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DeepSeek changes rules of AI’s great game

DeepSeek changes rules of AIs great game DeepSeek changes rules of AIs great game

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It is difficult to talk about economic history in the twenty-first century without discussing the “China Shock.” This is the term often used to describe China’s entry into the global market, a change that brought rich countries an abundance of cheap goods, but left entire industries and workforces behind.

Deepseek may provide a sequel. A little-known Chinese hedge fund has dropped a hand grenade into the world of artificial intelligence with a great language model that, in fact, matches the market leader, Sam Allman’s O’Pray, at a fraction of the cost. And although Openai treats its modeling work as proprietary, Deepseek’s R1 wears its technical underwear on the outside, making it attractive for developers to use and build upon.

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Things move faster in the age of artificial intelligence. Terrifyingly. Five of the biggest technology stocks geared toward AI platforms—chipmaker NVIDIA and the so-called surplus colors, Amazon, Microsoft and META—have combined to shed nearly $750 billion in market capitalization before U.S. markets open on Monday. It could be especially bleak for Nvidia if it proves that Deepseek won without using its most popular chips.

Investors in technology companies – including Europeans such as chip maker ASML, and energy companies that investors hope will get a boost from data centers – are left wondering whether their investments will go up in smoke. They were set to plow through about $300 billion in capital spending this year, according to Visual Alpha estimates. Analysts expect that on Wednesday, when they report earnings, Meta and Microsoft will report 2024 investment of $94 billion.

Annual Capex ($bn) line chart for Microsoft, Alphabet, Meta, Amazon and Oracle showing investments in AI have been climbing

In fact, the game is not over yet. Deepseek’s actual potential remains unclear, and it has not yet achieved “artificial general intelligence,” the human condition that Meta and Openai are pursuing. But the rules have changed. At the very least, Deepseek may take on some of the US giants’ clients. At worst, it challenged the fundamental belief that more hardware is the key to better AI. This principle has supported the market value of Silicon Valley companies during their investing on the fist.

What’s bad for Easter Eggs is still surprising to everyone else. For most business users, having the absolute best model is less important than having a reliable and good enough model. Not every driver needs a Ferrari. Advances in thinking like R1 could be a big step forward for “agents” who deal with customers and perform tasks in the workplace. If these are available cheaply, the profitability of companies should rise.

In this sense, this second China shock could resemble the first. It can not only bring destruction, but reinforcement – albeit painful for many. The researchers estimated that for every job lost to the China shock, American households’ purchasing power rose by more than $400,000. The race for artificial intelligence supremacy is on hold. The great giveaway has begun.

john.foley@ft.com

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2025-01-27 15:29:00


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