The tech world has been rocked by the emergence of DeepSeek -  a Chinese artificial intelligence company whose low-cost high-performance AI assistant has caused a significant stir in global markets.

The sudden success of DeepSeek's AI-powered app and its shocking cost efficiency have sent shockwaves through Wall Street, triggering one of the largest market capitalisation losses in history.

As DeepSeek’s rise poses a new challenge to the dominance of U.S.-based AI companies, particularly Nvidia, the market is grappling with the possibility that high costs and cutting-edge chips may not be the only route to success in AI. Here’s a deep dive into what DeepSeek is, how it operates, and the consequences it has had on the global tech market.

What is DeepSeek?

Founded in Hangzhou, China, DeepSeek is a startup that entered the AI scene in mid-2023. It made a notable entrance in January 2024 when its AI assistant, comparable to industry giants like ChatGPT, was released in the U.S. Despite being a relatively new player in the market, DeepSeek's chatbot quickly gained traction, becoming the most downloaded free app on Apple's App Store. It has gained praise for offering high-quality AI performance at a fraction of the cost compared to its American counterparts, raising eyebrows in Silicon Valley.

DeepSeek’s AI assistant is designed to enhance user experience by answering questions and providing helpful responses, with one reviewer noting that the chatbot adds more personality to the writing. However, DeepSeek’s success isn’t just about the app’s features; it’s the astonishingly low cost of development and operational efficiency that has left market observers in shock. The company reportedly spent only $6 million to develop the app, a tiny fraction of the billions of dollars invested by U.S. companies like OpenAI and Google into their own AI solutions.

Visionary behind DeepSeek: Liang Wenfeng

Liang Wenfeng, DeepSeek’s founder, is a 40-year-old entrepreneur and engineer with an interesting background. He leveraged funds from his hedge fund to launch DeepSeek, and according to reports, he amassed a significant number of Nvidia A100 chips before their export to China was banned. This move has been cited as the reason for the company's ability to launch its AI assistant by pairing high-performance Nvidia chips with cheaper, more accessible chips still available for import. This clever strategy allowed DeepSeek to launch its AI solution with significantly lower production costs than competitors.

Wenfeng’s presence in meetings with top Chinese officials, including a recent encounter with Premier Li Qiang, indicates the company’s deep connections within the Chinese government, further adding to its clout.

The AI App That Disrupted the Market

DeepSeek’s app was launched in the U.S. in early January 2024 and quickly became a hit. Users across the country flocked to the free app, which also garnered attention for being highly functional without any major political controversies. Although the app is designed to provide helpful, harmless responses, it has avoided certain sensitive topics, like the Tiananmen Square incident in 1989, which it refuses to answer.

Despite these restrictions, DeepSeek’s success points to a new trend in AI. The fact that a startup could produce such a high-quality AI model for a fraction of the cost of its U.S. competitors has undermined the prevailing assumption that cutting-edge AI requires billion-dollar budgets and the most powerful chips.

Why Did DeepSeek’s rise cause tech stocks to drop?

The rise of DeepSeek and its ability to deliver a sophisticated AI assistant at a fraction of the cost compared to U.S.-based companies created an immediate ripple effect across the stock market. On January 27, 2024, Nvidia, a major player in the chip manufacturing industry and a leader in AI hardware, saw its stock price plummet by 17%.

This drop wiped off nearly $593 billion from Nvidia’s market value, marking the biggest single-day market capitalisation loss in history. The fall in Nvidia’s stock price alone contributed significantly to a broader sell-off in the tech sector, especially affecting semiconductor companies and AI-supporting firms.

Nvidia’s chips, such as the A100 and H100 models, are considered the gold standard for AI applications, and their high performance is a key reason for the company's leadership in the industry. However, the market’s reaction to DeepSeek’s low-cost, highly effective AI solutions raised doubts about the necessity of ultra-expensive hardware and vast research budgets. DeepSeek’s success has led investors to question whether U.S. companies, who have spent billions on developing their AI systems, can continue to justify such massive expenditures when cheaper, efficient alternatives are now available.

As a result, the markets experienced a broad sell-off, with Nvidia’s competitors and AI suppliers suffering significant losses. Companies like Broadcom, Advantest, and SoftBank saw their stock prices tumble by as much as 20% in some cases, contributing to a 3% drop in the Nasdaq. The fear is that DeepSeek’s AI breakthrough signals a shift in the competitive landscape, where high-cost hardware and large budgets may no longer be required to create top-tier AI models.

The rise of DeepSeek has forced the market to confront a significant question: Is the era of massive investments in AI infrastructure coming to an end? Industry experts are calling this a crucial moment in the reevaluation of AI development models. JP Morgan’s Josh Meyers pointed out that DeepSeek’s models, which can run on affordable chips and devices like iPhones, challenge the belief that expensive data centers and high-performance chips are essential for cutting-edge AI. This shift in thinking could drastically alter the future of the AI market, prompting a reevaluation of capital expenditures across the entire tech industry.

As a result, the volatility in the markets is expected to continue as investors digest the implications of DeepSeek’s rise. There is also growing concern that the dominance of American tech giants in the AI sector could be threatened by low-cost, highly effective solutions coming out of China, further complicating the geopolitical and economic landscape.

DeepSeek’s rapid ascent and the market shockwaves it has caused serve as a reminder of how quickly the tech industry can change. With its low-cost AI assistant, DeepSeek has not only disrupted the market but also posed a serious challenge to the long-standing dominance of U.S.-based AI companies. As the industry adapts to this new reality, it remains to be seen whether U.S. firms will be able to justify their massive investments in AI hardware and research or if cheaper alternatives will redefine the future of the AI market.