Shares in major US technology firms have taken a significant hit in response to the sudden rise of DeepSeek, a Chinese artificial intelligence (AI) chatbot that has quickly gained popularity and posed a direct challenge to established American AI giants. The app, launched just last week, has already overtaken prominent competitors, including ChatGPT, to become the most downloaded free app in the United States.
The disruptive nature of DeepSeek, powered by the open-source DeepSeek-V3 model, has raised alarm bells across Silicon Valley. The chatbot, which its developers claim was built for under $6 million (£7.5 million), has sparked fears that US dominance in AI may be under threat. Shares in companies such as Nvidia, Microsoft, and Meta fell sharply on Monday in pre-market trading, as investors weighed the potential implications of this low-cost, high-performing alternative.
DeepSeek: A Game-Changing Development in AI
DeepSeek’s emergence has sent shockwaves through the tech industry, with its creators boasting that the chatbot’s performance rivals advanced models developed by OpenAI and others. Tasks like natural language reasoning, coding, and mathematics—considered benchmarks for AI capabilities—have reportedly been executed with precision by DeepSeek.
This breakthrough is even more startling considering the modest development cost of the DeepSeek-V3 model compared to the billions invested by US-based firms in AI research and infrastructure. If true, this achievement could fundamentally reshape perceptions about the cost structure of advanced AI development.
However, these cost claims have not gone unchallenged. Skeptics within the AI research community argue that such low-cost development is implausible, suggesting that unreported expenses or hidden resources might have contributed to DeepSeek’s success.
DeepSeek’s rise also coincides with a period of increased restrictions by the US government on exporting advanced chip technology to China, a move aimed at curbing China’s progress in AI and other high-tech fields. Despite these restrictions, Chinese developers have adapted by sharing research and finding innovative methods to reduce computing power requirements for AI training, a strategy that appears to have paid off significantly.
A “Sputnik Moment” for AI?
The rapid ascent of DeepSeek has drawn comparisons to the Sputnik satellite, launched by the Soviet Union in 1957, which marked a pivotal moment in the space race and galvanized American efforts to catch up. Silicon Valley venture capitalist and former Donald Trump advisor Marc Andreessen described DeepSeek’s debut as “AI’s Sputnik moment,” underscoring the potential shift in the global AI power dynamic.
The market reaction has been swift and dramatic. Shares in ASML, a Dutch chip equipment maker, dropped more than 10%, while Germany’s Siemens Energy, which produces AI-related hardware, saw a steep 21% decline in its stock price. These moves reflect growing investor concerns about how low-cost AI models could disrupt the current industry landscape.
Fiona Cincotta, senior market analyst at City Index, said the launch has caught many by surprise. “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 explained. “If you suddenly get this low-cost AI model, then that’s going to raise concerns over the profits of rivals, particularly given the amount that they’ve already invested in more expensive AI infrastructure.”
Meanwhile, Singapore-based technology equity advisor Vey-Sern Ling told the BBC that DeepSeek’s success “could potentially derail the investment case for the entire AI supply chain.”
The US Response: Strengthening AI Investments
In an effort to counter the growing competition, a consortium of US tech firms and international investors last week announced The Stargate Project, an ambitious initiative aimed at bolstering America’s AI capabilities. The project, which involves a staggering $500 billion investment, will focus on building AI infrastructure in Texas. This commitment underscores the high stakes of the AI race and the willingness of US firms to double down on their investments to maintain their edge.
Despite these efforts, Wall Street analysts remain divided on the long-term impact of DeepSeek. Banking giant Citi acknowledged the disruptive potential of the Chinese chatbot but cautioned that challenges faced by Chinese firms, including restrictions on advanced chips, could limit their ability to scale. “We estimate that in an inevitably more restrictive environment, US access to more advanced chips is an advantage,” Citi analysts noted in a report.
How Did DeepSeek Achieve This?
The man behind DeepSeek’s success is Liang Wenfeng, a 40-year-old entrepreneur from Hangzhou, China. Liang, who studied information and electronic engineering, previously founded a hedge fund that provided the financial backing for DeepSeek. According to industry insiders, Liang began stockpiling Nvidia A100 chips—which are now banned from export to China—well in advance of their restricted status. Estimates suggest he accumulated around 50,000 of these chips, which he then paired with lower-cost alternatives still available for import.
By leveraging this hybrid approach to hardware and refining the efficiency of their AI models, Liang and his team were able to achieve impressive results without incurring the sky-high costs typically associated with AI development. DeepSeek is powered by a combination of these pre-stocked advanced chips and innovations in software optimization, a strategy that could inspire others to rethink their development processes.
Liang’s efforts have not gone unnoticed by the Chinese government. He was recently spotted at a high-profile meeting between tech industry leaders and Chinese Premier Li Qiang, highlighting the growing importance of AI in China’s national strategy.
In an interview with The China Academy last year, Liang expressed surprise at the attention his earlier AI models received. “We didn’t expect pricing to be such a sensitive issue,” he said. “We were simply following our own pace, calculating costs, and setting prices accordingly.”
Tech Industry
DeepSeek’s launch has sparked a debate about the future trajectory of the global AI industry. On the one hand, the app’s success demonstrates that it is possible to develop competitive AI models without the colossal budgets typically associated with Silicon Valley giants. This realization could lead to a shift in investment strategies, with smaller firms and startups focusing on cost-efficient development rather than chasing the most advanced—and expensive—technological benchmarks.
On the other hand, the rise of DeepSeek raises questions about the sustainability of current business models for companies like OpenAI, which rely on significant investments in cutting-edge hardware and infrastructure. If low-cost alternatives can deliver comparable results, the perceived value of these investments could diminish.
For the US, DeepSeek’s success underscores the importance of maintaining its technological edge in the face of rising competition. The Biden administration’s restrictions on chip exports were intended to slow China’s progress, but the emergence of DeepSeek suggests that such measures may not be enough to prevent breakthroughs from Chinese developers.
