DeepSeek Shakes Up AI Market, U.S. Tech Giants Stumble

Shares in major U.S. technology firms have plummeted after the recent launch of a low-cost chatbot from a Chinese artificial intelligence firm. The DeepSeek app, which hit the market just last week, has already surpassed OpenAI’s ChatGPT to become the most downloaded free app in the U.S., causing significant ripples in the tech industry.

DeepSeek’s rapid rise has left U.S. tech giants like AI chip-maker Nvidia, Microsoft, and Meta reeling, with their share prices taking a hit on Monday. The app’s success has raised questions about the future of America’s AI dominance, especially since it was developed at a fraction of the cost of its rivals.

In response, OpenAI announced last week that it will join other firms in pledging to invest $500b in building AI infrastructure in the U.S. President Donald Trump, in one of his first statements since returning to office, hailed this as “the largest AI infrastructure project by far in history,” which he believes will keep “the future of technology” in the U.S.

DeepSeek is powered by the open-source DeepSeek-V3 model, which its developers claim was created for around $6 million—significantly less than the billions spent by other AI companies. However, this claim has faced scepticism within the AI community. Researchers have highlighted their use of already existing technology and open-source code, which can be freely used, modified, and distributed by anyone.

The timing of DeepSeek’s emergence is intriguing, as it comes amid U.S. restrictions on the sale of advanced chip technology to China. To circumvent these limitations, Chinese AI developers have shared their work and experimented with innovative approaches, resulting in AI models that require less computing power and cost far less to develop.

DeepSeek-R1, which was launched earlier this month, has impressed with its performance in tasks like math, coding, and natural language reasoning, on par with one of OpenAI’s latest models. This success has sent shockwaves through stock markets in Europe and the U.S. ASML, a Dutch chip equipment maker, saw its share price drop by more than 10%, while Siemens Energy, which manufactures AI-related hardware, experienced a 21% decline.

Financial analysts, like Fiona Cincotta from City Index, have noted, “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 sudden emergence of an affordable AI model raises concerns over the profitability of rivals who have already invested heavily in more expensive AI infrastructure.

DeepSeek’s disruptive impact on the AI industry was highlighted by Silicon Valley venture capitalist and Trump advisor Marc Andreessen, who described the app as “AI’s Sputnik moment.” This reference draws parallels to the Soviet Union’s launch of Sputnik in 1957, which caught the U.S. off-guard with its technological achievement.

However, Wall Street banking giant Citi has cautioned that while DeepSeek could challenge the dominance of American companies, issues faced by Chinese firms could slow their progress. Citi analysts pointed out that U.S. access to more advanced chips remains an advantage in an increasingly restrictive environment.

DeepSeek was founded in 2023 by Liang Wenfeng in Hangzhou, southeastern China. The 40-year-old information and electronic engineering graduate also established the hedge fund that backed DeepSeek. Reports indicate that Wenfeng amassed a collection of Nvidia A100 chips—now banned from export to China—which enabled him to launch DeepSeek by pairing these high-end chips with cheaper ones still available for import.

In a July 2024 interview with The China Academy, Wenfeng expressed his surprise at the reaction to the previous 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.”