DeepSeek, a relatively unknown Chinese AI startup, has created a shockwave across the globe as it has quickly emerged as a serious competitor to US tech giants like Nvidia, OpenAI, Google. Its bold claims about its efficiency at a cheaper cost led to a bloodbath in the US tech stocks and even global markets.
On January 27, reports of DeepSeek's success led to an up to 18% drop in major chipmaker stocks, including Nvidia, Broadcom, AMD, and Qualcomm along with AI server makers Dell Technologies and Super Micro.. The NASDAQ fell over 3 percent, wiping out more than $1 trillion in market value.
Market data revealed that the mayhem extended beyond traditional tech stocks. Siemens Energy, a key supplier of electrical hardware for AI infrastructure, saw its shares plummet by 20%, while Schneider Electric, a French company specializing in electrical power products and heavily invested in data center services, dropped 9% on Monday.
What is DeepSeek and why did it trigger a selloff in the US, global markets?
Founded in 2023 by Liang Wenfeng, who heads the Chinese quant hedge fund High-Flyer, DeepSeek is an AI startup which first gained attention in late 2023 when its V3 large language model (LLM) outperformed major players like ChatGPT-parent OpenAI, Google, and Meta, all while being developed at a fraction of the cost deployed by others.
DeepSeek’s journey began with the release of DeepSeek Coder in November 2023, an open-source coding model. Soon after, it introduced DeepSeek LLM, a 67-billion parameter model designed to rival the biggest AI companies. The real breakthrough, however, came last year in May with the launch of DeepSeek-V2, which impressed the industry with its high performance and low cost.
This aggressive pricing by Deepseek sparked a price war in China which forced major tech companies like TikTok-parent ByteDance, Tencent, Baidu, and Jack Ma-founded Alibaba to slash the prices of their AI models to stay competitive. DeepSeek’s latest R1 model, which mimics human reasoning, has reportedly further fueled excitement by matching, and in some cases, even surpassing OpenAI’s O1 model in key benchmarks.
DeepSeek claims that its R1 model delivers results on par with OpenAI’s O1, achieving a remarkable 97% success rate, but at 95% lower costs. Whilst ChatGPT cost hundreds of millions to compute, DeepSeek’s creators claim that they have spent less than £5 million.
To put things into context, OpenAI charges $15 per million input tokens for its o1 models, while DeepSeek R1 offers the same service at just $0.55 per million tokens, according to the official pricing shared by both platforms. The real difference is in total costs when factoring in both input and output processing.
Total cost per million tokens:
- OpenAI o1 model: $75.00
- DeepSeek R1 model: $10.24
This means DeepSeek R1 is approximately 86.35% cheaper than OpenAI, making it a significantly more affordable option for AI processing, currently.
DeepSeek's competitive pricing along with strong performance, has fueled its popularity leading to the DeepSeek app surpassing ChatGPT in App Store downloads in the US, with users praising its smartphone-friendly performance and ability to handle complex tasks like advanced mathematical computations. The company has also launched compact versions of the R1 model for use on laptops and other devices.
How is DeepSeek challenging AI giants?
DeepSeek's rapid ascent has created ripples across the tech industry causing a sharp selloff in the US Stocks and even global markets. What makes it even more impressive is that it has achieved this with just 220 employees, compared to OpenAI's 4,500 employees, and with a relatively small investment of $50 million, according to reports.
Another shocking factor is that DeepSeek managed to achieve this using H800 GPUs, while most tech companies are heavily investing in the more advanced H100 GPUs. This has raised questions about the effectiveness of US sanctions aimed at limiting China’s access to cutting-edge technology.
The company's ambitious $500 billion AI investment plan has alarmed Silicon Valley, causing a sharp fall in markets. Since US tech stocks have been rallying on AI-driven optimism, the sudden emergence of DeepSeek has added pressure and uncertainty.
Some experts even believe that Deepseek's rapid rise could have a significant impact on US tech stocks and global markets, challenging the dominance of some of the industry leaders.
Why is NVIDIA stock crashing?
NVIDIA, which is a major supplier of GPUs crucial for AI models, has been one of the biggest beneficiaries of the AI boom. Its stock has soared in recent years, driven by surging demand for AI hardware. However, with DeepSeek claiming to offer cost-effective AI models, there is a fear that demand for NVIDIA’s expensive chips could slow down, potentially impacting its stock price and market value.
Adding to the challenge, DeepSeek has partnered with NVIDIA’s biggest rival, AMD to strengthen its position in the AI space. With AMD’s expertise in high-performance processing, DeepSeek is expected to build more powerful and efficient AI models, intensifying competition in the industry.
The fear led to $600 million being eroded from Nvidia stock, the biggest single-day wipe out from a single stock in US market's history.
The concerns around Deepseek’s censorship
DeepSeek’s rapid ascent is forcing established players to rethink their strategies. As China continues to develop advanced AI solutions, US tech companies may have to innovate faster and cut costs to stay competitive. Meanwhile, the geopolitical implications of China's AI growth could alter trade dynamics between the US and China in the coming years.
However, while DeepSeek has impressed users with its capabilities and low cost, concerns have emerged about its heavy censorship. The chatbot refuses to engage in discussions on sensitive topics related to China, often responding with "Let's talk about something else." This lack of transparency has raised questions about its reliability, especially for users seeking unbiased and open-ended AI responses.
Some even argue that restrictions and censorship like this limit Deepseek R1’s usefulness compared to Western AI models like ChatGPT, which offer more balanced discussions on global issues.
Investors will now closely keep an eye on all the top AI stocks, and on DeepSeek to see if it can sustain its momentum or if US tech giants’ share prices will recover from this sharp downfall?
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