Chinese startup DeepSeek shakes up AI landscape with budget model

DeepSeek has developed a powerful AI model at a fraction of the cost of its US rivals, challenging the prevailing narrative that significant investments are necessary for AI development.

DeepSeek's success has sparked debate about the necessity of such high spending in tech landscape. / Photo: Reuters
Reuters

DeepSeek's success has sparked debate about the necessity of such high spending in tech landscape. / Photo: Reuters

Chinese startup DeepSeek's cheaper AI is sharpening investor scrutiny of the billions US 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 US on Monday.

The startup founded in 2023 has said its AI models either match or outperform top US 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."

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US chip makers tanks

DeepSeek's pricing blows away anything from the competition, he said. Shares of AI chip pioneer Nvidia sank 16 percent, Microsoft fell 3.8 percent and TSMC's US stock tumbled 14 percent.

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 publicised R1 model.

Still, it is a far cry from the $250 billion analysts estimate big US 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 US 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.

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