(Repeats story published Tuesday night in Asia)

*

DeepSeek likely to release next-generation R2 model before

May -

sources

*

Startup shuns typical Chinese tech giant culture, is known

for

flat hierarchy

*

China embraces DeepSeek after initial regulatory concerns

about

its mass chip purchases

*

Firm instructed to keep low-profile amid global concerns

about

its privacy practices

By Eduardo Baptista, Julie Zhu, Fanny Potkin

BEIJING/HONG KONG/SINGAPORE, Feb 25 (Reuters) - DeepSeek

is looking to press home its advantage.

The Chinese startup triggered a $1 trillion-plus sell-off in

global equities markets last month with a cut-price AI reasoning

model that outperformed many Western competitors.

Now, the Hangzhou-based firm is accelerating the launch of the

successor to January's R1 model, according to three people

familiar with the company.

Deepseek had planned to release R2 in early May but now

wants it out as early as possible, two of them said, without

providing specifics.

The company says it hopes the new model will produce better

coding and be able to reason in languages beyond English.

Details of the accelerated timeline for R2's release have not

been previously reported.

DeepSeek did not respond to a request for comment for this

story.

Rivals are still digesting the implications of R1, which was

built with less-powerful Nvidia ( NVDA ) chips but is competitive with

those developed at the costs of hundreds of billions of dollars

by U.S. tech giants.

"The launch of DeepSeek's R2 model could be a pivotal moment in

the AI industry," said Vijayasimha Alilughatta, chief operating

officer of Indian tech services provider Zensar. DeepSeek's

success at creating cost-effective AI models "would likely spur

companies worldwide to accelerate their own efforts ... breaking

the stranglehold of the few dominant players in the field," he

said.

R2 is likely to worry the U.S. government, which has identified

leadership of AI as a national priority. Its release may further

galvanize Chinese authorities and companies, dozens of which say

they have started integrating DeepSeek models into their

products.

Little is known about DeepSeek, whose founder Liang Wenfeng

became a billionaire through his quantitative hedge fund

High-Flyer. Liang, who was described by a former employer as

"low-key and introverted," has not spoken to any media since

July 2024.

Reuters interviewed a dozen former employees, as well as

quant fund professionals knowledgeable about the operations of

DeepSeek and its parent company High-Flyer. It also reviewed

state media articles, social-media posts from the companies and

research papers dating back to 2019.

They told a story of a company that functioned more like a

research lab than a for-profit enterprise and was unencumbered

by the hierarchical traditions of China's high-pressure tech

industry, even as it became responsible for what many investors

see as the latest breakthrough in AI.

DIFFERENT PATH

Liang was born in 1985 in a rural village in the southern

province of Guangdong. He later obtained communication

engineering degrees at the elite Zhejiang University.

One of his first jobs was running a research department at a

smart imaging firm in Shanghai. His then-boss, Zhou Chaoen, told

state media on Feb. 9 that Liang had hired prize-winning

algorithm engineers and operated with a "flat management

style."

At DeepSeek and High-Flyer, Liang has similarly shunned the

practices of Chinese tech giants known for rigid top-down

management, low pay for young employees and "996" - working from

9 a.m. to 9 p.m. six days a week.

Liang opened his Beijing office within walking distance of

Tsinghua University and Peking University, China's two most

prestigious education institutions. He regularly delved into

technical details and was happy to work alongside Gen-Z interns

and recent graduates that comprised the bulk of its workforce,

according to two former employees. They also described usually

working eight-hour days in a collaborative atmosphere.

"Liang gave us control and treated us as experts. He

constantly asked questions and learned alongside us," said

26-year-old researcher Benjamin Liu, who left the company in

September. "DeepSeek allowed me to take ownership of critical

parts of the pipeline, which was very exciting."

Liang did not respond to questions sent via DeepSeek.

While Baidu ( BIDU ) and other Chinese tech giants were racing to

build their consumer-facing versions of ChatGPT in 2023 and

profit off of the global AI boom, Liang told Chinese media

outlet Waves last year that he deliberately avoided spending

heavily on app development, focusing instead on refining the AI

model's quality.

Both DeepSeek and High-Flyer are known for paying

generously, according to three people familiar with its

compensation practices. At High-Flyer, it is not uncommon for a

senior data scientist to make 1.5 million yuan annually, while

competitors rarely pay more than 800,000, said one of the

people, a rival quant fund manager who knows Liang.

The largesse was funded by High-Flyer, which became one of

China's most successful quant funds and, even after a government

crackdown on the sector, still manages tens of billions of yuan,

according to two people in the industry.

COMPUTING POWER

DeepSeek's success with a low-cost AI model is based on

High-Flyer's decade-long and substantial investment in research

and computing power, three people said.

