In the rapidly evolving field of artificial intelligence (AI), a new player has emerged, shaking up the industry and unsettling the balance of power in global tech. DeepSeek, a Chinese AI startup, is generating considerable buzz for its cost-effective innovation and potential to rival leading Western companies like OpenAI and Anthropic. It has also been the leading cause behind Nvidia's monumental market cap plunge on January 27 - with the leading AI chip company losing 17% of its market share, equating to $589 billion in market cap drop, making it the largest single-day loss in US stock market history.

However, despite being an overnight success, DeepSeek's rise is not without controversy, raising questions about the ethics and economic repercussions of its approach. Let's take a look at what this Chinese AI startup is and what the hype around it is all about.

What is DeepSeek?

Founded in 2023, DeepSeek is a startup from Hangzhou founded by an engineering graduate Liang Wenfeng. After the launch of OpenAI's ChatGPT, many Chinese firms tried to create their own AI powered chatbots but ultimately failed to meet user expectations. However, the appreciation around DeepSeek is different. The company recently received wide recognition in the US tech industry for creating an advanced AI model with the 'DeepSeek - AI assistant' app reaching the top charts in US Apple app store and Google Play store.

DeepSeek has positioned itself as a formidable competitor in the AI race, particularly with the recent launch of its R1 and V3 models. According to a recent report by The Verge, the company claims to have developed its open source V3 LLM model with a budget of less than $6 million and just 2,000 Nvidia chips—a fraction of the resources utilised by western counterparts like OpenAI which reportedly used over 16,000 chips. OpenAI CEO Sam Altman claimed that the development for GPT-4 cost over $100 million.

According to a post on DeepSeek's official WeChat account, with the launch of its R1 model, DeepSeek is 20 to 50 times cheaper to use than OpenAI o1 model, depending on the task.

A threat to western dominance

DeepSeek's rapid progress has sparked alarm among Western tech giants and investors alike. Its ability to achieve results with limited resources challenges the prevailing notion that success in AI development is solely a function of capital and computational power. This has prompted a reevaluation of investment strategies across the industry, with other tech giants scrambling to adjust.

Nvidia, the chip manufacturer, had its shares plunging by more than 13 percent. Moreover, Dutch chipmaker ASML also fell more than 10 percent, AI investor SoftBank fell more than 8%, while Tokyo Electron slipped 4.9% according to a recent report by Business Insider.

The pan-European Stoxx 600 declined on 27 January, with technology stocks experiencing a sharp drop of 4.5%. Notably, Germany's Siemens Energy—an AI infrastructure hardware provider—plunged nearly 20%, and France's digital automation firm Schneider Electric saw a 9% decrease. These losses mirrored declines in Asian markets, where Japanese chipmakers Disco and Advantest, a supplier to Nvidia, fell by 1.8% and 8.6%, respectively. Meanwhile, in the US, Nasdaq 100 futures dropped 2.6%, and S&P 500 futures slid 1.4% according to a recent report by The Guardian.

While the technology behind DeepSeek's models is being celebrated, its success has geopolitical implications. It represents not only a technological shift but also a broader challenge to western dominance in AI research and development. The prospect of China gaining a significant foothold in this domain has further fuelled tensions in the ongoing tech rivalry between the US and China.

In a recent update, DeepSeek announced on 27 January that it would temporarily restrict new registrations due to "large-scale malicious attacks" on its software.

DeepSeek's rise also coincides with the US imposing restrictions on the sale of advanced chip technology essential for powering AI to China. To keep progressing without a steady flow of imported chips, Chinese AI developers have been sharing their research and testing alternative approaches. This collaboration has led to the creation of AI models that consume significantly less computing power. As a result, these models are now far more affordable than previously anticipated, potentially disrupting the entire industry.

The rise of DeepSeek marks a pivotal moment in the AI industry. Its disruptive approach has already reshaped the narrative around AI development, proving that innovation is not solely the domain of well-funded tech behemoths. As the company continues to expand, the world will be watching closely to see how it navigates the complex intersection of technology, ethics, and geopolitics.