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In technology markets, disruption can happen anytime and emerge from any corner. When it does happen, even the well-entrenched market leaders can potentially face existential threat overnight. American technology giants are now realising this the hard way. Chinese startup, DeepSeek, is creating waves in the Artificial Intelligence (AI) sector with its cost-effective AI models set to challenge the US tech dominance. In a matter of few days, this little-known startup has rattled the big players, so much so that the stocks of the American tech giants have started tumbling. There are fears that the days of American domination in the AI space may well be over. 

 

AI’s ‘Sputnik Moment’

 

DeepSeek's AI Assistant, developed at a fraction of the cost of its rivals and using less computing power, is threatening to upset the technology world order. Backed by a hedge fund in China, DeepSeek’s opensource R1 model has massively disrupted the global market, sent shockwaves through Silicon Valley and has come to redefine the industry’s cost and efficiency models. Its open source AI assistant, launched last week, has already become the top free app on the Apple App Store, surpassing ChatGPT.

 

The development is aptly described by some experts as the “Sputnik moment’, referring to the launch of the Soviet satellite in 1957 that triggered the space race. While not many details are available in the public domain regarding the Chinese AI lab which has developed these chatbot models, it has seemingly leapfrogged the likes of OpenAI, Google, and Meta in the high-stakes AI arms race.

 

The lab’s recently unveiled open-source, reasoning model, DeepSeek R1, has been said to outperform the tech industry’s leading AI models, such as OpenAI’s o1, on key math and reasoning benchmarks. The impact on the global markets was almost instant. On Monday, US tech giant Nvidia lost over a sixth of its value, wiping out a record amount of market capitalisation in a single day amounting to $ 600 billion, after the surging popularity of the Chinese chatbot.

 

Billions versus Millions

 

The swashbuckling entry of the Chinese player has raised doubts about the reasoning behind some American tech companies' decision to pledge billions of dollars in AI investment.

 

While ChatGPT-maker OpenAI has been haemorrhaging money - spending $5 billion last year alone - DeepSeek's developers say it built this latest model for a mere $5.6 million. That is a tiny fraction of the cost that AI giants like OpenAI, Google, and Anthropic have relied on to develop their own models.

 

DeepSeek’s AI models have not only given Western AI giants a run for their money but also sparked fears that the US may now have to struggle to maintain its AI primacy in the face of a brewing tech cold war with China.

 

AI chip giant Nvidia and other tech firms connected to AI, including Microsoft and Google, saw their values take a sharp dip. DeepSeek's emergence comes as the US is restricting the sale of the advanced chip technology that powers AI to China.

 

Forced to continue their work without steady supplies of imported advanced chips, Chinese AI developers have experimented with new approaches to the technology. This has resulted in AI models that require far less computing power than before. It also means that they cost a lot less than previously thought possible, which has the potential to upend the industry.

 

The world’s top companies typically train their chatbots with supercomputers that use as many as 16,000 chips or more. DeepSeek’s engineers said they needed only about 2,000 Nvidia chips.

 

Faster than forest fires

 

Worries that the emergence of low-cost Chinese AI models would threaten the dominance of American AI leaders line Nvidia have led to a rout in tech stocks on Wall Street. The energy companies linked to powering AI data centres suffered significant losses in the stock market.

 

Founded in 2023 in Hangzhou, DeepSeek is a rising AI company known for creating advanced, cost-effective models that compete with the US tech firms. 

 

Its achievement highlights China's ability to innovate despite restrictions on the supply of high-power AI chips. This has sparked renewed investor interest in undervalued Chinese AI companies.

 

Eclipses the ‘Stargate’

 

The stormy entry of DeepSeek comes barely a week after the US President Donald Trump announced, with much fanfare and pomp, the launch of ‘Stargate’ project, a joint venture that promises up to $500 billion in private investment for AI infrastructure.

 

The thinking in American trade and political circles is that its abundant data centers and control over the highest-end chips gave it a commanding lead in AI, despite China's dominance in rare-earth metals and engineering talent.

 

Some have even seen it as a foregone conclusion that America would dominate the AI race, despite warnings from some top executives who said the country's advantages should not be taken for granted.

 

Boost to Beijing’s bargaining power

 

DeepSeek's success has already been noticed in China's top political circles. On January 20, the day DeepSeek-R1 was released to the public, founder Liang attended a closed-door symposium for businessmen and experts hosted by Chinese premier Li Qiang, according to state news agency Xinhua.

 

Liang's presence at the gathering is potentially a sign that DeepSeek's success could be important to Beijing's policy goal of overcoming Washington's export controls and achieving self-sufficiency in strategic industries like AI.

 

The US may still go on to command the sector, but there is a sense that DeepSeek has shaken some of that swagger.