Does the future of AI belong to China?

US tech stocks tumbled this week following the launch of a low-cost Chinese artificial intelligence (AI) application, which threatened Big Tech’s market dominance.

The AI investment boom of the past two years has, until now, been largely driven by a handful of US tech stocks, led by the so-called Magnificent Seven. 

The arrival of Chinese start-up DeepSeek’s new AI model on Monday quickly threatened the established order and had an almost immediate impact on US markets. Upon launch, it claimed the number one spot in the Apple app store, outperforming Microsoft-backed OpenAI’s ChatGPT and Alphabet’s Gemini.

“With corporate optimism running at record levels, the news about the launch of the DeepSeek app sent prices for some of the biggest tech stocks tumbling,” says Louise Dudley, Portfolio Manager at Federated Hermes.

The launch of the new open-source model triggered a 3.1% drop in the tech-heavy Nasdaq index, while the S&P 500 was down 1.5% in trading on Monday. The Mag 7 (Apple, Microsoft, Alphabet, Meta, Amazon, Tesla and Nvidia) fell 2.7% in response to growing awareness of the model and the potential implications it has for the AI industry.

Sputnik moment 

DeepSeek claims to have trained the model on a budget of just $5.6 million, using lower-end Nvidia chips because more powerful chips, such as those used to train Meta’s Llama-3 model, are unavailable in China due to US export controls.

“This would suggest significant cost and efficiency breakthroughs that have the potential to disrupt the AI value chain through greater competition. The DeepSeek model has similar performance levels to AI research organisation OpenAI’s reasoning model with less than 5% of the inference cost,” explains Tej Sthankiya Senior Equity Analyst at Federated Hermes. 

DeepSeek’s announcement has been dubbed a “Sputnik moment” and a “wake-up call” for US AI superpowers, by venture capitalist Marc Andreessen and President Donald Trump, respectively. 

“If AI deployment can be done at a lower price, it reduces barriers to entry and adoption, and presents a threat to mega-cap dominance. The US tech stock tumble also highlights the risk of market reliance on mega-caps,” says Sthankiya. 

Sthankiya adds that long-term demand for Nvidia’s premium chips is unlikely to be affected by low-cost AI: “Lower AI inference costs mean more consumer and enterprise applications across end markets become cost-effective, and thus long-term demand likely remains unaffected. There’s even the case to be made that there will be more demand for chips because now it is economical to have many more models trained and used in different ways. A recent analogy for this is the cloud computing platform shift.”