Well, the Chinese weren’t supposed to do that.
The first disruption to the triumphalist Trump narrative of a new American Golden Age enforced by tariffs, taxes and sheer magisterial will has come earlier than expected, via a trillion-dollar smashing of the Nasdaq index. It’s a demonstration that the entire business model of artificial intelligence, as pushed by Silicon Valley, might be wildly overcapitalised.
Worse, it came just a few days after Donald Trump hosted the announcement by donors Larry Ellison and Sam Altman of a US$500 billion investment in AI infrastructure. The framing was that the new US president, by deregulating AI (what could go wrong?) and liberating his tech bro backers, was ushering in a new era of colossal investment that would cement America’s control of AI. To provide the massive scaling needed to deliver this future, vast data centres would be built powered by nuclear power and fossil fuels — drill, baby, drill — and cooled by US water supplies (never mind that communities need water to drink and farm).
No-one could threaten this new frontier of US exceptionalism, the story goes. After all, the Chinese, courtesy of the Biden administration, don’t have access to the latest chips to drive that scaling.
Cue DeepSeek, the Chinese hedge fund-owned, Hangzhou-based company that has released its AI assistant that matches or betters the performance of OpenAI’s ChatGPT, but for a tiny fraction of the cost and resource-impact, using older chips and less data. Deepseek’s R1 model promptly leapfrogged ChatGPT to become the top-rated free application on Apple’s App Store in the US and China on Monday.
The business model of AI, as peddled by US tech companies, and the massive investment undertaken and promised for it — with all its massive environmental costs — suddenly looks deeply flawed. And investors, primed for the bursting of the tech bubble inflated by AI hype, have taken fright.
In the wake of a Wall Street Journal report on Deepseek R1 on Sunday, markets across Asia slumped — especially tech stocks, led by Tokyo. Most markets in Europe also ended in the red, but Wall Street saw the biggest hit, with tech stocks and especially AI and AI-related companies impacted, led by the giant Nvidia (now no longer the world’s biggest company by market value) and fellow chipmaker Broadcom. The Nasdaq index lost more than a trillion dollars in value with more than half of that coming as Nvidia shed more than 15% in value. Apple and Meta were able to resist the carnage, but not enough to sustain the broader index.
Even tech bros in Trump’s orbit were impressed. Right-wing venture capitalist Marc Andreessen tweeted that “Deepseek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen”. The R1 model currently won’t answer questions on Chinese leader Xi Jinping or the Tiananmen Square massacre, but it can be modified to remove blocks like that.
According to DeepSeek researchers, R1 used Nvidia’s H800 chips for training and they spent US$5.6 million developing it. H800 chips were initially developed as a reduced-capability product to get around restrictions on sales to China, and were subsequently banned by US sanctions. If true, the achievement gives China a leadership role in AI, an area the country was supposed to be playing catch-up in.
China already leads the world in electric vehicles — cheaper and as good, or better than, Western vehicles — and dominates solar photovoltaic production. But those have been delivered courtesy of massive government subsidies for those industries and the achievement of scale that other economies can’t match. This is different, and it has been achieved in the face of American sanctions that were supposed to preserve America’s tech dominance.
It also illustrates — if only by sheer dollar value — how the end of the US empire and the rise of China is one of the defining narratives of our age. Much of the current state of US politics can be seen as a reaction against the steady decline of America and the resentment of, and lashing out at, a competitor that refuses to be cowed — and which, unlike Russia, has the sheer size to challenge the US.
Entire business empires are being built on a belief that American exceptionalism will always prevail and that the US just has to want it badly enough, and pull enough policy levers, to stay on top. There are a trillion reasons to be sceptical of that.
Have something to say about this article? Write to us at letters@crikey.com.au. Please include your full name to be considered for publication in Crikey’s Your Say. We reserve the right to edit for length and clarity.
