China's DeepSeek is developing its own AI chip, according to Reuters, which cited three people familiar with the matter. The company has not officially confirmed the report. The new chip is being built for AI inference, which is the stage where a trained AI model answers users' questions. It is not meant for training new AI models.China's DeepSeek is developing its own AI inference chip to reduce reliance on Nvidia and Huawei. (REUTERS/Dado Ruvic/Illustration/File Photo) (REUTERS)If the project succeeds, DeepSeek will rely less on Nvidia and Huawei chips, which it currently uses to train and run its AI models. This would be a major change for DeepSeek because the company has mainly focused on building powerful AI models instead of designing computer chips. Reuters reported that DeepSeek's move could also create fresh competition for Chinese tech giant Huawei, which has become one of China's biggest AI chip suppliers.Also Read: USPS raises Forever stamp price and adds new mailing fees: Here's what you need to knowDEEPSEEK AI CHIP PLANSAfter the Reuters report, shares of Nvidia fell about 2% in premarket trading, while Bloomberg also reported Nvidia shares were down about 2.2% in early trading. DeepSeek became famous around the world more than a year ago after launching two highly efficient AI models that surprised many experts in Silicon Valley and Washington. The company impressed the tech industry because it claimed it built advanced AI models using far fewer chips and computing resources than many rivals.Its success showed that Chinese companies could still compete with top U.S. AI firms despite American export restrictions on advanced AI chips. DeepSeek's chip project is still in its early stages and the company has started talking to chip designers, manufacturers and memory suppliers, as per Reuters. One person familiar with the matter said the chip effort started about a year ago. DeepSeek has quietly hired more chip-design engineers in recent months without posting public job advertisements.All three Reuters sources spoke on the condition of anonymity because the information has not been made public. DeepSeek did not respond to Reuters' request for comment about the chip project.GLOBAL AI CHIP RACEDeepSeek is not alone. Many leading AI companies are now building their own custom chips to reduce dependence on Nvidia and improve performance. Bloomberg reported that almost every major AI developer is designing custom chips that work better with their own AI systems.Reuters noted that OpenAI introduced its first custom inference chip called Jalapeno last month in partnership with Broadcom. Anthropic has been considering building its own AI chips. Amazon is working on selling custom AI chips for use in other companies' data centres. Alphabet's Tensor Processing Units (TPUs) have seen strong demand.US CHIP RESTRICTIONSDeepSeek's chip effort has become more important because U.S. export controls prevent Chinese companies from buying Nvidia's most advanced AI chips. The Chinese government has also encouraged domestic technology companies to build homegrown alternatives to foreign chips. DeepSeek founder Liang Wenfeng said in a rare 2024 interview with a Chinese media outlet that U.S. chip export controls were a challenge for the company, according to a Reuters report.CHINA AI CHIP MARKETDeepSeek has used both Nvidia and Huawei chips for its AI systems. The company earlier said the foundation model behind its R1 reasoning model was trained using Nvidia's H800 chip. The H800 chip was specially made for the Chinese market before the U.S. banned its exports in late 2023. DeepSeek has since started depending more on Huawei's Ascend chips.In April, DeepSeek released its V4 AI model that was adapted for Huawei's Ascend chips. Huawei also said its processors were used to train part of V4-Flash, a lighter version of the model. Reuters reported that orders for Huawei's Ascend 950 chips increased sharply after the launch of the new model.Reuters said Huawei currently controls about half of China's $50 billion AI chip market, helped by U.S. restrictions on Nvidia's advanced products. Huawei supplies AI chips to DeepSeek and several other leading Chinese AI companies. However, Reuters said Huawei's market dominance is starting to weaken as companies like Alibaba and Baidu develop their own AI chips.WHY AI INFERENCE MATTERSInference is now the fastest-growing part of the AI industry because more companies are using AI applications every day. Unlike training chips, inference chips mainly run already-trained AI models to answer users' questions. Reuters said inference chips can also be cheaper and use less electricity than general-purpose graphics processors (GPUs).Building a competitive AI chip usually takes several years and requires huge investments. Manufacturing is another challenge because U.S. restrictions prevent Chinese chip designers from using the world's most advanced overseas factories. U.S. restrictions have reduced China's access to high-bandwidth memory (HBM), which is important for advanced AI chips, according to Reuters.DEEPSEEK FUNDING AND FUTUREIn June, DeepSeek planned to raise $7 billion in its first funding round at a valuation of $52 billion to $59 billion. DeepSeek has now raised more than $7.4 billion in its first fundraising round. Investors valued DeepSeek at more than $50 billion, making it China's most valuable AI startup.Founder Liang Wenfeng invested around $3 billion himself, making the biggest contribution to the funding round. The Wall Street Journal reported that Liang owned nearly 90% of DeepSeek before the fundraising. The report said Liang still controls the company through a special structure where most investors put money into a limited partnership that he manages instead of directly buying company shares. Investors are also required to keep their investments for five years, according to people familiar with the matter.China's National Artificial Intelligence Industry Investment Fund invested about $150 million directly into DeepSeek, according to the Wall Street Journal. The Wall Street Journal said Tencent invested around $1.5 billion. Battery maker CATL invested around $740 million. Other investors included JD.com, NetEase, IDG Capital and Monolith Management, according to people familiar with the deal. DeepSeek and the investors did not immediately respond to requests for comment, the Wall Street Journal reported.DeepSeek plans to use the new funding to expand research, development and computing infrastructure. The company is also expected to secure more domestic computing power because U.S. trade restrictions limit China's access to advanced AI chips. According to the Wall Street Journal, some investors have encouraged DeepSeek to find more ways to earn money from its AI products.DeepSeek is expanding teams working on agentic AI tools, which are software systems that can automate complex tasks and could create future revenue. Liang has promised investors the company will continue working toward artificial general intelligence (AGI) and keep developing open-source AI technology. Even after raising billions of dollars, DeepSeek is still valued far below major U.S. AI companies such as OpenAI and Anthropic, according to the Wall Street Journal.