What happened?

DeepSeek, a Chinese company specialising in generative AI applications, has roared into view and soared in popularity on app stores thanks to its ability to deliver ChatGPT-level performance at a fraction of the development cost. Reports suggest DeepSeek has achieved this breakthrough by training its AI model on significantly fewer and less-powerful GPUs compared to alternatives like OpenAI’s ChatGPT. This development could have profound implications for the AI industry and associated sectors.

Why does this matter?

The potential impact of DeepSeek’s innovation is far-reaching. Historically, AI development has been a high cost activity – both for developers and end-users – driven by the substantial computational power and infrastructure required. DeepSeek has developed a new approach with more efficient compute and less hardware, which shows that AI models can be trained more cost-effectively, potentially transforming the economic dynamics of the industry.

Market fallout

News of DeepSeek’s efficiency triggered a sharp market reaction. Shares of companies involved in GPU manufacturing and AI hardware – including cooling systems used in data centres – fell sharply on Monday. Investors interpreted the development as a sign of declining demand for these components.

Taking a step back

While the market’s reaction was dramatic, we believe this development is, in fact, a net positive for the AI sector.

Why DeepSeek’s breakthrough is good news for AI

1. Lower costs and barriers to entry:

AI, once the preserve of mega-cap tech giants with deep pockets like Microsoft, OpenAI, Adobe, and Meta, is now becoming more accessible. Reduced hardware and energy demands mean smaller players can enter the space, fostering competition and accelerating innovation and demand.

2. Improved energy efficiency:

AI infrastructure has faced criticism for its significant energy consumption. Some tech giants have invested in alternative energy solutions, even building their own small nuclear reactors to meet future demand. DeepSeek’s breakthrough goes some way to ease these concerns by cutting or pushing back the increases in energy demand, reducing the environmental footprint of AI.

3. A foundation for AI 2.0:

The rise of companies like DeepSeek could expedite the next phase of AI innovation. While the first wave of AI focused on applications like code generation, copywriting, and image creation, lower costs and increased competition may pave the way for entirely new use cases to emerge in a second wave.

4. Motivating the big players:

Established players such as Meta, Microsoft, and Alphabet are unlikely to scale back their AI ambitions. Instead, they’re likely to seize on these efficiencies themselves to expand further. Notably, Meta recently announced a 20% increase in capital expenditure, much of which is earmarked for AI. This could be considered an arms race, and if you aren’t moving forwards, you’re moving backwards. The emergence of a new international competitor like DeepSeek will only heighten the urgency for US tech giants to maintain their leadership.

What’s next?

It’s important to approach DeepSeek’s claims with a little scepticism, especially given the timing and the context of a Chinese app rising rapidly in US download rankings. However, if the figures are accurate, this development marks an exciting milestone for the future of AI.

Rather than damaging the industry, DeepSeek has injected it with yet more innovation and urgency, making AI more cost-effective, efficient, and scalable. These are likely to lead to wider adoption, setting the stage for a sustainable and dynamic AI ecosystem.

My perspective

I’m closely monitoring these developments. While market reactions can be outsized or misaligned with long-term implications, I view this as a positive shift for the AI landscape.

Our portfolio is well-positioned to benefit from these idiosyncratic moves. Just as Microsoft and Amazon rebounded and thrived after the initial Covid-19 market sell-off, I think the long-term effects of DeepSeek’s advancements will unlock significant opportunities.

To demonstrate my confidence, I’ve begun to initiate the first round of company investment into our own Fund in 2025. This aligns with my belief in the short-term nature of current market volatility and the immense long-term potential of a more efficient and accessible AI ecosystem. Some investors have taken fright this week. I am instead energised by the latest development. It won’t be the last.

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