The quant fund was an earlier pioneer in AI trading and a

top executive said in 2020 that High-Flyer was going "all in" on

AI by re-investing 70% of its revenue, mostly into AI research.

High-Flyer spent 1.2 billion yuan on two supercomputing AI

clusters in 2020 and 2021. The second cluster, Fire-Flyer II,

was made up of around 10,000 Nvidia A100 chips, used for

training AI models.

DeepSeek had not been established at that time, so the

accumulation of computing power caught the attention of Chinese

securities regulators, said a person with direct knowledge of

officials' thinking.

"Regulators wanted to know why they need so many chips?" the

person said. "How they were going to use it? What kind of impact

would that have on the market?"

Authorities decided not to intervene, in a move that would

prove crucial for DeepSeek's fortunes: the U.S. banned the

export of A100 chips to China in 2022, at which point Fire-Flyer

II was already in operation.

Beijing now celebrates DeepSeek, but has instructed it not

to engage with the media without approval, according to a person

familiar with Chinese official thinking.

Authorities had asked Liang to keep a low-profile because

they were worried that too much hype in the media would draw

unnecessary attention, the person said.

China's cabinet and commerce ministry, as well as China's

securities regulator, did not respond to requests for comment.

As one of the few companies with a large A100 cluster,

High-Flyer and DeepSeek were able to attract some of China's

best research talent, two former employees said.

"The key advantage of vast (computing) resources is that it

allows for large-scale experimentation," said Liu, the former

employee.

Some Western AI entrepreneurs, like Scale AI CEO Alexandr

Wang, have claimed that DeepSeek had as many as 50,000

higher-end Nvidia ( NVDA ) chips that are banned for export to China. He

has not produced evidence for the allegation or responded to

Reuters' requests to provide proof.

DeepSeek has not responded to Wang's claims. Two former

employees attributed the company's success to Liang's focus on

more cost-effective AI architecture.

The startup used techniques like Mixture-of-Experts (MoE)

and multihead latent attention (MLA), which incur far lower

computing costs, its research papers show.

The MoE technique divides an AI model into different areas

of expertise and activates only those related to a query, as

opposed to more common architectures that use the entire model.

MLA architecture allows a model to process different aspects

of one piece of information simultaneously, helping it detect

key details more effectively.

While competitors like France's Mistral have developed

models based on MoE, DeepSeek was the first firm to depend

heavily on this architecture while achieving parity with more

expensively built models.

DeepSeek's pricing was 20 to 40 times cheaper than what

OpenAI charged for equivalent models, analysts at Bernstein

brokerage estimated in early February.

For now, Western and Chinese tech giants have signaled plans

to continue heavy AI spending, but DeepSeek's success with R1

and its earlier V3 model has prompted some to alter strategies.

OpenAI cut prices this month, while Google's Gemini has

introduced discounted tiers of access. Since R1's launch, OpenAI

has also released an O3-Mini model that relies on less computing

power.

Adnan Masood of U.S. tech services provider UST told Reuters

that his laboratory had run benchmarks that found R1 often used

three times as many tokens, or units of data processed by the AI

model, for reasoning as OpenAI's scaled-down model.

STATE EMBRACE

Even before R1 gripped global attention, there were signs

that DeepSeek had caught Beijing's favor. In January, state

media reported that Liang attended a meeting with Chinese

Premier Li Qiang in Beijing as the designated representative of

the AI sector, ahead of the leaders of better-known firms.

The subsequent fanfare over the cost competitiveness of its

models has buoyed Beijing's belief that it can out-innovate the

U.S., with Chinese companies and government bodies embracing

DeepSeek models at a pace that has not been offered to other

firms.

At least 13 Chinese city governments and 10 state-owned

energy companies say they have deployed DeepSeek into their

systems, while tech giants Lenovo ( LNVGF ), Baidu ( BIDU ) and

Tencent ( TCTZF ) - owner of China's largest social media app

WeChat - have integrated DeepSeek's models into their products.

Chinese leader Xi Jinping and Li "have signalled they

endorse DeepSeek," said Alfred Wu, an expert on Chinese

policymaking at Singapore's Lee Kuan Yew School of Public

Policy. "Now everyone just endorses it."

The Chinese embrace comes as governments from South Korea to

Italy remove DeepSeek from national app stores, citing privacy

concerns.

"If DeepSeek becomes the go-to AI model across Chinese state

entities, Western regulators might see this as another reason to

escalate restrictions on AI chips or software collaborations,"

said Stephen Wu, an AI expert and founder of hedge fund Carthage

Capital.

Further limits on advanced AI chips are a challenge that

Liang has acknowledged.

"Our problem has never been funding," he told Waves in July.

"It's the embargo on high-end chips."

(Additional reporting by Samuel Shen, Gu Li, Larissa Liao,

Aditya Soni and Shanghai Newsroom; Editing by Brenda Goh and

Katerina Ang)