Top White House advisers this week expressed alarm that China's DeepSeek may have benefited from a method that allegedly piggybacks off the advances of U.S. rivals called "distillation."

The start-up had become a key player in the “Chinese Large-Model Technology Avengers Team” that would counter US AI dominance, said another. China’s delight, however, spelled pain for several giant US technology companies as investors questioned whether DeepSeek’s breakthrough undermined the case for their colossal spending on AI infrastructure.

SINGAPORE—The unexpected success of Chinese AI startup DeepSeek has revealed cracks in U.S. efforts to contain China’s technology ambitions, challenging both Washington and Silicon Valley to rethink how best to preserve American supremacy.