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The artificial intelligence market faced turbulence this week as China's DeepSeek emerged as a formidable contender, challenging industry giants like Nvidia and OpenAI. The startup's advancements in AI have left Wall Street questioning the future of AI infrastructure investments and the demand for high-end chips. This development comes amid heightened global competition and export restrictions targeting China's tech industry.
DeepSeek's breakthrough began in December 2024 when it unveiled a large language model (LLM) that rivaled systems by OpenAI and Google. In January 2025, it launched another model reportedly developed at a fraction of the cost—just $5.6 million—raising eyebrows across the tech world. The use of open-source technology and less advanced Nvidia H800 chips has fueled debates about whether cutting-edge AI can thrive without the robust computing power traditionally considered essential.
Market reactions were swift. Nasdaq futures fell 2.6% on Sunday night, while Nvidia's stock dropped 7% in European trading. Other tech heavyweights like Tesla and Meta also experienced declines of over 2%. "DeepSeek is providing a reason for investors to unwind their positions in AI stocks," said Wong Kok Hoong, head of equity sales at Maybank. The slump extended to chip-related firms like Tokyo Electron and SoftBank, both of which recorded significant losses.
DeepSeek's low-cost approach has raised concerns about the capital expenditure strategies of U.S. tech firms. Companies like Google, Meta, and Microsoft have been pouring billions into AI infrastructure, with Microsoft alone investing heavily in OpenAI. Economist Ed Yardeni noted, "The soaring capital expenditure might outpace revenue growth, squeezing profit margins." This sentiment casts doubt on the profitability of U.S. tech giants in the face of cheaper alternatives like DeepSeek.
Despite concerns, analysts predict that DeepSeek's emergence could accelerate innovation among American firms. Raymond James analyst Srini Pajjuri remarked, "U.S. companies may double down on their advantage—access to Nvidia's GPUs—to maintain dominance." Nvidia, a key player in the AI sector, faces mounting pressure to deliver its next-generation Blackwell chips (H200) as demand for efficient AI hardware surges.
The geopolitical backdrop piles up another layer of complexity. U.S. export restrictions have limited access to high-performance chips in China, but DeepSeek's advancements suggest these measures may not be as effective as intended. Masahiro Ichikawa, a strategist at Sumitomo Mitsui, commented, "It's premature to assume U.S. technologies will remain globally unmatched."
In the AI market, implications of DeepSeek's success remain uncertain. While it disrupts existing norms, it also underscores the need for established players to innovate and adapt. Only time will tell if it's dominance will last or it's just a temporary market disruption.
