China's DeepSeek AI shakes industry and dents America's swagger

China's DeepSeek AI shakes industry and dents America's swagger

The astonishing success of the Chinese AI app DeepSeek has sent shockwaves throughout the global technology landscape, with significant implications for markets and the traditional sense of American superiority in artificial intelligence (AI). Venture capitalist Marc Andreessen referred to DeepSeek’s debut as “AI’s Sputnik moment,” drawing a parallel to the 1957 launch of the Soviet satellite that ignited the space race between the US and the USSR.

Over the weekend, DeepSeek quickly became the most downloaded free app on the US App Store, a development that took the tech world by surprise. By Monday, the AI chatbot’s rapid rise had triggered a major sell-off of tech stocks, as investors grew concerned about the implications of China's growing dominance in the AI sector. A key example of the fallout came from Nvidia, a leading AI chip designer, whose shares plunged 17% by the end of the trading day. This sharp drop led to a nearly $600 billion loss in market value for the company, marking the largest single drop in US stock market history, according to Bloomberg.

The dramatic market shift has largely been driven by a critical cost advantage. While OpenAI, the company behind the popular ChatGPT, has been hemorrhaging money—spending a staggering $5 billion in the past year—DeepSeek’s developers claim to have built their AI model for just $5.6 million. This represents a fraction of the financial investment made by tech giants like OpenAI, Google, and Anthropic to develop their own models, raising important questions about the future of AI development and competition. The situation has left Silicon Valley reeling, as it becomes clear that the cost and scale of AI innovation are rapidly changing, potentially altering the balance of power in the global tech industry. 

As the dramatic rise of DeepSeek sent shockwaves through the tech industry, there was a noticeable silence across Silicon Valley when I reached out to sources who are usually quick to comment. Many investors, analysts, and industry experts seemed stunned by the rapid emergence of the new Chinese AI app.

Some wondered if this development represented a potential buying opportunity, while others expressed skepticism about the information DeepSeek was providing. Veteran analyst Gene Munster shared his doubts, telling me on Monday that the financials DeepSeek has cited seemed questionable. He questioned whether the startup was being subsidized or if the numbers it presented were accurate.

DeepSeek's Meteoric Rise Shakes US Dominance in AI Industry

"The chatbot is surprisingly good, which just makes it hard to believe," Munster said, adding that the app's capabilities had raised concerns about its legitimacy.

Despite these questions, Munster described DeepSeek’s sudden emergence as a bold statement by China and a significant "black eye for US tech." This comment came just a week after OpenAI’s Sam Altman and Oracle’s Larry Ellison appeared alongside former President Donald Trump in a press conference that seemed to represent the peak of American confidence in AI. The event was a clear demonstration of the optimism surrounding US leadership in the AI sector, but DeepSeek’s success has now cast doubt on that dominance.

In response to the rapid rise of DeepSeek, the new Chinese AI app, the US tech sector has seen a shift in confidence, with some industry leaders and investors reassessing the country's position in the AI race. Just days before DeepSeek’s emergence, the US had made headlines with the announcement of Stargate, a joint venture promising up to $500 billion in private investment for AI infrastructure, including data centers in Texas and other locations, alongside 100,000 new jobs. The US had long considered its abundance of data centers and control over cutting-edge chips as key advantages in the AI race, despite China’s dominance in rare-earth metals and engineering talent.

Many believed it was a foregone conclusion that the US would maintain control over the AI industry, but recent events, including the rise of DeepSeek, have cast doubt on that certainty. The sudden success of the app has caused some to rethink assumptions about what is required to lead in AI development. Former President Donald Trump, commenting on the moment, called it a "wake-up call" for the American tech industry, noting that cheaper AI development could ultimately be beneficial.

The impact of DeepSeek's arrival extended beyond tech stocks, which took a significant hit on Monday, also affecting energy stocks. DeepSeek’s approach has challenged the notion that vast capital, compute power, and energy are essential for building AI. The app's model, which DeepSeek claims was developed using existing technology and open-source software, has raised questions about the future of companies like Nvidia, which manufactures GPUs (graphics processing units) crucial for AI development. DeepSeek reportedly used Nvidia’s H800 chips, despite US restrictions on selling high-powered chips to China, which may come under scrutiny in light of this new competition.

While OpenAI’s Sam Altman was mostly quiet on social media after DeepSeek’s emergence, he later commented, calling the app "impressive... particularly around what they're able to deliver for the price." Altman also acknowledged the invigorating presence of a new competitor in the AI space.

The launch of DeepSeek has echoed the surprise of the 1957 Sputnik launch, which marked the beginning of the space age, when the US was caught off guard. The response of the US tech sector to this unexpected challenge from a Chinese company could reshape the dynamics of the AI race and intensify competition moving forward.

What is DeepSeek and why did it cause tech stocks to drop?

DeepSeek, an AI-powered chatbot developed by the Chinese company DeepSeek, has rapidly surged to the top of the Apple App Store's free app rankings following its US release in January. The app's sudden success, coupled with the company's reported ability to develop AI models at a fraction of the cost of US competitors, has caused a stir in financial markets.

Marc Andreessen, a prominent Silicon Valley venture capitalist, has praised DeepSeek as "one of the most amazing and impressive breakthroughs" in AI. The company claims that its latest AI models rival those of leading US-based companies, such as ChatGPT, while costing far less to develop. DeepSeek's AI assistant was built for just $6 million, significantly lower than the billions spent by companies in the US.

Founded in July 2023 in Hangzhou, China, DeepSeek launched its app in the US on January 10, according to Sensor Tower. The company's founder, Liang Wenfeng, who also runs a hedge fund, reportedly amassed a stockpile of Nvidia A100 chips, which are now banned from export to China. Experts believe that Liang paired these chips with lower-end models still available for import to create DeepSeek's AI platform.

DeepSeek has quickly gained popularity, becoming both the most downloaded and the highest-rated free app in the US on Apple's App Store. However, some users have reported difficulties in signing up for the service. Despite these issues, DeepSeek's success highlights a new challenge to US tech dominance, as the company has made a significant impact with its low-cost, powerful AI assistant.

 

 

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