Chinese firm DeepSeek's artificial intelligence chatbot on Monday overtook rival ChatGPT to become the top-rated free application available on Apple's App Store in the United States, stunning industry insiders and analysts with its ability to match its American competitors.
Powered by the DeepSeek-V3 model, which its creators say "tops the leaderboard among open-source models and rivals the most advanced closed-source models globally," the AI application has surged in popularity among U.S. users since it was released on Jan. 10, according to app data research firm Sensor Tower.
DeepSeek has rolled out a free assistant it says uses lower-cost chips and less data, seemingly challenging a widespread bet in financial markets that AI will drive demand along a supply chain from chipmakers to data centers.
The milestone highlights how DeepSeek has left a deep impression on Silicon Valley, upending widely held views about U.S. primacy in AI and the effectiveness of Washington's export controls targeting China's advanced chip and AI capabilities.
AI models from ChatGPT to DeepSeek require advanced chips to power their training. The Biden administration has since 2021 widened the scope of bans designed to stop these chips from being exported to China and used to train Chinese firms' AI models.
However, DeepSeek researchers wrote in a paper last month that the DeepSeek-V3 used Nvidia's H800 chips for training, spending less than $6 million.
H800 chips are not top-of-the-line. Initially developed as a reduced-capability product to get around restrictions on sales to China, they were subsequently banned by U.S. sanctions.
Although this detail has since been disputed, the claim that the chips used were less powerful than the most advanced Nvidia products Washington has sought to keep out of China, as well as the relatively cheap training costs, has prompted U.S. tech executives to question the effectiveness of tech export controls.
Little is known about the company behind DeepSeek, a small Hangzhou-based startup founded in 2023, when search engine giant Baidu released the first Chinese AI large-language model.
Since then, dozens of Chinese tech companies, large and small, have released their own AI models, but DeepSeek is the first to be praised by the U.S. tech industry as matching or even surpassing the performance of cutting-edge U.S. models.
Meanwhile, Nasdaq futures slumped, and technology shares slid in Japan on Monday as the surging popularity of DeepSeek wobbled investors' faith in the profitability of AI and the sector's voracious demand for high-tech chips.
Nasdaq 100 futures were down 2.6% and S&P 500 futures slipped 1.4% by the European morning, and shares in Nvidia supplier Advantest fell 8.5% in Tokyo.
Frankfurt-listed shares of Nvidia slipped about 7%, while those of Tesla, Amazon and Meta fell more than 2% in early European trading.
"It's a case of a crowded trade, and now DeepSeek is giving a reason for investors and traders to unwind," said Wong Kok Hoong, head of equity sales trading at Maybank.
AI-focused startup investor SoftBank Group slid more than 8%, on course for its biggest one-day fall since Sept. 30. Last week, it announced a $19 billion commitment to fund Stargate, a data center joint venture with OpenAI.
Chipmaking equipment giant Tokyo Electron fell 5%.
Tech-heavy markets in Taiwan and South Korea were closed.
European tech stocks, especially Dutch computer chip equipment maker ASML, which counts Taiwan's TSMC, Intel and Samsung as its customers, will likely face pressure at the open.
Shares of Nvidia, the poster child of AI, have risen 196% since the start of 2024, outperforming the 35% gain in the Nasdaq.
Besides chips, data centers and related companies also took a hit on Monday, with Malaysia's utility conglomerate YTL Power falling 7% in Kuala Lumpur to its lowest in two months.
"The market is questioning the capex spend of the major tech companies," said Nick Ferres, chief investment officer at Vantage Point Asset Management in Singapore, noting that positioning had become crowded.
To be sure, much remains unknown about the details of DeepSeek's development and the hardware it uses.
"The idea that the most cutting-edge technologies in America, like Nvida and ChatGPT, are the most superior globally, there's concern that this perspective might start to change," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management. "I think it might be a bit premature."
Markets reaction in China was also mixed, with a CSI300 index of AI shares down 2.2% but big data stocks up 4%.
