Why Chinese AI company DeepSeek is spooking investors on U.S. tech
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Major U.S. tech stocks, including Nvidia, Oracle and Broadcom, plummeted Monday after Chinese artificial intelligence startup DeepSeek unveiled a system that it says can compete against OpenAI’s ChatGPT model at a much lower cost.
The stock of chipmakers Nvidia and Broadcom plunged about 17%, while the stock price for Oracle declined 14%. The tech sell-off brought the broader stock market down with it. The Standard & Poor’s 500 index dropped 1.5% and the tech-focused Nasdaq 100 sank 3%.
“Companies are worried that DeepSeek will crush the profit capabilities of U.S. AI giants,” said Ray Wang, chief executive of Constellation Research, a research and advisory firm in Silicon Valley.
Despite its market-moving clout, DeepSeek is hardly a household name in the U.S. Here’s a primer.
What is DeepSeek and who is behind it?
DeepSeek is a Chinese startup that develops open-source AI models, similar to ChatGPT, which helped bring generative artificial intelligence to the mainstream.
Its mobile app surged to the top of Apple’s download charts in the U.S. after its release in early January. The DeepSeek mobile app was downloaded 1.6 million times by Saturday and ranked No. 1 in iPhone app stores in Australia, Canada, China, Singapore, the U.S. and the United Kingdom, according to data from market tracker App Figures.
The app distinguishes itself from other chatbots such as ChatGPT by articulating its reasoning before delivering a response to a prompt. The company claims its latest model, DeepSeek-R1, offers performance on par with OpenAI’s latest system, and lets individuals interested in developing chatbots on the technology build on its software.
DeepSeek caught the attention of Silicon Valley by saying it could compete with OpenAI at lower costs. DeepSeek said it needed only roughly 2,000 specialized computer chips from Nvidia to train its chatbots, according to the New York Times. U.S. companies, by comparison, use supercomputers with as many as 16,000 chips and sometimes more, the newspaper reported.
Hedge fund manager Liang Wenfeng founded DeepSeek in 2023. Liang co-founded the hedge fund High-Flyer with college friends in 2015 shortly after graduating, according to the Wall Street Journal.
President Trump unveiled the AI initiative on Tuesday alongside the executives of OpenAI, Oracle and Softbank.
Why did U.S. tech stocks take such a hit?
On Monday, Nvidia lost roughly $600 billion in market value, the biggest single day drop for a company in U.S. history, according to CNBC.
Investors worry that if DeepSeek can build a model that requires fewer chips, that would reduce the demand for the types of semiconductors Nvidia and other firms supply. It also could reduce the competitive edge of U.S. tech giants that have invested billions in AI technology.
Washington has banned the export of high-end technologies such as graphics processing unit semiconductors (or GPUs, which are crucial for AI technology) to China, in a bid to stall the country’s advances. But DeepSeek’s progress suggests Chinese AI engineers have worked their way around the restrictions, focusing on greater efficiency with limited resources.
“The DeepSeek model is ... very impressive, especially since DeepSeek had to navigate strict chip restrictions from the U.S.,” wrote Wedbush Securities analyst Daniel Ives in a Monday research note. “It remains to be seen if DeepSeek found a way to work around these chip restrictions rules and what chips they ultimately used, as there will be many skeptics around this issue given the information is coming from China.”
OpenAI on Monday said it will release its controversial text-to-video tool to the public with different subscription tiers.
How much of a threat does China pose to U.S. dominance in the AI market?
The U.S. is still a major leader in the artificial intelligence sector, capturing 68% of the global venture capital funding in AI companies in the third quarter of last year, according to CB Insights. The Silicon Valley geographic area took up roughly half that amount.
Some of the leaders in the space including San Francisco-based startups such as ChatGPT maker OpenAI and Anthropic, as well as blue chip tech giants including Google’s parent company, Alphabet, and Meta. Alphabet’s stock fell 4% on Monday, while Meta’s rose slightly.
Some analysts were skeptical about the veracity of DeepSeek and what the model can actually accomplish. After all, other companies probably would try to match DeepSeek’s savings.
“What DeepSeek showed is that there are lots of efficiency gains that every AI company can achieve,” Wang said. “However, we haven’t verified if this is true or not and what problems are being solved.”
He said China is a “strong competitor,” but “the psychological operations warfare as we saw today is more powerful than what they really can deliver.”
Trump’s views on artificial intelligence, cryptocurrency, electric vehicles and other issues could reshape the tech industry.
How will the Trump administration respond?
Trump has emphasized the importance of America being a leader in AI technology and innovation.
“The release of DeepSeek, AI from a Chinese company, should be a wake up call for our industries that we need to be laser focused on competing to win,” Trump said at a House Republican conference in Florida on Monday.
After Trump started his second term as president, he rescinded an executive order signed by President Biden in 2023 that required AI companies to share their safety test results with the U.S. government.
Although some people in the tech industry applauded Biden’s executive order as a way of establishing guardrails and guidelines for AI companies, others expressed concern that it could stifle innovation. Trump while a candidate warned that Biden’s policies, including that executive order, weren’t working.
On Monday, David Sacks, Trump’s White House AI and crypto czar, said DeepSeek has shown the AI race will be very competitive.
“President Trump was right to rescind the Biden EO, which hamstrung American AI companies without asking whether China would do the same. (Obviously not.),” Sacks wrote Monday on social media platform X. “I’m confident in the U.S. but we can’t be complacent.”
Trump last week announced that OpenAI, Oracle and Softbank are committing $100 billion to an initiative called the Stargate project, with plans to invest $500 billion in AI infrastructure over the next four years. Trump said it would help create more than 100,000 U.S. jobs.
Bloomberg contributed to this report.
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