A Chinese AI startup, DeepSeek, has caused a stir in the global tech landscape with its impressive AI model, 'r1', which outperformed OpenAI's latest model at a fraction of the cost. This development has sparked concerns about the sustainability of heavy investments made by American tech giants in AI research and infrastructure, leading to a sharp decline in Japan's chip-related stocks and potential market volatility.
Japan's chip-related stocks experienced a sharp decline on Monday as concerns surrounding a potential challenge to America's global dominance in artificial intelligence emerged. The catalyst for this market reaction was the impressive performance of DeepSeek, a Chinese AI startup, which has raised questions about the sustainability of large investments made by major tech companies in AI models and data centers.
DeepSeek achieved significant breakthroughs by developing a reasoning model called 'r1' that outperformed OpenAI's latest 'o1' in several independent tests, all at a remarkably low cost of under $6 million. This rapid progress has triggered anxieties within the industry, particularly among American tech giants who have been pouring billions into AI research and infrastructure.Andrew Jackson, head of equity strategy at ORTUS Advisors, commented on the situation, stating, 'Japan's chip stocks are selling off sharply on the DeepSeek concerns and we are seeing a rotation out of growth names into value.' He also noted a potential impact on the U.S. stock market, suggesting, 'Judging from the move in Nasdaq futures we may be in for a rough ride tonight in the U.S. also.' Junrong Yeap, a market strategist at IG, echoed these sentiments, emphasizing that while DeepSeek's long-term viability remains uncertain, the immediate concern stems from the potential threat to the pricing power of U.S. tech giants and the need to re-evaluate their massive AI expenditures. He stated, 'While it remains to be seen if DeepSeek will prove to be a viable, cheaper alternative in the long term, initial worries are centered on whether U.S. tech giants' pricing power are being threatened and if their massive AI spending need re-evaluation.'Chamath Palihapitiya, a prominent venture capitalist and CEO of Social Capital, believes this development will trigger volatility in the stock market as capital markets attempt to reassess the valuations of the 'Magnificent 7' companies, the dominant seven U.S. tech giants. Palihapitiya stated, 'With a model this cheap, many new products and experiences can now emerge trying to win the hearts and minds of the global populace,' highlighting the potential for disruptive innovation fueled by DeepSeek's cost-effective AI solutions. He added, 'capital markets will seek to re-price the values of the 'Magnificent 7' companies.
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