1

DeepSeek: what you Need to Understand About the Chinese Firm Disrupting the AI Landscape

Regena Rasheed edited this page 2025-02-02 23:23:32 +11:00

Richard Whittle gets funding from the ESRC, Research England and was the recipient of a CAPE Fellowship.

Stuart Mills does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Partners

University of Salford and University of Leeds offer funding as founding partners of The Conversation UK.

View all partners

Before January 27 2025, it's fair to say that Chinese tech company DeepSeek was flying under the radar. And then it came significantly into view.

Suddenly, everybody was speaking about it - not least the shareholders and executives at US tech companies like Nvidia, Microsoft and Google, which all saw their business values tumble thanks to the success of this AI research study lab.

Founded by a successful Chinese hedge fund supervisor, the laboratory has taken a different method to artificial intelligence. One of the major distinctions is expense.

The advancement costs for Open AI's ChatGPT-4 were stated to be in excess of US$ 100 million (₤ 81 million). DeepSeek's R1 design - which is used to create content, fix logic problems and develop computer system code - was reportedly used much fewer, less effective computer chips than the likes of GPT-4, resulting in expenses claimed (however unverified) to be as low as US$ 6 million.

This has both monetary and geopolitical impacts. China goes through US sanctions on importing the most sophisticated computer system chips. But the reality that a Chinese startup has actually been able to develop such a sophisticated model raises concerns about the effectiveness of these sanctions, and whether Chinese innovators can work around them.

The timing of DeepSeek's brand-new release on January 20, as Donald Trump was being sworn in as president, indicated an obstacle to US supremacy in AI. Trump reacted by describing the moment as a "wake-up call".

From a financial point of view, the most visible impact may be on consumers. Unlike rivals such as OpenAI, which recently began charging US$ 200 monthly for access to their premium models, DeepSeek's equivalent tools are currently totally free. They are likewise "open source", allowing anybody to poke around in the code and reconfigure things as they want.

Low costs of advancement and effective use of hardware seem to have afforded DeepSeek this cost benefit, and have actually currently forced some Chinese rivals to reduce their costs. Consumers ought to prepare for lower costs from other AI services too.

Artificial investment

Longer term - which, in the AI industry, e.bike.free.fr can still be incredibly soon - the success of DeepSeek could have a big influence on AI financial investment.

This is because so far, nearly all of the huge AI companies - OpenAI, Meta, Google - have been struggling to commercialise their models and pay.

Previously, this was not necessarily a problem. Companies like Twitter and Uber went years without making revenues, prioritising a commanding market share (lots of users) instead.

And business like OpenAI have been doing the very same. In exchange for constant financial investment from hedge funds and other organisations, they promise to construct much more effective models.

These models, the company pitch probably goes, will massively increase productivity and then profitability for services, which will end up pleased to pay for AI products. In the mean time, all the tech business need to do is collect more data, purchase more effective chips (and more of them), and develop their models for longer.

But this costs a great deal of money.

Nvidia's Blackwell chip - the world's most effective AI chip to date - expenses around US$ 40,000 per system, and AI business often require tens of countless them. But already, AI business have not truly struggled to bring in the necessary financial investment, even if the sums are substantial.

DeepSeek might change all this.

By showing that innovations with existing (and possibly less sophisticated) hardware can achieve similar efficiency, it has given a warning that tossing money at AI is not guaranteed to pay off.

For example, prior to January 20, it might have been assumed that the most advanced AI designs require massive information centres and other infrastructure. This meant the likes of Google, Microsoft and OpenAI would face minimal competitors since of the high barriers (the vast expense) to enter this market.

Money worries

But if those barriers to entry are much lower than everybody thinks - as DeepSeek's success suggests - then many huge AI investments all of a sudden look a lot riskier. Hence the abrupt result on huge tech share prices.

Shares in chipmaker Nvidia fell by around 17% and ASML, which produces the machines required to manufacture sophisticated chips, likewise saw its share cost fall. (While there has been a slight bounceback in Nvidia's stock cost, it appears to have actually settled below its previous highs, reflecting a new market truth.)

Nvidia and ASML are "pick-and-shovel" companies that make the tools essential to produce a product, rather than the item itself. (The term originates from the concept that in a goldrush, the only person guaranteed to earn money is the one selling the choices and shovels.)

The "shovels" they offer are chips and chip-making devices. The fall in their share rates originated from the sense that if DeepSeek's more affordable approach works, the billions of dollars of future sales that investors have priced into these companies may not materialise.

For the likes of Microsoft, Google and Meta (OpenAI is not openly traded), the cost of structure advanced AI may now have fallen, suggesting these companies will have to invest less to remain competitive. That, for them, could be a good idea.

But there is now question as to whether these business can effectively monetise their AI programs.

US stocks comprise a traditionally big portion of global financial investment today, forum.altaycoins.com and technology companies comprise a traditionally large percentage of the value of the US stock exchange. Losses in this market may require investors to sell other investments to cover their losses in tech, resulting in a whole-market decline.

And it should not have actually come as a surprise. In 2023, a leaked Google memo cautioned that the AI market was exposed to outsider disruption. The memo argued that AI companies "had no moat" - no defense - versus rival models. DeepSeek's success may be the evidence that this is true.