Nearly 70 years on, AI has its own Sputnik moment

Reverse! Reverse! A new AI model from China, DeepSeek, has spooked investors and wiped an extraordinary amount of money off the value of US tech companies.

It was a bit of a mad old day on the world’s stock markets yesterday. The FTSE ended up, the Dow Jones ended up, but there was a run on tech stocks that saw the Nasdaq down 3.1%. And along the way the world’s richest company, chip maker Nvidia, posted the biggest drop in value in the history of the US stock market. 

A massive $600 billion was wiped off its value on Monday alone. By the time you read this it could be more. Or it could have rallied. Everything’s a bit febrile at the moment as the stock market goes through one of its intermittent periods of essentially turning into a glorified bookmakers as investors hunt big profits by backing the right horse.

A DeepSeek dive

If you haven’t been following this in minute detail, basically a Chinese developer released a new AI chatbot called DeepSeek which seems to be just as capable as well-known competitors such as OpenAI, Claude, Gemini et al. What set the cat amongst the pigeons was the fact that it said it built it for $5.6m.

OpenAI CEO Sam Altman has said GPT-4 cost over $100 million to train. So, that’s about one-twentieth of the cost. DeepSeek then added insult to injury by saying it only used 2000 specialized chips from Nvidia to do this. The big models being released by US tech companies use closer to 16,000.

So, it’s significantly cheaper all round and doesn’t use as many resources. This is why venture capitalist Marc Andreessen referred to it as “AI’s Sputnik moment.” In 1957, the USA’s hubris regarding the space race was punctured when Russia got the Sputnik 1 satellite into orbit, surprising the entire world and sending an entire nation into a long existential panic.

Investors will have seen DeepSeek-R1 in a similar way; an unwelcome sign that America’s lead in the global AI space race is not assured no matter how much money they throw at it. And with OpenAI's Sam Altman and Oracle's Larry Ellison joining President Donald Trump to announce the faintly ludicrously named Stargate initiative last week, a $500bn investment of that nature doesn’t seem quite the sure bet it was as little as a week ago. 

It wasn’t meant to be like this. The Biden administration passed legislation designed specifically to stop advanced chips such as Nvidia’s from getting into Chinese hands. Inevitably though some will make their way there, and it looks like given limited resources, Chinese developers have been forced to be that bit more creative when it comes to reverse engineering what OpenAI et al are doing.

So, what does $500bn get you? A six-month lead in the market if you’re lucky? That’s not the sort of thing that investors want to hear.

So where does this leave us?

There are probably more questions than answers here. DeepSeek fairly swiftly had to stop new users signing up on Monday, claiming malicious attacks. The veracity of this is being questioned by some, as are the numbers that DeepSeek is reporting. It wouldn’t be the first company to be economical with the truth when it comes to such things, but put in the context of American unease over Chinese tech, there are more factors at play here than normal. A sale of TikTok in the US is still likely to be enforced in the next month or two, with Microsoft the newest suitor.

On the one hand, it potentially tips us into dangerous new territory. The development of AI has been breakneck enough that it has alarmed many people. Couch it in terms of a superpower arms race, and even the limited guardrails that we have in place now could become quickly ineffectual.

On the other, it's worth noting that energy stocks also fell on Monday. The environmental damage caused by AI is becoming an area of increasing concern. If DeepSeek shows that with some optimization that can be limited, then that is probably a good thing for the rest of us if not the energy stock shareholders.

As a side note, one of the companies that lost bigly yesterday was Constellation Energy, which is behind the planned revival of the Three Mile Island nuclear plant for powering AI. Yes, that Three Mile Island…

Either way, the AI stampede is looking even more like a bubble today than it did before. And like bubbles everywhere, they tend to get blown around on the wind rather easily.

The existential panic caused by Sputnik eventually took America to the Moon 12 years later. It will be interesting to see where this leads. But don’t be surprised if there is a loud popping noise at least at some point along the way.

tl;dr

• The launch of the Chinese AI model DeepSeek has unsettled investors, causing a significant decline in US tech stocks, with Nvidia experiencing its largest drop in market value in history, losing $600 billion in one day.
• DeepSeek's development cost was reported at $5.6 million, significantly less than the $100 million claimed by OpenAI for GPT-4, using fewer Nvidia chips in its training, which has raised concerns about the US's competitive edge in AI.
• The US administration's efforts to prevent advanced chip technology from reaching China may prove ineffective as Chinese developers demonstrate resourcefulness in advancing their AI capabilities despite limitations.
• The growing sense of urgency surrounding AI development parallels historical events, akin to the United States' response to the Sputnik launch.