The Journal. - Chinese AI Is Spooking Silicon Valley

Episode Date: July 28, 2026

Low-cost artificial intelligence models from China are rapidly improving, closing the gap with U.S. AI products and forcing an industry-wide debate over the future of AI. WSJ’s Amrith Ramkumar explains how these "open-weight" models have caused a rift in Silicon Valley. Ryan Knutson hosts.   Further Listening: - How to Keep Up with AI At Work (Without Losing Your Mind)- Microsoft’s CEO Has a Message: Don’t Let AI Eat the Economy Sign up for WSJ’s free What’s News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Live from New York, it's the journal. That's right, Jess and I are back with another live show in New York City. This time on Wednesday, September 9th. We're going to be at City Winery for an evening of sharp reporting, insider conversation, and special guests. And probably wine? I hope so. Either way, you won't want to miss it. Tickets are on sale now.

Check out the link in our show notes. See you there. China has made some big advancements in AI recently. New breakthroughs in powerful, low-cost Chinese AI models. are sending shockwaves through Washington and Silicon Valley. The latest Chinese offering seen as a credible challenge. It is no longer a given that the U.S. Frontier Labs have a safe lead in AI. Big U.S. AI companies are alarmed by this.

Our colleague Amrith Ramq Kumar covers tech policy in AI. The view was essentially that the U.S. has a decent size lead. You could say six to nine months. A lot of people argue over China and other countries. These models are made by companies in China. like Alibaba, Z.AI, and Deepseek. The most recent model that has everyone's attention is called Kimmy K-3.

It was made by a company called Moonshot AI. And it's basically been shown in some benchmarks to be getting close to advanced U.S. capabilities. And that's what turned a lot of heads. It's not just that these models are good. They're also way cheaper than American AI models from companies like OpenAI and Anthropic. These things cost a fraction

of what companies are currently paying to use Anthropics' top products and Open AI's top products. And especially at big companies with a large number of employees, they're telling them to use AI as much as possible. But the bills are just racking up and they're quite insane.

And these new models are really attractive to a lot of U.S. companies. We've written a lot about how executives are struggling with that and finance departments are sort of fretting. It's millions and millions or tens of millions of dollars spent on AI compute. If you can cut that bill in half

or 75% and get something close to the same performance. I mean, that's a no-brainer for a lot of executives. But when it comes to the U.S. companies that make AI products, like OpenAI and Anthropic, they have a lot to be worried about. Some AI researchers and analysts have questioned whether this could be the beginning of the end of America's dominance in the AI race.

You have Anthropic and Open AI barreling toward IPOs with valuations around a trillion dollars or other really high figures, And the notion that China could come out with more products to undercut those businesses is really scary for a lot of people. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Tuesday, July 28th. Coming up on the show, Who's Afraid of Chinese AI? This episode is presented by SAP.

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and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. All right, so these new Chinese AI models are much cheaper, and have apparently gotten a lot better. So let's talk about how they did that, starting with how have they gotten so much better?

China has been thought to be several months to a year behind, and one way they've been trying to catch up is this technique called distillation, where you essentially train off another company's AI models. China does an enormous amount of its own innovation and research on AI, but some Chinese companies have also been accused of distilling U.S. models, basically studying how they respond to prompts, and then working backward.

Kind of like trying to reverse engineer all the secret ingredients in a can of Coke. With AI and how sophisticated these techniques can get, it's like just imagine millions and millions of cans of Coke and pouring them out, seeing what's in there, and trying to mimic those. And a lot of people have said if you go and use these Chinese models, the language they use when they respond will be similar to what is used in Anthropics' latest models, for example. So that is definitely a part of the equation. And the stunning thing to a lot of people is that China,

is doing this even while the U.S. has restrictions on what advanced chips it can get. U.S. companies make the world's most powerful chips, which are essential to developing advanced AI, and the U.S. has made it hard for Chinese companies to get them. How is it that China is able to catch up if they're still being restricted on what U.S. chips they can use? I mean, that's really the billion-dollar question that people continue to ask. One answer. maybe a tech loophole called remote access.

