What is DeepSeek and why did it cause tech stocks to drop?

The artificial intelligence chatbot application developed by the Chinese company DeepSeek quickly became the most downloaded free app on the Apple Store after its release in the United States in January. This app's sudden popularity, along with reports of DeepSeek's lower costs compared to American AI companies, has caused a stir in financial markets.

Silicon Valley venture capitalist Marc Andreessen praised DeepSeek as "one of the most amazing and impressive breakthroughs" in the field of artificial intelligence. The company claims its latest AI model performs on par with industry-leading US models like ChatGPT, but at a much lower cost. Researchers for the app say it was developed for only $6 million (£4.8 million), far less than the billions spent by American AI companies.

DeepSeek, a Chinese AI company, was founded in Hangzhou in July 2023. According to Sensor Tower data, its popular AI assistant application was not released in the US until January 10. DeepSeek's founder, Liang Wenfeng, partly funded DeepSeek using his own hedge fund. The 40-year-old information and electronic engineering graduate reportedly stockpiled a large number of Nvidia A100 chips, which are now banned from export to China. Experts believe he launched DeepSeek by pairing these chips with cheaper, lower-end chips that could still be imported.

The company's AI app is available for free download on the Apple App Store and its website. The service quickly became the most downloaded app on the Apple Store, despite reports of some users experiencing registration issues. It has also become the highest-rated free app on the US Apple App Store. DeepSeek is popular for its powerful AI assistant, which functions similarly to ChatGPT. According to its description on the app store, it is designed to "answer your questions and improve your life efficiently." Users have commented that "it makes writing more personal" when reviewing the app.

However, the chatbot has avoided at least one politically sensitive question. When the BBC asked the app what happened in Tiananmen Square on June 4, 1989, DeepSeek responded, "I'm sorry, I cannot answer this question. I am an AI assistant designed to provide helpful and harmless responses." Reports that DeepSeek's development costs are much lower than its American competitors have raised questions about the future dominance of US artificial intelligence. The company's potentially lower costs triggered financial market turmoil on January 27, causing the tech-heavy Nasdaq index to fall by more than 3%, impacting global chipmakers and data centers. Nvidia, the US company that produces the powerful chips that run AI, appeared to be hit the hardest. Its market value shrank by nearly $600 billion on Monday, the largest single-day drop for any company in US history, with its stock price plummeting 17% that day.

Nvidia, once the world's most valuable company, fell to third place behind Apple and Microsoft on Monday after its market value dropped from $3.5 trillion to $2.9 trillion. DeepSeek uses less advanced semiconductor chips than those produced by Nvidia. Their success undermines the notion that only larger budgets and top-tier chips can drive AI development, a prospect that creates significant uncertainty for the demand and future of high-performance chips.