What is China’s DeepSeek - and why is it freaking out Wall Street?

Chinese AI start-up DeepSeek has rocked the US stock market after demonstrating breakthrough artificial intelligence models that offer comparable performance to the world’s best chatbots at seemingly a fraction of the cost.

DeepSeek is only a year old but it’s quickly become the No.1 app in the Australian app store, and its emergence may offer a counterpoint to the widespread belief that the future of AI will require ever-increasing amounts of power and energy to develop.

Global technology stocks tumbled overnight as hype around DeepSeek’s innovation snowballed and investors began to digest the implications for its US-based rivals and their hardware suppliers.

The app distinguishes itself from other chatbots such as OpenAI’s ChatGPT by articulating its reasoning before delivering a response.Credit: Bloomberg

Shares in AI giant Nvidia tanked 17 per cent and the company lost a record $US589 billion ($936 billion) in market capitalisation; the net worth of its CEO and largest shareholder Jensen Huang fell by some $US20 billion in mere hours. Shares in Oracle also plummeted.

What is DeepSeek?

DeepSeek was founded in 2023 by Liang Wenfeng, chief of AI-driven quant hedge fund High-Flyer. The company develops open-source AI models, meaning the developer community at large can inspect and improve the software. Its mobile app surged to the top of the iPhone download charts in the US after its release in early January.

The app distinguishes itself from other chatbots such as OpenAI’s ChatGPT by articulating its reasoning before delivering a response to a prompt. The company claims its R1 release offers performance on par with OpenAI’s latest and has granted the licence for individuals interested in developing chatbots using the technology to build on it.

How does DeepSeek R1 compare to OpenAI or Meta AI?

Though not fully detailed by the company, the cost of training and developing DeepSeek’s models appears to be only a fraction of what’s required for OpenAI or Meta’s best products. The much better efficiency of the model puts into question the need for vast expenditures of capital to acquire the latest and most powerful AI accelerators from the likes of Nvidia.

That also amplifies attention on US export curbs of such advanced semiconductors to China – which were intended to prevent a breakthrough of the sort that DeepSeek appears to represent.

DeepSeek says R1 is near or better than rival models in several leading benchmarks such as AIME 2024 for mathematical tasks, MMLU for general knowledge and AlpacaEval 2.0 for question-and-answer performance. It also ranks among the top performers on a UC Berkeley-affiliated leaderboard called Chatbot Arena.

What’s raising alarm in the US?

Washington has banned the export of high-end technologies such as GPU semiconductors to China in a bid to stall the country’s advances in AI – the key frontier in the US-China contest for tech supremacy. But DeepSeek’s progress suggests Chinese AI engineers have worked around the restrictions, focusing on greater efficiency with limited resources.

While it remains unclear how much advanced AI-training hardware DeepSeek has had access to, the company’s demonstrated enough to suggest the trade restrictions were not entirely effective in stymieing China’s progress.

Tech stocks plunged on Wall Street on Monday, led by AI darling Nvidia. Credit: Bloomberg

When did DeepSeek spark global interest?

The AI developer has been closely watched since the release of its earliest model in 2023. In November, it gave the world a glimpse of its DeepSeek R1 reasoning model, designed to mimic human thinking. That model underpins its mobile chatbot app, which together with the web interface in January rocketed to global renown as a much cheaper OpenAI alternative. Investor Marc Andreessen called it “AI’s Sputnik moment”.

The DeepSeek mobile app was downloaded 1.6 million times by January 25 and ranked No.1 in iPhone app stores in Australia, Canada, China, Singapore, the US and the UK, according to data from market tracker App Figures.

Who is DeepSeek’s founder?

Born in Guangdong in 1985, Liang received bachelor’s and master’s degrees in electronic and information engineering from Zhejiang University. He founded DeepSeek with 10 million yuan ($2.2 million) in registered capital, according to company database Tianyancha.

The bottleneck for further advances is not more fundraising, Liang said in an interview with Chinese outlet 36Kr, but US restrictions on access to the best chips. Most of his top researchers were fresh graduates from top Chinese universities, he said, stressing the need for China to develop its own domestic ecosystem akin to the one built around Nvidia and its AI chips.

“More investment does not necessarily lead to more innovation. Otherwise, large companies would take over all innovation,” Liang said.

Where does DeepSeek stand in China’s AI landscape?

China’s technology leaders, from Alibaba and Baidu to Tencent, have poured significant money and resources into the race to acquire hardware and customers for their AI ventures.

Venture capitalist Marc Andreessen called DeepSeek’s latest release AI’s “Sputnik moment”. Credit: Bloomberg

Alongside Kai-Fu Lee’s 01.AI start-up, DeepSeek stands out with its open-source approach – designed to recruit the largest number of users quickly before developing monetisation strategies atop that large audience.

Because DeepSeek’s models are more affordable, it’s already played a role in helping drive down costs for AI developers in China, where the bigger players have engaged in a price war that’s seen successive waves of price cuts over the past year and a half.

What does this mean for Donald Trump’s AI push?

One of Donald Trump’s first announcements since retaking the US presidency was Stargate, a new ambitious joint venture designed to unlock up to $US500 billion in private sector investment to fund AI infrastructure, create more than 100,000 jobs, and help the US stay ahead of the likes of China.

DeepSeek’s rapid ascent will add a deeper sense of urgency to what was already a fast-moving collaborative effort.

“What we want to do is we want to keep it [AI] in this country. China is a competitor; others are competitors. We want to be in this country, and we’re making it available,” Trump said at a press conference at the White House.

“I’m gonna help a lot through emergency declarations because we have an emergency; we have to get this stuff built. So they have to produce a lot of electricity. And we’ll make it possible for them to get this production done easily, at their own plants, if they want.”

Why did DeepSeek send Nvidia’s share price tumbling?

DeepSeek’s success may push OpenAI and other US providers to lower pricing to maintain their established lead. It also calls into question the vast spending by companies such as Meta and Microsoft – each of which has committed to capex of $US65 billion ($103 billion) or more this year, largely on AI infrastructure – if more efficient models can compete with a much smaller outlay.

That roiled global stock markets as investors sold off companies such as Nvidia and ASML that have benefited from booming demand for AI services. Shares in Chinese names linked to DeepSeek, such as Iflytek, climbed.

Developers around the world are already experimenting with DeepSeek’s software and looking to build tools with it. That could quicken the adoption of advanced AI reasoning models — while also potentially touching off additional concerns about the need for guardrails around their use. DeepSeek’s advances may hasten regulation to control how AI is developed.

What are DeepSeek’s shortcomings?

Like all other Chinese AI models, DeepSeek self-censors on topics deemed sensitive in China. It deflects queries about the 1989 Tiananmen Square protests or geopolitically fraught questions such as the possibility of China invading Taiwan. In tests, the DeepSeek bot is capable of giving detailed responses about political figures such as Indian Prime Minister Narendra Modi but declines to do so about Chinese President Xi Jinping.

DeepSeek’s cloud infrastructure is likely to be tested by its sudden popularity. The company briefly experienced a major outage on January 27 and will have to manage even more traffic as new and returning users pour more queries into its chatbot.

It said it was hit by a cyberattack on Monday that disrupted users’ ability to register on the site. The company, whose artificial intelligence chatbot has sent the tech world into a frenzy, said that it had suffered “large-scale malicious attacks” on its services. Registered users could log in normally, DeepSeek said.

with Bloomberg

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