And that is when user basically can access data center space and chips in another country. So Chinese companies are essentially able to use remote access to train their models on chips that might not be located in China. They might be in Singapore, Thailand, et cetera. Frankly, there's not a ton known. This is sort of like the secret sauce for why these Chinese companies are so successful. The combination of distillation and finding, new workarounds to get more essentially out of less powerful chips, has allowed the Chinese companies

to not quite match the U.S. capabilities, but they're pretty close. Chinese authorities have denied that its companies have used unauthorized distillation techniques to copy U.S. models, and have said the allegations are politically motivated. Now let's talk about why China's AI models are cheaper. First, Chinese AI companies are often subsidized by the Chinese government and use different training techniques to cut costs. The other thing is that most of their models are what's known as open weight. Open weight means that the parameters that make up the AI model are public and can be shared and adapted. You might be more familiar with the phrase open source, which is a pretty similar idea.

Openweight tools are very significant because the open source technology generally to zoom out is the backbone of our modern internet. It's what's allowed Silicon Valley to thrive over the past several decades. It's how many companies have been built, essentially. Openweight AI models give the companies that use them a lot more control. And it really spurs a lot of adoption among businesses because they want to take these AI tools, plug them into their own products, use their own proprietary data, and that's much easier to do with open weight products than closed products like those offered by Anthropic and OpenAI. Some of the most popular models from U.S. companies, like the ones of Power Chat, GPT or Claude, are not open weight.

customers can't see or control the underlying code. It's sort of like Android versus iOS on Apple that Android can run on any smartphone, and smartphone makers can put their own spin on it and customize it and change it in any number of ways, where if you want iOS, it's just on Apple devices. That's a really good way to think about it. It's very easy to just take the model,

take how it was built, and integrate that into your own organization in ways you can't really do with Anthropic and Open AI. You're basically captive to sort of their tools, their interface, and it's a much, much tougher process and much more expensive. And their business model is also much different from companies like Anthropic or OpenAI. For Chinese openweight AI companies, the hope is that mass adoption will bring in revenue down the road through upsells or additional services. For a lot of businesses, openweight systems are much

more appealing. There's a whole other swath of Silicon Valley and smaller startups that are saying, this is great. There are cheaper AI tools on the market. I can go in, I can download the parameters, I can modify them. This will help my business. It's cheaper. It's more accessible than Anthropics Cloud, OpenAI's models, etc. For all these reasons, some American businesses, like Airbnb and Coinbase, have already ditched U.S. AI models for their Chinese competitors. If this Chinese open source model succeeds, how bad could it be for companies like OpenAI and Anthropic? What's the worst-case scenario? The worst-case scenario for these companies is that this is just the beginning, that these companies have to really cut prices that cuts into their profit margins, they're still spending a ton of money, investors flee, and then you're in sort of a potential death spiral.

So few people expect that right now, but that's what the fear that keeps people up at night and what they're thinking in the back of their mind every time, China comes out with one of these great models. How USAI companies are responding? That's next. When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked, the Rachel.

While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us and actually travel with us at WestJet.com earlier this month, an executive at OpenAI named Dean Ball started sharing his thoughts about Chinese open-weight models. Dean Ball is a former Trump administration official who was in the

administration for a very short time last year, and he recently started at Open AI in a position focused on essentially policy strategy. In this position, Ball is said that when he comments on AI policy, he's speaking for himself, not Open AI. But he said on X after Kimi K3 came out that he was worried that Chinese AI models were essentially going to take over and that there would essentially be this sort of dystopian hellscape where communism ran the AI world. In Ballsview, if China wins the AI race and open-weight models come to dominate, AI could become something provided by governments rather than sold by companies. The idea is that if China has...

basically gains control of the AI race and that its open weight models are the ones that proliferate widely, essentially the companies lose a lot of control over that. And because the Chinese government has a role in how China's companies are developing these things, that essentially it becomes a utilitarian product that's available to everyone as opposed to a premium product that's reserved for, in the most powerful cases, the U.S. government and powerful companies. The worry is that this won't be an industry anymore, it won't be a business. It'll just be like this service that the Chinese government provides to the world. Or other governments, even the U.S., if the U.S. goes that way and it's all open models.

David Sachs, a top White House official on AI policy, criticized Ball's Take, and said it sounded like he was just trying to protect open AI's business. Right in quote, the weaponization of regulatory uncertainty as a competitive tool should be completely unacceptable. More broadly, there are other concerns about these Chinese AI companies, like political censorship.

So there's been testing by cybersecurity researchers and others that's basically shown the Chinese models do have a bit of a bias if you ask them about something like Tiananmen Square, right? They're still going to tow the party line there. They're like, I'm not sure what you're talking about. Exactly. Interesting.

