China's DeepSeek deals early blow to Trump’s AI dream

A quick analysis suggests that it matches the capabilities of the first-generation ChatGPT while outperforming chatbots from Google and Anthropic. It is also accessible to everyone as an open-source chatbot, a stark contrast to the restricted models provided by American companies. DeepSeek created its industry-changing tool by managing to leverage older Nvidia H800 chips from 2021.

Stockmarket drubbing

The huge hit to Nvidia's stock valuation has led some investors to ask whether we are in another tech bubble similar to the one that burst in 2000. This would be bad news for the tech firms but good news for consumers. It is also good news for China, whose dominance over rare earth metals and a deep reservoir of top-tier technical talent is likely to mean there are more DeepSeeks to emerge.

The world's 500 wealthiest tech investors lost a numbing $108bn in Wall Street's Monday session, led by Jensen Huang, co-founder of Nvidia. According to the Bloomberg Billionaires Index, DeepSeek's arrival sent major indices plummeting. The S&P 500 fell by 1.5%, the Nasdaq recorded its worst daily decline this year, and the Philadelphia Semiconductor Index plunged 9.2%, its steepest single-day drop since March 2020.

DeepSeek hit shares around the world. Dutch semiconductor company ASML lost value, as did Germany's Siemens Energy and Japanese chipmaker Kisco (2.9%). Advantest, which supplies chip-testing equipment to Nvidia, saw an 11% drop. 

Tokyo Electron, which manufactures chip-making equipment, fell by almost 6%, while China's Semiconductor Manufacturing International Corporation (SMIC) sank by 2.5%. Furukawa Electric, which makes wiring cables for data centres, fell by more than 9%, making it the biggest loser on the benchmark Nikkei 225 Index.

Some felt the good news. In Hong Kong, the Hang Seng Index rose by 1.1%, driven by Chinese technology firms listed in the region, including Tencent and Alibaba. Shares of the Chinese AI company iFlytek also gained 2.4%.

Quickly recalibrating

It is evident that US restrictions on exporting advanced technology to China have failed to block Beijing's AI ambitions. This will not have gone unnoticed by Trump, whose trade war with China kicked off this week with tariffs and counter-tariffs. 

In today's America, most developments seem to be accompanied by conspiracies, and sure enough, questions have been asked about DeepSeek's costs and whether there are forces backing or enabling it to contradict American tech bravado. All eyes are now on Liang Wenfeng, 40, a software engineering graduate and co-founder of the hedge fund High-Flyer, who established DeepSeek in 2023 in Hangzhou, south-east China. 

The company's core team comprises young innovators from China's top universities. On 20 January 2025, around the launch of DeepSeek R-1, Liang attended a closed-door seminar with Chinese Premier Li Qiang, seen as Beijing's endorsement of DeepSeek's role in countering US tech restrictions.

Analysts at Bernstein Research have expressed doubts about the claim of its $6-12mn development cost, suggesting that the actual cost may be significantly higher. Similarly, tech entrepreneur Elon Musk has also questioned both this figure and the application's capabilities.

Washington's ban on the sale of advanced chip technologies used in AI development to China has prompted Chinese developers to collaborate among themselves and experiment with new approaches that require much less computing power. While AI companies typically require supercomputers with up to 16,000 chips, DeepSeek's engineers say they relied on just 2,000.

A wake up call

Although Trump heralded DeepSeek as being good for competition, in truth, it rains on his parade, having used his inauguration speech to extol the virtues of American industry. Yet this is a battle in the war. It is highly likely that AI will contribute to substantial productivity gains and bolster economic growth across all economies.

What matters to Trump (and, to a lesser extent, his voters) is where this leaves the US in the tech race against China. Washington has already banned the popular Chinese app TikTok from being used in the United States. Trump, ever the negotiator, has most recently suggested it may be jointly owned by Americans and has since noted that Microsoft is in negotiations to acquire it. 

Between Microsoft and Meta, there are planned AI investments of around $140bn, but DeepSeek is testing the rationale, meaning that investors will be paying close attention to corporate earnings from the so-called 'Magnificent Seven' US tech stocks in the coming days, as the aftershocks across the global AI landscape continue to be felt.

At a Republican Party conference in Miami, Trump said DeepSeek was a "wake-up call" for US tech. "We need to be laser-focused on competing to win," he said. "It's good that companies in China have come up with a cheaper, faster method of AI. That's good because you don't have to spend as much money. I view that as a positive, as an asset." Whether it is a positive for US tech, time will tell.