🚨 China's DeepSeek Shock and Global AI Market Ripples

Today Korean Economic News | 2025.01.29

📌 'DeepSeek Shock' Causes Nasdaq Futures to Plunge 5%... Nvidia Down 11% Before Market Opening

💬 China's announcement of its new low-cost AI technology 'DeepSeek' has caused a massive shock to the global AI market. US Nasdaq futures plunged 5% at one point, and Nvidia, considered an AI leader, fell 11% before market opening. The market is experiencing significant turbulence as major AI companies such as Palantir and Supermicro also show sharp declines.

1️⃣ Simple Explanation

The global AI market has been thrown into shock as China announced its new low-cost AI technology 'DeepSeek'. Let's break down what this means and why the market has reacted so strongly.

Until now, the AI technology market has been dominated by US companies, especially Nvidia. Nvidia is a company that produces high-performance semiconductor chips (GPUs) essential for AI training and operation, and has been the biggest beneficiary of the AI boom. Their products boast excellent performance but have been characterized by very high prices.

However, with the emergence of China's 'DeepSeek', the situation has changed. DeepSeek reportedly provides similar performance to existing AI technology but at a much lower price. This is similar to a situation where a low-cost smartphone with similar features suddenly appears in a market that previously only had premium brand smartphones.

In this situation, investors have come to think, "Now, the profits of US companies like Nvidia could decrease," resulting in a sharp drop in the stock prices of AI-related companies. Especially since Nvidia was symbolic of the AI boom, the drop in this company's stock price has caused significant ripples throughout the entire technology stock market.

This incident shows, beyond simple stock fluctuations, that AI technology competition between the US and China is intensifying further. It is being received as a signal that the landscape of the global AI market could change as China succeeds in developing its own technology despite the technological sanctions imposed by the US. From a consumer perspective, there is a positive aspect that AI technology costs could decrease, but for investors, uncertainty has increased.

2️⃣ Economic Terms

📕 AI Technology

AI technology refers to artificial intelligence technology that allows computers to learn and make judgments like humans.

• It consists of various fields such as deep learning, machine learning, and natural language processing.
• Recently, with the development of generative AI, the ability to create various contents such as text, images, and voice has greatly improved.

📕 Nasdaq

Nasdaq is a US technology-centered stock market where global technology companies are listed.

• Global technology companies such as Apple, Microsoft, Nvidia, and Tesla are traded.
• It is a market focused on technological innovation and growth potential, reflecting global technology trends and investment sentiment.

📕 Stock Price Plunge

A stock price plunge refers to a phenomenon where stock prices fall significantly in a short period.

• It can occur due to various factors such as unexpected negative news, earnings shocks, and changes in the industrial environment.
• There is a tendency for price declines to accelerate as investors' fear and selling pressure overlap.

📕 Technology Hegemony Competition

Technology hegemony competition refers to competition between countries to gain leadership in advanced technology fields.

• It revolves around core technologies of future industries such as AI, semiconductors, 5G, and space technology.
• It is closely related not only to economic benefits but also to national security and international influence.

3️⃣ Principles and Economic Outlook

💡 Technical Characteristics of DeepSeek and Market Impact

• What challenges does China's 'DeepSeek' pose to the existing AI technology market, and how can its impact be evaluated?

  • First, it's necessary to examine the technical characteristics and differentiation of DeepSeek. DeepSeek is AI technology based on Large Language Models (LLMs), and compared to major US models, it has the characteristic of requiring much lower computing resources while showing similar performance. In particular, it is known to have been optimized to significantly reduce dependence on expensive Nvidia GPUs and enable efficient operation with Chinese chips. This can be seen as the result of China's efforts to build an independent AI ecosystem amid US technology sanctions.

  • Second, the market impact is significant in terms of cost efficiency and accessibility. While existing AI model training and operation required enormous costs, DeepSeek is evaluated to have greatly lowered this cost barrier. This has the effect of increasing the possibility for not only large corporations but also small and medium-sized enterprises, startups, and developing countries to access AI technology. From a technology democratization perspective, this is a positive development, but it can act as a factor pressuring the profitability of companies that have invested in existing high-cost technology.