So there is a bit of like bias there Chinese open weight models also have fewer systems in place to prevent bad actors from using AI to cause harm. They also don't have the same safeguards, and so that's why people are so alarmed by this. They don't have to go through the same safety testing and government oversight that the U.S. has recently started to do and that other advanced economies are doing. Where there's limits on, hey, can you teach me how to make a bomb or whatever? The U.S. models will be like, no. Exactly.

Or at least they should say no. Exactly. The U.S. companies say they're increasing their safeguards, and the government has more of a role there. And then there's national security. As with any Chinese technology, there are huge security concerns here, especially for a lot of lawmakers and administration officials, others in Washington. These models are open weight, so that does give you more insight into how they were built, how they work, etc. But there are still huge data privacy concerns and a fear that the Chinese government, could somehow have access or influence into how this all works. Some AI executives have asked the White House to consider stepping in,

to take a clearer stand against Chinese AI companies, or even ban Chinese AI models entirely. The Trump administration has said that it's considering what to do about it. In recent days, we've seen several administration officials come out with statements, like, this is very troubling, we're studying what's going on. But then, late last week, an open letter about these open, weight models shook things up even more. It was written by Jensen Huang, the CEO of NVIDIA, which designs many of the semiconductor chips used to power AI. The letter took a strong

stance defending open weight models. Saying that they're good for Silicon Valley and good for America and the rest of the world. And they're urging the government not to take any action, essentially restricting these models from China or anywhere else because they think they benefit innovation. Just a few days ago, Jensen Huang talked about his position. with great AI, open models. It's great for the whole industry. Obviously, when there's more, if there's great AI, even if it's open, wherever it comes from,

there will be more use. Huang wrote in the letter that open models strengthen safety and cybersecurity and give companies that use open-way AI tools more freedom. These Chinese models are excellent. Open-source models that are excellent should be used. In the following hours and days, other tech company leaders signed on. You've basically had this onslaught where top CEOs, including Invidios, Jensen Wong, Meadows, Mark Zuckerberg, and many other tech luminaries have planted a flag essentially defending open-weight models.

InVIDIA's role in all of this is fascinating. They're the biggest trip designer in the world. They supply all these customers. Their interest is to make the ecosystem as diverse and robust as possible. so they sell as many chips as possible. So what kind of pressure did that put on OpenAI and Anthropic, who are kind of what this letter is about? The letter created enormous pressure on others in the tech ecosystem. You had meta, you had Nvidia, and you also had Microsoft, right out of the gate, three of the biggest players in the space.

And then that sort of shine the spotlight on Anthropic, Open AI, and Google. By the end of the weekend, OpenAI, and Google had endorsed the letter. Both of those companies also develop OpenMod. And again, the letter is framed in a way that's basically like, open weight models are great, let's sing kumbaya. It's like easy to sort of get behind that, even if you have some security concerns and privately we're talking to the government about what can be done. Anthropic is the one major AI company that's yet to endorse the letter. Yesterday, CEO Dario Amadeh published a response.

He wrote that he agrees with many of the points in the open letter, but disagrees that broad access to open weights makes the ecosystem safer. They've made clear they see risks with open source and from a competitive standpoint. They don't have open models and they're pretty much against them. But now they are standing against essentially big swats of the White House, big swats of Silicon Valley, pretty much the rest of the AI ecosystem in the U.S. I mean, it seems like one of the concerns about the race over AI between the U.S. and China is that China is like really leading the way on these open weight models.

that creates a concern. But with this letter, it feels like almost all of Silicon Valley, all of the tech world, other than just one giant, are also endorsing that open-weight path. So what do you think that's going to mean for the future of the way this technology develops? The race is definitely entering a new chapter, and China's ability to have government support behind all of this

and long-term policy clarity is really coming into focus for a lot of people. I think there will continue to be a roller coaster here where when the open models have breakthroughs, it stirs up this debate again about whether there need to be restrictions and the value of open weight and how much China is catching up. And then in a matter of weeks or months, you'll see probably more advances from Open AIA Anthropic and others when the pendulum might swing back a bit. So I think it's just hard for people to feel like they're on stable ground in this AI race. That's all for today. Tuesday, July 28th. The Journal is a co-production of Spotify and the Wall Street Journal. Additional reporting in this episode by Jonathan Chang, Raphael Huang, Tina Lee, and Katrina Northrop.

Thanks for listening. See you tomorrow.