Investors have been fleeing US artificial intelligence stocks amid surprise at a new, cheaper but still effective alternative Chinese technology.

What is DeepSeek?

DeepSeek is a Chinese artificial intelligence (AI) company based in Hangzhou that emerged a couple of years ago from a university startup. Its stated goal is to make an artificial general intelligence – a term for a human-level intelligence that no technology firm has yet achieved. It’s not there yet, but this may be one reason why the computer scientists at DeepSeek have taken a different approach to building their AI model, with the result that it appears many times cheaper to operate than its US rivals. 

Another reason it appears to have taken the low-cost approach could be the fact that Chinese computer scientists have long had to work around limits to the number of computer chips that are available to them, as result of US government restrictions. 

Why haven’t we heard about it before? 

The company has been quietly impressing the AI world for a while with its technical innovations, including a cost-to-performance ratio several times lower than that for models made by Meta (Llama) and OpenAI (Chat GPT). It hasn’t been making as much noise about the potential of its breakthroughs as the Silicon Valley companies. They have been pumping out product announcements for months as they become increasingly concerned to finally generate returns on their multibillion-dollar investments. But expect to see more of DeepSeek’s cheery blue whale logo as more and more people around the world download it to experiment.

What is this R1 model that people have been talking about?

This is the DeepSeek AI model people are getting most excited about for now as it claims to have a performance on a par with OpenAI’s o1 model, which was released to Chat GPT users in December. On Monday it was the most popular free app downloaded on Apple’s app store in the UK and other parts of the world.  

But there are lots of AI models out there from OpenAI, Google, Meta and others. What’s the big deal?

This model uses a different kind of internal architecture that requires less memory use, thereby considerably reducing the computational costs of every search or interaction with the chatbot-style system. It has been praised by researchers for its ability to tackle complex reasoning tasks, particularly in mathematics and coding and it appears to be producing results comparable with rivals for a fraction of the computing power. DeepSeek has said it took two months and less than $6m (£4.8m) to develop the model, although some observers caution this is likely to be an underestimate. Nevertheless it is vastly less than the billions that the Silicon Valley tech companies are spending to develop AIs and is less expensive to operate. 

Who is in charge?

A key character is Liang Wenfeng, who used to run a Chinese quantitative hedge fund that now funds DeepSeek. In a rare interview, he said: “For many years, Chinese companies are used to others doing technological innovation, while we focused on application monetisation – but this isn’t inevitable. In this wave, our starting point is not to take advantage of the opportunity to make a quick profit, but rather to reach the technical frontier and drive the development of the entire ecosystem … We believe that as the economy develops, China should gradually become a contributor instead of free-riding.”

Why did US tech stocks fall?

Hundreds of billions of dollars were wiped off big technology stocks after the news of the DeepSeek chatbot’s performance spread widely over the weekend. The timing was significant as in recent days US tech companies had pledged hundreds of billions of dollars more for investment in AI – much of which will go into building the computing infrastructure and energy sources needed, it was widely thought, to reach the goal of artificial general intelligence. DeepSeek’s performance seems to question, at least, that narrative.

What is the worry for Nvidia?

Nvidia is one of the companies that has gained most from the AI boom. It went from being a maker of graphics cards for video games to being the dominant maker of chips to the voraciously hungry AI industry. It has been compared to a modest trader in pickaxes and buckets in 19th-century California, which happened to be on the spot when the gold rush happened and so it became a massive supplier to the world’s richest industry. Tech companies looking sideways at DeepSeek are likely wondering whether they now need to buy as many of Nvidia’s tools. Its market value fell by $600bn on Monday. 

What is DeepSeek not doing?

It hasn’t reached artificial general intelligence, the threshold at which AI starts to reason and which OpenAI and others in Silicon Valley are pursuing. Sam Altman, OpenAI’s chief executive, has cautioned that breakthrough is unlikely to be imminent. But it does seem to be doing what others can at a fraction of the cost.

Is the rise of DeepSeek good news?

One possibility is that advanced AI capabilities might now be achievable without the massive amount of computational power, microchips, energy and cooling water previously thought necessary. As with all technological breakthroughs, time will help tell how consequential it actually is.