, who is head of the Foreign Ministry's Asian and Oceanian Affairs Bureau. They sent him to Beijing to see if he can sort of try and patch things up. But in the meantime, as you've already alluded to, this is hammering some Japanese stocks. You know, we've seen the Isetan and Mitsukoshi department store owner, that stock price has fallen over 10%. And also the Tokyo Disneyland operator, that's lost nearly 6%. Japan Airlines is down.

20:52This is all because these companies benefit hugely from Chinese tourists going to Japan. And as you've said, Alice, once nationalist fervor grips the Chinese people, as it is clearly starting to do, then you immediately see a drop off in the willingness of Chinese to buy Japanese stuff and to travel to Japan. How do you see this? I mean, there is obviously historical context here. I mean, why is it that Chinese feel so triggered, as it were, by Japan at these moments? Well, I mean, China had a harrowing experience in World War II at the hands of Japan. Japan occupied parts of China, even getting up to Shanghai, where my family's originally from.

21:35And the rape of Nanjing or even the systemic wiping out of populations in China are deeply, deeply remembered within the Chinese collective. and I think that that probably intensifies a lot of already, I think, strategic rivalries and issues at play. So there's a deep set historical mistrust but at the same time I think when we look at it from a real politique standpoint, Japan is deeply worried about an ascendant China and what that means for the Asia-Pacific region. If the U.S. decides that it ultimately doesn't want to be regional and global hegemon, Japan is in a very, very, I think, isolated state because it has no nuclear deterrence of its own.

22:23It cannot, according to the treaty that it signed after World War II with the Americans, it cannot have an offensive military capable of warfare. And it has the three non-nuclear principles, meaning that it cannot possess, produce, or allow the introduction of nuclear weapons onto its territory. So I think Japan, from a real politique, realist standpoint, is in a very desperate situation. And I'm not surprised that Takeichi is trying to draw into question the three non-nuclear principles. That is another reason why China is worried, because, and this is according to people close to her, she apparently wants to call to question the strict adherence of the no introduction of nuclear weapons principle, because ultimately Xi wants to allow US nuclear armed vessels to sit in Japanese ports to basically have a credible nuclear deterrence against China in a potential showdown over Taiwan or in the region.

23:19So this is, I think, all driven by the tectonic shifts of power, mainly in terms of the US-China relationship in the region. And I think ultimately, I wouldn't be surprised, even if we do see a de-escalation in the short term, that there is an increasing rivalry between Japan and a mistrust between Japan and China, and that Japan gets closer with, say, Korea, India, Australia, some of these other countries that could be on the opposing side of China if there is a showdown in the region. But just very quickly, James, having lived in Japan, do you think that there has been a shift in Japan's attitude towards China in the last few years?

24:01Well, I mean, I think that certainly Prime Minister Takeuchi comes from the wing of the Liberal Democratic Party, the LDP, which is known to be more hawkish towards China. She's seen as a little bit of a successor to Shinzo Abe, the previous prime minister, who was, you know, considered to be fairly hawkish towards China. And I think that is already playing out in the minds of the Chinese and making China extra anxious about what the next few years of Takeuchi's tenure is going to produce. So I think that this flare up that we've seen at the moment could set the tone for however long Takeichi is prime minister, even if there are attempts by the Japanese, as I'm sure there will be, to de-escalate.

24:48Like you, I see this as a, well, maybe not a continuous source of tension, but, you know, a general undertow of tension between the two countries. Well, James, we're going to take a quick coffee break. So stay with us as we wait for the next segment.

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25:38Well, welcome back. This is my favorite section of this podcast, not just because I am a caffeine addict, but also I find this story quite astonishing. China's coffee wars are growing up and Starbucks is taking cover, it seems. After nearly 30 years at 8 ,000 stores, America's Starbucks is selling a majority stake in its Chinese business to bore you capital, keeping just 40%. Local rivals like Luckin and Koti are surging ahead, opening thousands of outlets, cutting prices and serving drinks, very bizarre drinks I would say, tailored to local tastes from pork trisade lattes to alcohol-infused specials.

26:17Starbucks's premium strategy and slow product rollout just couldn't keep up in the end. This joint venture gives Starbucks local insight, faster expansion and digital integration critical in a market that remains dominated by WeChat Pay and Alipay. Now, other US brands like Burger King and Decathlon are following suit, selling their stakes to local partners to survive amid China's hyper-competitive consumer landscape. Now, the big question is, is China still a land of opportunity or have homegrown brands completely rewritten the rules? James, I love this story for many, many reasons, as already alluded to.

26:56But also I had noticed from a friend who sent me a message earlier in the year that they had picked up a coffee, a pineapple cold brew from Luckin's New York store. And I realized then that Luckin, a coffee brand that I'd long associated just with China, has become very global in the last few years. And it was funny for me to see this picture because I still remember during COVID went bankrupt. And prior to that, I had cases of financial fraud. So I was surprised to see that they not only have become profitable again, but they are trying to relist in the Nasdaq and now have at least two stores that I know of in New York, where apparently the regular priced ice latte costs as little as$5.75.

27:40Now I've compared that to some of my colleagues living in New York, who say that at Starbucks and other places you could get an ice latte for$6 to$8 US, but listeners should definitely correct us. I do know for a fact that people who download the app as first-time users can have a coffee for as little as$1.99. So this is a strategy that they've definitely kept alive that has been successful in the Chinese context. But I am a little bit skeptical that they can do a reverse Starbucks and be as successful in America because I do think the Chinese market is quite different and that they'd have to burn a lot of cash to really survive in America.