Purported Chinese firm’s AI breakthrough rocks U.S. companies, stocks

A high-flying American stock powering the artificial intelligence revolution sustained a sharp blow on Wall Street on Monday amid the sudden popularity of Chinese AI firm DeepSeek, a potentially far cheaper rival.

Shares in AI pioneer Nvidia immediately dropped more than 13% during intraday trading after the market opened. Microsoft, which has invested heavily in AI, dipped before recovering, and investors in energy providers buoying the AI sector sold off stock. Nvidia eventually finished down the day nearly 17%, wiping out some $560 billion in market capitalization — a record decline in nominal terms for the U.S. stock market, according to Bloomberg News.

The tech-heavy Nasdaq stock exchange was down more than 3%, its biggest one-day loss in more than a month.

The sudden pullback was a response to DeepSeek’s release of its newest model last week. Company officials claimed the model was “on par” with the technological performance of American AI titan OpenAI. The Hangzhou-based technology startup published a paper last week on its DeepSeek-R1 model, claiming it demonstrated “powerful and intriguing reasoning behaviors” at a tiny fraction of the cost of U.S. rivals.

In a frenzy of investor interest, DeepSeek soared to the top of Apple’s App Store and ranked as the most downloaded free app, just ahead of OpenAI’s ChatGPT.

The gains spooked investors amid effusive praise from some in the technology sector for R1’s performance and debates about the validity of DeepSeek’s low budget. One analyst estimated that the company had spent just $6 million developing its AI app, compared with what a recent Goldman Sachs report said was a projected $1 trillion investment by the American AI industry in the coming years.

The Chinese firm’s claims generated enthusiasm and skepticism.

“DeepSeek R1 is AI’s Sputnik moment,” venture capitalist Marc Andreessen said Sunday on X, referring to the American panic in the mid-20th century over Soviet advances in the space race. 

Amid the crush of user interest, DeepSeek struggled with registrations and said it was sustaining malicious cyberattacks.

“Due to large-scale malicious attacks on DeepSeek’s services, registration may be busy,” the company said on its website. “Please wait and try again. Registered users can log in normally. Thank you for your understanding and support.”

Another concern is that China may use DeepSeek to refine and improve its ability to censor online content and amass user data. Users reported that the chatbot restricted answers to questions about the 1989 massacre of pro-democracy demonstrators at Tiananmen Square in Beijing.

China’s policies of civil-military fusion, which encourage cooperation between companies and the ruling Chinese Communist Party, have triggered fears that the data ingested by the AI platform will end up in the hands of party bosses and security agents.

The platform’s policies describe data collection processes, including the retention of information voluntarily provided by users, such as email addresses and telephone numbers. According to its privacy policy, DeepSeek automatically collects certain technical information, including “keystroke patterns or rhythms.”

Skepticism abounds about how DeepSeek achieved its breakthrough. In recent months, rumors spread in Silicon Valley that DeepSeek’s model performed at a level comparable to American competitors for “around one-fourth of the cost,” according to a Wall Street Journal report.

Doubts about the low investment cost persist. When an X user asked whether DeepSeek’s gain was “done on a shoestring” budget, X owner Elon Musk scoffed.

“Lmao no,” Mr. Musk said Sunday, mocking the accuracy of the reported price tag.

DeepSeek may also rely far more on some of the falling U.S. AI stocks for its successes than people realize.

Last week, Scale AI CEO Alexandr Wang said DeepSeek got its hands on Nvidia’s technology. Despite restrictions impeding the flow of Nvidia semiconductors, Mr. Wang noted that DeepSeek had managed to obtain the technology anyway.

“My understanding is that DeepSeek has about 50,000 [Nvidia] H100s, which they can’t talk about obviously because it is against the export controls that the United States has put in place,” Mr. Wang told CNBC.

Inauguration Day rollout

DeepSeek began touting its newest model on Inauguration Day, and the announcement sent shock waves through the global markets. President Trump moved quickly after taking office to promote a $500 billion long-term AI investment deal designed to keep the U.S. the global leader in the exploding field.

David Sacks, whom Mr. Trump named one of his AI czars, said DeepSeek’s developments showed that Mr. Trump was correct to nullify the AI executive order President Biden issued last year and demand an overhaul of federal government policy holding back AI development.

“DeepSeek R1 shows that the AI race will be very competitive and that President Trump was right to rescind the Biden EO, which hamstrung American AI companies without asking whether China would do the same …” Mr. Sacks said on X. “I’m confident in the U.S., but we can’t be complacent.”

Fear of China’s potential AI advance rippled around the world Monday. Japan’s chip-related companies, including Advantest, were significantly off in Tokyo trading. In Amsterdam, Dutch chipmaking equipment company ASML lost 7% of its value. Germany’s Siemens Energy, which provides AI infrastructure hardware, lost nearly 20%, and France-based digital automation company Schneider Electric fell by 9%.

Although saying it was far too early to declare DeepSeek an “existential threat” to U.S. AI competitors, Richard Hunter, head of markets at Interactive Investor, acknowledged in a note that the news was cause for concern.

“It will almost certainly put the cat among the pigeons as investors scramble to assess the potential damage it could have on a burgeoning industry which has powered much of the gain seen in the main indices over the past couple of years,” he wrote.

As the U.S. works to stay ahead of DeepSeek and other foreign rivals, OpenAI is expected to announce new services soon. Amid speculation that the offerings could include unprecedented artificial general intelligence capabilities surpassing humans, OpenAI CEO Sam Altman said last week that his platform had not built such capability yet.

Mr. Altman has a closed-door briefing reportedly scheduled for Thursday with officials in Washington. The buzz surrounding DeepSeek figures to be a major topic of conversation.

The turmoil in the AI market may have direct ramifications for the broader American stock market, which has soared in recent years on the strength of a tiny group of tech companies, including Nvidia, Apple, Microsoft and Oracle. The “Magnificent Seven” accounted for half of the S&P 500 index’s total 2024 return, The Associated Press reported, and a downturn in those stocks could have an immediate and damaging effect on the Dow Jones and the 401(k) holdings of millions of American savers.

Monday’s losses were heavily concentrated in the technology sector. For the day, the broad S&P 500 index of stocks was down a modest 1.46% overall.

“It is possible that the news out of China could be overstated, and then we could see a reversal of the recent market moves,” Brian Jacobsen, chief economist at Annex Wealth Management, told AP. “It is also possible that the news is true, but then that would present new investment opportunities.”