The launch of DeepSeek, a new low-cost chatbot developed by a Chinese artificial intelligence (AI) firm, has sent shockwaves through the US technology sector, causing significant declines in stock prices for several major companies. This new app quickly surpassed competitors, including ChatGPT, to become the most downloaded free application in the United States shortly after its release last week.
Impact on US tech stocks
On Monday, shares of US-based technology giants and AI-related firms, such as Nvidia, Microsoft, and Meta, experienced a sharp downturn just before the opening of the US markets. The DeepSeek chatbot is reportedly created at a fraction of the cost compared to its competitors, raising pressing questions regarding the sustainability of American leadership in the AI industry and the planned investments by US-based firms.
DeepSeek is powered by the open-source DeepSeek-V3 model, which its developers assert was developed for less than $6 million (£7.5 million). This cost is significantly lower than the billions invested by other companies in the sector. However, this claim has faced skepticism from various experts within the AI community.
Strategic shifts in Chinese AI development
The researchers behind DeepSeek emphasized their use of existing technologies and open-source code, which allows for free modification and distribution of software. The emergence of DeepSeek occurs amidst the US’s tightening restrictions on the export of advanced chip technology to China, compelling Chinese developers to collaborate and innovate with limited resources. This shift has led to the creation of AI models that demand considerably less computing power, ultimately reducing costs and potentially revolutionizing the industry.
Following the launch of DeepSeek-R1, the company claimed that its performance aligns closely with the latest models from OpenAI, particularly in tasks involving mathematics, coding, and natural language processing. Silicon Valley venture capitalist Marc Andreessen referred to DeepSeek-R1 as “AI’s Sputnik moment,” alluding to the surprise the US experienced when the Soviet Union launched its satellite in 1957.
The rapid rise of DeepSeek has bewildered market analysts, with ASML, a Dutch chip equipment manufacturer, witnessing a more than 10% dip in its share value, while Siemens Energy, which produces AI-related hardware, saw its stock plummet by 21%. Fiona Cincotta, a senior market analyst at City Index, remarked, “This idea of a low-cost Chinese version hasn’t necessarily been forefront, so it’s taken the market a little bit by surprise.” She added that the introduction of such an affordable AI model raises concerns regarding the profitability of existing rivals, especially in light of their considerable investments in more expensive AI infrastructure.
Despite the challenges posed by DeepSeek, analysts at Citi have cautioned that while it could present a challenge to the dominance of American firms like OpenAI, various issues confronting Chinese companies could hinder their growth. Their report noted, “We estimate that in an inevitably more restrictive environment, US access to more advanced chips is an advantage.”
Recently, a consortium of US tech firms and international investors unveiled The Stargate Project, which aims to invest $500 billion into AI infrastructure in Texas, indicating a strong commitment to retaining leadership in this critical sector.
DeepSeek was founded in 2023 by Liang Wenfeng in Hangzhou, China. The 40-year-old engineer, who previously established a hedge fund to support DeepSeek, reportedly amassed a collection of Nvidia A100 chips, which are now banned from export to China. Experts estimate that he accumulated around 50,000 of these chips, allowing him to combine them with cheaper, lower-end alternatives still available for import. Liang was recently observed at a meeting with industry experts and Chinese Premier Li Qiang. In a July 2024 interview with The China Academy, Liang expressed surprise at the response to an earlier version of his AI model, stating, “We didn’t expect pricing to be such a sensitive issue. We were simply following our own pace, calculating costs, and setting prices accordingly.”
As the landscape of the AI industry evolves, the implications of DeepSeek’s entry into the market continue to unfold, leaving stakeholders on both sides of the Pacific to reassess their strategies and investments in this rapidly changing field.