China's DeepSeek and the tech market slump: What we need to know

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DeepSeek, a Chinese AI startup, has developed an affordable AI model called R1, which has outperformed OpenAI’s ChatGPT and caused a significant decline in US tech stocks. The company’s unique approach requires less computational power and memory, challenging the financial strategies of major tech firms investing heavily in AI. DeepSeek’s rapid rise highlights a potential shift in the AI industry.

DeepSeek, the new rising star in the AI space, has been making waves lately by creating a stir in the tech world. This Chinese startup, which was established at the end of 2023, is located in Hangzhou and has emerged as a giant threat to OpenAI and Google. The news of DeepSeek’s AI model, R1, has caused ripples on Wall Street, resulting in a significant decline in US tech stocks.

DeepSeek: A new player in the AI

DeepSeek is an AI company that originated from a university startup and aims to develop artificial general intelligence (AGI), which refers to human-level intelligence that has yet to be achieved by any tech firm. Although DeepSeek has not reached this milestone, its approach to AI development sets it apart from its competitors. Reportedly, the company has managed to create an AI model that operates at a fraction of the cost of its US counterparts. This cost-effectiveness can be attributed to two factors: a unique internal architecture that requires less memory and the ongoing limitations imposed by US government restrictions on chip availability for Chinese companies.

DeepSeek’s model is designed to use significantly less computational power while still delivering high-quality results, especially in complex reasoning tasks such as mathematics and coding. The company claims it took just two months and less than $6 million (£4.8 million) to develop R1, which is considerably less than the billions invested by Silicon Valley giants in their AI projects.

In a significant achievement, DeepSeek’s AI Assistant has also surpassed OpenAI’s ChatGPT to become the top free app on the US App Store. This highlights the growing influence of the Chinese startup. Despite facing challenges with access to restricted computer chips, DeepSeek’s rapid growth has attracted the attention of US tech companies that have invested heavily in AI infrastructure.

Why did US tech stocks fall?

The announcement of DeepSeek’s R1 model triggered a sell-off in US tech stocks, hundreds of billions of dollars were lost in big tech stocks after news about DeepSeek’s chatbot performance spread over the weekend. This was particularly important because US tech companies had recently committed to investing huge amounts in AI.

On Monday, NVIDIA dropped 17%. This decline wiped out nearly $600 billion from its market value. Investors reacted strongly to the news, fearing that DeepSeek’s advancements could disrupt the lucrative AI supply chain that has been pivotal for Silicon Valley’s growth. As per AP, venture capitalist Marc Andreessen described this moment as ‘AI’s Sputnik moment,’ indicating a significant turning point in the industry. Almost every major index felt the pangs as the S&P 500 lost 1.7%. Even the giants – Microsoft and Meta Platforms faced major loss. The reaction was starkly ironic as the US tech companies had just engaged investments of billions in AI recently.

Affordable AI solutions?

The major factor setting DeepSeek apart from other players is that it uses open-source technology. This is in stark contrast to private models developed by companies such as OpenAI, Google, and Meta. With its AI models being offered at a lower cost to developers, DeepSeek is opening up AI availability and providing an alternative that’s cheaper than those from larger companies. On the other hand, according to Business Standard, Meta and Microsoft have increased spending on AI hugely, with Meta planning to spend up to $65 billion on AI infrastructure by 2025. DeepSeek’s affordable and open-source model could challenge the financial strategies of established companies that have been at the forefront of the AI field for a long time.

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