There’s a new player in AI on the world stage: DeepSeek, a Chinese startup that’s throwing tech valuations into chaos and challenging U.S. dominance in the field.
DeepSeek has rolled out a free AI assistant that it says uses cheaper chips and less data. On Monday, it overtook rival ChatGPT to become the top-rated free application available on Apple’s App Store in the United States.
U.S. stocks dropped sharply on Monday, as the surging popularity of DeepSeek sparked a selloff in chipmaker Nvidia and other companies that stand to benefit from investments in the technology.
Whether DeepSeek’s developments have the potential to really disrupt the industry is something investors will be paying close attention to, said Adam Sarhan, CEO of 50 Park Investments.
“If it is something that can, then we have a situation where all these AI stocks and the market as a whole will be re-priced.”
What is DeepSeek?
Little is known about the small Hangzhou startup behind DeepSeek, which was founded out of a hedge fund in 2023.
Its researchers wrote in a paper last month that the DeepSeek-V3 model, launched on Jan. 10, cost less than $6 million US to develop and uses less data than competitors, running counter to the assumption that AI development will eat up increasing amounts of money and energy.
DeepSeek offers the prospect of a viable, cheaper AI alternative, raising questions on the heavy spending by U.S. companies such as Apple and Microsoft, amid a growing investor push for returns.
“We still don’t know the details and nothing has been 100 per cent confirmed in regards to the claims, but if there truly has been a breakthrough in the cost to train models from $100 million+ to this alleged $6 million number, this is actually very positive for productivity and AI end users as cost is obviously much lower, meaning lower cost of access,” Jon Withaar, a senior portfolio manager at Pictet Asset Management, said.
One of the differences between DeepSeek’s AI assistant, R1, and other chatbots like OpenAI’s ChatGPT is that DeepSeek lays out its reasoning when it answers questions, something developers are excited about.
“The dealbreaker is the access to the raw thinking steps,” Elvis Saravia, an AI researcher and co-founder of the U.K.-based AI consulting firm DAIR.AI, wrote on X, adding that the response quality was “comparable” to OpenAI’s latest version.
DeepSeek-R1, which came out on Jan. 20, was released as “open-weight,” which means that developers and researchers can look at its inner workings and build on it. It’s not completely open source because its training data has not been made available, according to a Nature article.
U.S. dominance in AI challenged
One of the reasons DeepSeek is making headlines is because its development occurred despite U.S. actions to keep Americans at the top of AI development. In 2022, the U.S. curbed exports of computer chips to China, hampering their advanced supercomputing development.
According to the paper on DeepSeek-V3’s development, researchers used Nvidia’s H800 chips for training.
H800 chips are not top of the line. Initially developed as a reduced-capability product to get around curbs on sales to China, they were subsequently banned by U.S. sanctions.
Marc Andreessen, the Silicon Valley venture capitalist, said in a post on X on Sunday that DeepSeek’s R1 model was AI’s “Sputnik moment,” referencing the former Soviet Union’s launch of a satellite that marked the start of the space race with the U.S. in the late 1950s.
“DeepSeek-R1 is one of the most amazing and impressive breakthroughs I’ve ever seen — and as open source, a profound gift to the world,” he said in a separate post.
Nvidia drops 11%
The impact was being felt in tech markets on Monday.
Nvidia, whose chips are the top choice for powering AI applications, saw shares drop 11.4 per cent in premarket trading, while industry peers Broadcom and Marvell Technology fell about 11 per cent each.
Microsoft, Meta Platforms and Google parent Alphabet fell between 1.8 per cent and 3.6 per cent.
AI server makers Dell Technologies DELL.N and Super Micro Computer SMCI.O slid 5.6 per cent and 8.1 per cent.
In Japan, startup investor SoftBank Group 9984.T slid more than eight per cent. Last week, it announced a $19-billion US commitment to fund Stargate, a data-centre joint venture with OpenAI.
In his announcement of the Stargate deal, U.S. President Donald Trump said the U.S. was investing up to $500 billion in the private sector to fund infrastructure for artificial intelligence.
European tech stocks also dropped on Monday in the technology sector.
“The catalyst of a foreign competitor to U.S.-led AI dominance begs other questions about trade and semiconductor chips and energy needs,” Robert Savage, head of markets strategy and insights at BNY, wrote in a note on Monday, calling the markets “unsettled.”