Tech sell-off deepens as DeepSeek triggers AI rethink

Japanese technology shares fell on Tuesday as a global market rout sparked by the emergence of a low-cost Chinese artificial intelligence model entered day two, with investors questioning the sky-high valuation and dominance of AI bellwethers.

Shares of Nvidia, the poster child of the AI boom in recent years, dragged US stocks lower, sinking 17 per cent on Monday and wiping $593 billion from the chipmaker's market value, a record one-day loss for any company.

It all stemmed from a free AI assistant launched by Chinese startup DeepSeek last week that the firm said uses less data at a fraction of the cost of services available currently. That garnered attention worldwide, although scepticism lingers.

OpenAI CEO Sam Altman called it an "impressive model".

"We will obviously deliver much better models and also it's legit invigorating to have a new competitor!," Altman, the head of the AI firm behind ChatGPT, said in a social media post.

The launch and increasing popularity of DeepSeek spurred investors to dump tech stocks globally, with ripples felt from Tokyo to Amsterdam to Silicon Valley.

Markets in tech-heavy South Korea and Taiwan are closed for the next few days for Lunar New Year. Mainland China is closed until February 4, leaving the spotlight firmly on Japanese firms.

On Tuesday, chip-testing equipment maker Advantest, a supplier to Nvidia lost 10 per cent after diving nearly 9 per cent on Monday. Chip-making equipment maker Tokyo Electron and technology start-up investor SoftBank Group slid 5 per cent.

"It's clearly a sell first, ask questions later approach, and we've actually seen that kind of move in the past in Japan," said Kei Okamura, a portfolio manager at Neuberger Berman, referring to a global market meltdown in August headlined by Japan's Nikkei.

Over in the U.S., Broadcom finished down 17.4 per cent, while ChatGPT backer Microsoft fell 2.1 per cent and Google parent Alphabet closed down 4.2 per cent. The Philadelphia semiconductor index tumbled 9.2 per cent, for its deepest percentage drop since March 2020.

NO MARGIN OF ERROR

The selloff has brought into the spotlight the crowded positioning among investors and the billions of dollars US tech giants are pouring in to develop AI capabilities, as well as the extremely high valuation of some of these firms.

"What makes Monday's tech selloff so jarring is that the valuations of many of these AI and tech companies offer no margin of error," said David Bahnsen, chief investment officer at The Bahnsen Group.

"The excessive weighting these tech stocks have in many investor portfolios and the high concentration these tech stocks have in the market indices was a significant and under-appreciated risk issue."

The hype around AI has powered a huge flow of capital into equities, inflating valuations and lifting stock markets to record highs, leading to an increase of around $10 trillion in the market value of "Magnificent Seven" companies since ChatGPT kicked off the AI boom in November 2022.

It is not just the chipmakers and tech companies but companies focused on datacentres also taking a hit, with Malaysia's utility conglomerate YTL Power down 9 per cent on Tuesday, its third session of steep loss.

"We're still, like many investors, gathering information," said Neuberger Berman's Okamura, noting that a lot of investors are scrambling to gather more information and decide their next move.

"I think we’re going to see many more of these (developments) going forward. And we’ve seen technological advancements like this that have had implications for cost spend."

Investor focus will be on the flurry of tech earnings this week, with executives likely keen to calm frayed nerves and ease concerns about capital spending.

AI RACE

Little is known about the Hangzhou startup behind DeepSeek, whose controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, records showed.

Its researchers wrote in a paper last month that its DeepSeek-V3 model, launched on January 10, used Nvidia's lower-capability H800 chips for training, at a cost of less than $6 million.

The launch and the popularity of the app contrasts with the lacklustre reception that met the Chinese ChatGPT equivalent made by search engine giant Baidu, which exposed the gap in AI capabilities between US and Chinese firms.

The quality and cost efficiency of DeepSeek's models have flipped this narrative on its head and spurred a warning from US President Donald Trump, who called it "a wakeup call for our industries".

Japan's digital minister Masaaki Taira said DeepSeek's emergence had upended conventional wisdom that Chinese AI was years behind.

"It's been said that Chinese generative AI might be about five years behind, but that turned out to be wrong and it seems to be on a fairly good track," Taira said, adding that Japan was taking a closer look into suggestions that Chinese AI may be more cost effective.