  • Third, it has the potential to bring fundamental changes to the competitive structure of the global AI market. Until now, US companies such as OpenAI, Anthropic, and Google have led advanced AI technology, and Nvidia has enjoyed a monopolistic position in terms of hardware. However, the emergence of DeepSeek could crack this dominant structure. In particular, the fact that China has secured its own technological capabilities despite technological sanctions from the US and Western countries signifies a new phase in global technology competition.

  • Fourth, it presents new possibilities in terms of commercialization and application of AI technology. DeepSeek's low-cost model opens the way for AI to be applied to more diverse industries and services. There is a possibility of expanded use even in fields that have been hesitant to adopt AI due to cost issues, such as education, healthcare, and small business support. In addition, expansion overseas is expected to accelerate, centered not only on the Chinese domestic market but also on 'Belt and Road' countries.

• The reason DeepSeek's emergence immediately shocked the market is because of its impact across these various aspects. It is being perceived as an event that can bring fundamental changes to the business models, revenue structures, and competitive landscape of the global AI industry beyond simple technological development. In particular, concerns seem to have spread among investors that the premium pricing strategies and market dominance of existing leading companies like Nvidia could be challenged.

💡 Background and Meaning of AI Company Stock Price Plunges

• What background and meaning do the 5% plunge in Nasdaq futures and the stock price declines of AI companies including Nvidia have?

  • First, concerns about Nvidia's business model and profitability are the key cause of the stock price decline. Nvidia has been evaluated as the biggest beneficiary of the AI boom by supplying high-performance AI semiconductors (GPUs). Its stock price has risen explosively since 2023, and its market capitalization has surpassed $3 trillion, making it one of the world's top companies. However, the emergence of low-cost AI models like DeepSeek could reduce dependence on expensive GPUs, which has become an occasion to question Nvidia's growth prospects. In particular, it can be seen as reflecting the market's doubts about whether the high price of Nvidia GPUs is sustainable.

  • Second, the stock price declines of other AI-related companies such as Palantir and Supermicro signify a reevaluation of the revenue models across the AI industry. These companies have pursued high value-added strategies in various fields such as AI infrastructure, solutions, and services. However, the emergence of low-cost alternatives like DeepSeek could act as downward pressure on overall prices, which could lead to deteriorating profitability. Also, intensified competition with Chinese companies could be a challenging factor in securing market share.

  • Third, this stock price plunge can also be interpreted as a market adjustment for excessive expectations and overvaluation of AI companies. Amid the AI fever, the stock prices of related companies rose to very high levels compared to their performance, and there were voices of concern about this overvaluation. The emergence of DeepSeek provided a concrete occasion for these concerns to be realized and triggered an adjustment of investors' expectations.

  • Fourth, the scale and speed of the stock price plunge show the vulnerability of investment sentiment towards the AI industry. The 5% drop in Nasdaq futures and Nvidia's 11% decline are beyond the level of a normal market adjustment. This testifies to how high investors' expectations were for the growth potential and profitability of the AI industry, and how uncertain the foundation for those expectations was. As much as the speed and direction of technological innovation are difficult to predict, the market has once again confirmed that investment risk is equally high.

• This stock price plunge, beyond a short-term market reaction, raises fundamental questions about the direction of evolution and business models in the AI industry. It suggests that the AI industry is entering a new phase in various aspects, such as competition between high-cost, high-performance models and low-cost, adequate-performance models, the balance between technological innovation and profitability, and changes in the global competitive structure. It's time for investors to consider risk management and portfolio adjustments that take these changes into account.

💡 New Phase in US-China Technology Hegemony Competition

• What significance does the emergence of DeepSeek have for the technology hegemony competition between the US and China, and what is the outlook for the future?

  • First, DeepSeek can be seen as China's strategic response to US technology sanctions against China. The US has strictly restricted the export of advanced semiconductors and AI technology to China, and Nvidia's high-performance GPUs in particular were subject to strong export controls. In this situation, China has been making efforts to reduce dependence on US technology through its own technology development, and DeepSeek can be evaluated as one of the results. By developing an AI model that can operate efficiently with fewer computing resources, China has found an approach to bypass US technology sanctions.

