In the realm of 21st-century economics, one cannot overlook the impact of the “China shock.” This term refers to China’s entry into the global market, which flooded rich countries with inexpensive goods but also left entire industries and workforces in disarray. Now, DeepSeek, a relatively unknown Chinese hedge fund, might be setting the stage for a new shock—one that could reshape the artificial intelligence (AI) landscape.

DeepSeek’s groundbreaking move involves the development of a large language model that rivals industry leaders like OpenAI’s Sam Altman, but at a significantly lower cost. Unlike OpenAI, which keeps its models’ underlying technologies under wraps, DeepSeek’s R1 model offers transparency, allowing developers to access and build upon its structure. This open-source approach has the potential to revolutionize AI by making powerful tools more accessible to a broader range of users.

The Speed of Change in AI

The AI industry is evolving at an unprecedented pace, and recent developments underscore just how quickly things can shift. Take, for example, the dramatic drop in market value for some of the biggest technology stocks tied to AI, including chipmaker Nvidia and major players like Alphabet, Amazon, Microsoft, and Meta Platforms. Before US markets opened on Monday, these companies collectively lost almost $750 billion in market value. If DeepSeek’s success turns out to be achieved without relying on Nvidia’s high-end chips, the repercussions could be particularly severe for the chipmaker.

This rapid change has left investors in technology companies, including European chipmakers like ASML and energy companies that were hoping for a boost from the growth of data centers, wondering if their investments might go up in smoke. In 2024, hyperscalers such as Meta and Microsoft were set to invest nearly $300 billion in capital expenditures, with analysts expecting them to report investment totals of around $94 billion this year.

The Changing Landscape of AI Investment

While the market turbulence caused by DeepSeek’s emergence is undeniable, the game is far from over. DeepSeek has yet to achieve “artificial general intelligence” (AGI)—the humanlike capabilities that companies like Meta and OpenAI are striving for. However, the very foundation of the AI industry may have shifted. The arrival of DeepSeek may signal a departure from the belief that larger investments in hardware are the key to improving AI. This belief has driven the massive market valuations of Silicon Valley companies as they pour money into cutting-edge hardware and infrastructure. For tech giants, this shift could mean losing customers to DeepSeek’s more affordable and accessible offerings. At the very least, DeepSeek’s disruption challenges the conventional wisdom that AI advancement relies on ever-more powerful hardware.

While the situation may spell trouble for the hyperscalers, it could present significant opportunities for businesses at large. For many enterprises, having the absolute best AI model is less critical than having one that is reliable and sufficiently capable. Just as most drivers don’t need a Ferrari, not all businesses require the most advanced AI available. For companies focused on improving customer service and automating tasks in the workplace, affordable AI models like R1 could be a game-changer. This shift could lead to increased corporate profitability as businesses benefit from better AI tools at lower costs.

A New Economic Reshuffling

DeepSeek’s rise has the potential to mirror the effects of the first “China shock” in some ways. It could bring significant disruption and upheaval, but it may also lead to a reshuffling of the global AI market. While certain companies and industries may suffer, others stand to gain. Historical research suggests that while the China shock resulted in job losses, it also boosted the purchasing power of US households by more than $400,000 per job lost. Similarly, this new phase in AI development could ultimately lead to widespread benefits as more affordable and accessible AI technologies open up new avenues for innovation and profitability.

In conclusion, the battle for AI supremacy is far from settled, but one thing is clear: DeepSeek’s entry into the market is not just a minor development. It has the potential to rewrite the rules of AI, challenging established players and creating new opportunities for businesses worldwide. As the great AI giveaway begins, the future of artificial intelligence may be more inclusive, accessible, and profitable for a broader array of industries and organizations than ever before.