The DeepSeek AI Freakout

"Who saw that coming? Not Wall Street, which sold off tech stocks on Monday after the weekend news that a highly sophisticated Chinese AI model, DeepSeek, rivals Big Tech-built systems but cost a fraction to develop. The implications are likely to be far-reaching, and not merely in equities.

The tech-heavy Nasdaq fell 3.1%, driven by a 16.9% dive in Nvidia shares. Nvidia dominates the market in advanced AI chips. Its stock had surged more than 10-fold since early 2023 -- achieving a more than $3.3 trillion market valuation until Monday -- as tech giants announced hefty outlays on AI.

Enter DeepSeek, which last week released a new R1 model that claims to be as advanced as OpenAI's on math, code and reasoning tasks. Tech gurus who inspected the model agreed. One economist asked R1 how much Donald Trump's proposed 25% tariffs will affect Canada's GDP, and it spit back an answer close to that of a major bank's estimate in 12 seconds. Along with the detailed steps R1 used to get to the answer.

More startling, DeepSeek required far fewer chips to train than other advanced AI models and thus cost only an estimated $5.6 million to develop. Other advanced models cost in the neighborhood of $1 billion. Venture capitalist Marc Andreessen called it "AI's Sputnik moment," and he may be right.

DeepSeek is challenging assumptions about the computing power and spending needed for AI advances. OpenAI, Oracle and SoftBank last week made headlines when they announced a joint venture, Stargate, to invest up to $500 billion in building out AI infrastructure. Microsoft plans to spend $80 billion on AI data centers this year.

CEO Mark Zuckerberg on Friday said Meta would spend about $65 billion on AI projects this year and build a data center "so large that it would cover a significant part of Manhattan." Meta expects to have 1.3 million advanced chips by the end of this year. DeepSeek's model reportedly required as few as 10,000 to develop.

DeepSeek's breakthrough means these tech giants may not have to spend as much to train their AI models. But it also means these firms, notably Google's DeepMind, might lose their first-mover, technological edge. Google shares fell 4% on Monday. DeepSeek's model is open-source, meaning that other developers can inspect and fiddle with its code and build their own applications with it.

This could help give more small businesses access to AI tools at a fraction of the cost of closed-source models like OpenAI and Anthropic, which Amazon has backed. There are advantages to such closed-source systems, especially for privacy and national security. But open-source can foster more collaboration and experimentation.

It's notable that DeepSeek is a startup founded by Liang Wenfeng, a Chinese hedge fund trader. Americans think of China's economy as run top-down, and much of it is. But its growth over the last few decades, especially in tech, has been spurred by entrepreneurs. Alibaba, Tencent and ByteDance were all once startups that now rival U.S. tech giants.

This is another reason for the U.S. to avoid the trap of thinking it must imitate Chinese industrial policy to succeed in the AI race. A bipartisan Senate AI report last spring called for Congress to pass $32 billion a year in "emergency" spending for non-defense AI, supposedly to better compete with China. What a waste of money that would be.

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DeepSeek is vindicating President Trump's decision to rescind a Biden executive order that gave government far too much control over AI. Companies developing AI models that pose a "serious risk" to national security, economic security, or public health and safety would have had to notify regulators when training their models and share the results of "red-team safety tests."

Mr. Biden said such tests are needed to eliminate biases, limitations and errors. But open-source models allow the public to review and test systems. Some have pointed out that DeepSeek doesn't answer questions on subjects that are politically sensitive to Beijing.

DeepSeek should also cause Republicans in Washington to rethink their antitrust obsessions with big tech. Bureaucrats aren't capable of overseeing thousands of AI models, and more regulation would slow innovation and make it harder for U.S. companies to compete with China. As DeepSeek shows, it's possible for a David to compete with the Goliaths. Let a thousand American AI flowers bloom." [1]

1.  The DeepSeek AI Freakout. Wall Street Journal, Eastern edition; New York, N.Y.. 28 Jan 2025: A18.