  • Second, this incident provides important lessons about the effects and limitations of technology sanctions. US technology sanctions delayed China's AI development in the short term, but paradoxically, they made China invest more resources in its own technology development and seek creative solutions. In particular, the fact that technological innovation occurred in the direction of avoiding high-cost structures can be seen as an unintended consequence of the sanctions. This shows that technology sanctions alone cannot completely block technological development, and may instead promote various development paths.

  • Third, there is a possibility that the trend of the global AI market becoming regionalized and blocked will strengthen. Chinese technology like DeepSeek is likely to spread primarily to the Chinese domestic market and countries that have friendly relations with China. On the other hand, the US and its allies may limit the use of Chinese AI technology in terms of security and values. This means that the 'Splinternet' phenomenon, where the global technology market is divided according to geopolitical structure, could deepen in the AI field as well.

  • Fourth, technology hegemony competition is expected to expand to aspects of cost efficiency and accessibility. Until now, US-China technology competition has mainly focused on the performance and innovation of cutting-edge technology. However, the emergence of DeepSeek suggests that other dimensions of competition such as cost efficiency, accessibility, and practicality may become important. Especially considering developing country markets, technology that provides adequate performance at low cost may be more widely adopted. This means that the US and China could develop strategies to secure competitive advantages in different market segments.

• With the emergence of DeepSeek, the US-China technology hegemony competition can be seen to have entered a new phase. This heralds that competition will become more intense across various dimensions beyond simple technological superiority, including business models, market accessibility, and international influence. Also, as the direction of technological innovation diversifies, the trajectory of global technological development is likely to become more complex and difficult to predict.

4️⃣ In Conclusion

China's announcement of 'DeepSeek' technology and the resulting shock to the global AI market is an important event that shows a new phase in the structural change of the global technology industry and geopolitical competition beyond simple technological innovation or stock price fluctuations. This raises fundamental questions in various aspects such as the direction of AI technology development, the sustainability of business models, and the international competitive structure.

From a corporate perspective, this situation should be taken as a signal of the need to reassess existing business models and adapt to a new competitive environment. High-cost technology providers like Nvidia in particular need to review the sustainability of their premium pricing strategies and accelerate innovation towards increasing cost efficiency. Also, to maintain competitive advantages in the global market, they need to strengthen technological differentiation and focus more on building comprehensive solutions and ecosystems.

From an investor's perspective, it's time to reconsider the balance between expectations and reality for the AI industry. Risk management has become important, taking into account the gap between overvalued stock prices and performance, the uncertainty of technological innovation, and changes in the competitive structure. Rather than overreacting to short-term volatility, an approach that comprehensively evaluates long-term technology trends and the competitiveness of individual companies is needed. Also, it's worth considering lowering excessive dependence on specific companies or technologies through portfolio diversification.

For policy makers, this raises the need to recognize the complexity and multidimensionality of technology hegemony competition and develop more sophisticated strategies. Beyond simple technology sanctions or protectionist approaches, comprehensive policies that strengthen the innovation and resilience of domestic technology ecosystems are required. In particular, investment and efforts for securing long-term competitiveness such as basic research, talent development, and international cooperation will become even more important.

From a consumer and corporate user perspective, the positive aspect is that the accessibility of AI technology may increase and the cost burden may decrease. The range of choices for solutions that fit their needs and situations among various technology options has widened, which can promote the wider spread and application of AI technology. However, at the same time, new challenges may also arise such as diversification of technology standards, compatibility issues, and intellectual property and privacy protection issues.

In conclusion, the 'DeepSeek shock' is an event that compactly shows the various challenges and changes that the global AI industry will face as it enters a maturity phase. It can be seen as an adjustment occurring in the process of sustainable business models, various market segments, and complex international competitive structures being formed beyond the initial optimistic expectations and high growth. In the midst of these changes, the process of all entities - companies, investors, policy makers, users - adapting to the new environment and readjusting their strategies is inevitable, and this can ultimately lead to healthier and more sustainable development of AI technology.