Big Tech faces heat as China's DeepSeek sows doubt

28/1/2025 6:07

Chinese startup DeepSeek's cheaper AI

is sharpening investor scrutiny of the billions U.S. tech giants

are pouring to develop the technology and analysts say it will

dominate this week's much-awaited results from industry

bellwethers.



DeepSeek has claimed it took just two months and cost under

$6 million to build an AI model using Nvidia's less-advanced

H800 chips. An app powered by the V3 model became the top iPhone

download in the U.S. on Monday.



The startup founded in 2023 has said its AI models either

match or outperform top U.S. rivals at a fraction of the cost,

challenging the view that scaling AI requires vast computing

power and investment.



Such a business need has powered an increase of around $10

trillion in the market value of "Magnificent Seven" companies

since ChatGPT kicked off the AI boom in November 2022.



"Did DeepSeek really build OpenAI for $5 million? Of course

not," Bernstein analyst Stacy Rasgon said. "It seems like a

stretch to think the innovations being deployed by DeepSeek are

completely unknown by the top tier AI researchers at the world's

other numerous AI labs."



DeepSeek's pricing blows away anything from the competition,

he said. Shares of AI chip pioneer Nvidia sank 16%,

Microsoft fell 3.8% and TSMC's U.S. stock

tumbled 14%.

Rasgon and other analysts argue DeepSeek's training costs for

its V3 model could be higher as the nearly $6 million cited by

the startup only includes the amount spent on computing power,

while little is known about the costs to build the more

publicized R1 model.



Still, it is a far cry from the $250 billion analysts

estimate big U.S. cloud companies will spend this year on AI

infrastructure. That spending has been questioned by investors

worried about slow returns in the past year.



With most of the American tech giants set to report results

this week and the next, analysts and investors expect executives

of the companies to offer more clarity on their strategy.



"(DeepSeek's rise) puts into question whether the current

pace of capex spend/technology upgrades is necessary. Commentary

from U.S. hyperscalers will be key this week to see if they

remain aggressive with AI spend," CFRA analyst Angelo Zino said.



"They will likely stress the need for greater computing

power as we shift toward agentic AI and physical AI," Zino

added, referring to autonomous AI agents that require little

human intervention for routine tasks, as well as robots and

self-driving cars.







PRICING PUSH



While the price of using AI models has been falling with

rising competition and the progress in the technology,

Bernstein's Rasgon said DeepSeek stands out as it has priced its

models at up to 40 times lower than OpenAI's comparable models.



That could, analysts said, start a price war for AI

services, potentially pressuring tech companies such as OpenAI

that are already losing billions of dollars each year due to the

high operational costs of running services such as ChatGPT.



"If DeepSeek adoption intensifies, it could initiate price

reductions from competitors who have similar open source

products," said Gadjo Sevilla, senior analyst at eMarketer.



"Market leaders like OpenAI (pushing for profitability) are

unlikely to lower pricing in the short term. They will likely

double down on trust and safety as key differentiating features,

which happen to matter to enterprise users."



Some experts also doubt that U.S. businesses would be

willing to embrace Chinese AI technology, given Sino-U.S.

tensions and concerns about data privacy and security.



DeepSeek has said it stores user information in servers in

China, which could be a sticking point in its U.S adoption.



Some investors, however, believe American tech giants would

pounce on DeepSeek's breakthroughs and that cheaper AI services

are bound to increase technology adoption, which could lift

demand for chips.



"Did DeepSeek seek and find a more efficient processing

model for AI? Maybe, but you can count on the incumbents to

adopt any new techniques found," said Mark Malek, chief

investment officer at SiebertNXT.



"(This) would only make the AI opportunity bigger in the

future."