The Economist: DeepSeek sends a shockwave through markets

Key topics.DeepSeek's R1 AI model outperforms Western tech with lower costs.U.S. tech giants lose $1 trillion in value as AI spending may be excessive.DeepSeek's success challenges AI geopolitics and raises demand uncertainties..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..The seventh BizNews Conference, BNC#7, is to be held in Hermanus from March 11 to 13, 2025. The 2025 BizNews Conference is designed to provide an excellent opportunity for members of the BizNews community to interact directly with the keynote speakers, old (and new) friends from previous BNC events – and to interact with members of the BizNews team. Register for BNC#7 here..If you prefer WhatsApp for updates, sign up to the BizNews channel here..From The Economist, published under licence. The original article can be found on www.economist.com.© 2024 The Economist Newspaper Limited. All rights reserved..The Economist .A cheap Chinese language model has investors in Silicon Valley asking questions___STEADY_PAYWALL___.In a flash, euphoria over artificial intelligence (AI) has turned to panic. Since early trading began on January 27th the market value of Nvidia, an AI chipmaking champion, has slumped by 17% at the time of writing. The share prices of Alphabet, Amazon and Microsoft—America's cloud-computing triumvirate—have fallen by 3%, 1% and 3%, respectively. All told, American tech companies have shed around $1trn in value..The immediate cause of investors' panic is DeepSeek, an obscure Chinese hedge-fund turned AI startup that last week blew analysts away with its latest large language model, R1. Consumers are flocking to DeepSeek's chatbot, which was the most downloaded app on iPhones over the weekend. Innovative techniques have allowed the company to train AI models that perform about as well as the most sophisticated Western models with only a fraction of the computer power—and so a fraction of the cost..DeepSeek's entrance on the AI scene comes at a time when American tech giants are splurging ever more on AI infrastructure. Last year the combined spending on data centres by the three cloud-computing giants and Meta (which has also been developing AI models) reached about $180bn, up by 57% from the year before. At the start of this month Microsoft said it would spend a further $80bn in 2025 on AI infrastructure. Last week Meta said it was planning to pour $65bn into AI this year..Yet if high-performing models can be trained with less computing power, all that investment may prove excessive. Although shareholders in the cloud-computing giants might welcome a reprieve from further capital spending, they may now be wondering what will become of the investments made to date. Even more worrying is what all this could mean for Nvidia and other companies supplying data-centre equipment, as well as those involved in providing the energy that fuels them. Shares in Siemens Energy, a maker of electrical equipment, and Cameco, a producer of uranium used for nuclear power, have tumbled by 20% and 13%, respectively..Read more: BizNews Briefing – Ramaphosa drives GNU onto rocks; DeepSeek smashes tech stocks.A rout in public markets will also ripple through to private companies. In 2024 venture capitalists invested $132bn in AI startups, an increase of more than half from the previous year, reckons PitchBook, a research firm. Model-makers that have been burning through cash, including OpenAI and Anthropic, may find it harder to raise capital now that DeepSeek has shown it is possible to do more with less. Other venture-backed firms such as Groq and Cerebras, two AI chipmakers, and CoreWeave, an AI cloud-computing firm, could also face trouble..How bad will the rout be? Three uncertainties hang over the market. The first relates to the economics of AI. DeepSeek's innovations suggest that the upfront cost of training a model may plunge. Yet that is happening just as a wave of so-called reasoning models, including OpenAI's o3 and DeepSeek's own R1, are deploying much more computing power at the inference stage, where the model responds to questions. These models are able to, in effect, think harder about queries in order to generate better answers. What exactly the opposing forces of cheaper training and pricier inference mean for spending on computer power may not become clear for some time..A second source of uncertainty is geopolitics. America is trying to stymie China's AI efforts by restricting the export of cutting-edge chips and the equipment used to make them. DeepSeek's success shows that this strategy has so far failed. President Donald Trump may conclude that the answer is to further tighten export restrictions, worsening the blow for companies in the AI supply chain..The final area of uncertainty is demand. Some Wall Street bulls are already seeing a positive side to DeepSeek's breakthroughs. As AI models become cheaper to train, companies could use the technology more. Already shares in businesses that are building services on top of others' AI models, including Salesforce, an enterprise-software firm, and Apple, maker of the iPhone, have risen as investors bet on falling costs..Yet there is a worse scenario, too. For many enterprises, the cost of AI is less of a problem than difficulties implementing it on a large scale. If this persists, underlying demand for the technology could start to sag. And that would be enough to turn today's market slump into a collapse..Read also:.Milei's example shows GNU was a mistake opposition parties should abandon – FMFThe Economist: Will America's crypto frenzy end in disaster?The Cape at the precipice of descent into a "Narco State"

The Economist: DeepSeek sends a shockwave through markets

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