Why DeepSeek prompted a $1 trillion tech sell-off
Dado Ruvic/REUTERS
- This post originally appeared in the Business Insider Today newsletter.
- You can sign up for Business Insider's daily newsletter here.
Good morning! Your Starbucks coffee could soon give you a boost, but not in the caffeinated way. The chain wants workers to start writing messages, including inspirational ones, on customers' cups next month. (In the meantime, in case you need to hear it, I think you're doing great.)
In today's big story, a Chinese startup has left investors hurting, people questioning what they know about AI development, and the tech industry in a frenzy.
What's on deck
Markets: How much does it pay to work in private credit?
Tech: In a time when nostalgia is cool, Yahoo hopes it can bring itself back to relevancy.
Business: You've heard of FOMO, but what about FOBO? (Hint: It's not a good thing.)
But first, here comes China.
If this was forwarded to you, sign up here.
The big story
AI comes for AI
Illustration by Justin Sullivan/Getty Images
Want to see a magic trick? How about making more than $1 trillion disappear in a day?
That was DeepSeek's introduction to investors and the tech industry as fears over the Chinese AI startup sent shockwaves everywhere Monday.
Let's break it all down:
Why is everyone freaking out over DeepSeek? In the simplest of terms, DeepSeek showed how quickly it can catch up to the US AI industry by doing more with less than was previously believed possible. It's also charging a lot less than everyone else. So when companies are talking about finally getting ROI on those AI investments, DeepSeek is making those calculations much harder.
So it's just some more competition? Imagine you make incredible cookies. People really love them and feel like they'll ultimately change how people eat. The downside is these cookies require lots of expensive ingredients and tools to make. But your investors don't care because the cookies are great. And everyone will pay a fortune for them, meaning they'll eventually make loads of money from backing you.
Then, all of a sudden, someone starts baking cookies using fewer, cheaper ingredients. The cookies are priced much lower than yours and taste just as good. What's worse: They're willing to share their recipe with everyone. That's what's going on between the US AI industry and DeepSeek.
But if we can do things cheaper than before, isn't that good? Not if you bet a lot of money on needing a ton of expensive infrastructure to succeed in the space. The general thesis has been spending big on AI is fine because you can make that money back eventually. But DeepSeek's cheaper models using older chips are calling those beliefs — and the trillions spent on AI infrastructure — into question, writes BI's Emma Cosgrove. Meanwhile, customers are ready to give it a spin. AWS is already seeing clients ask for access to DeepSeek models, according to an internal document, writes BI's Eugene Kim.
And the market melted down? For many tech stocks, yes. (Although companies like Apple, which is focused on integration over building models, could actually benefit.) Energy companies, which were viewed as key players powering the AI revolution, also took a bath on Monday. Big picture, DeepSeek exposed the market warts that investors have been willing to overlook: it's overvalued and companies are overspending.
So is that a wrap on AI in the US? I wouldn't go that far. You might have heard the term "Jevons paradox" thrown around. That's the idea that even if better efficiency means using fewer resources, the demand will increase so much that it won't matter. Some analysts and AI leaders think Monday's chip stock sell-off was a little overblown.
Anything else? DeepSeek being a Chinese company adds another layer of complexity. President Donald Trump clearly intends to make the US the leader in AI — Remember Stargate? — so it's not likely he'll take this lying down.
Trump said on Monday DeepSeek's ability to train AI more cheaply is a "wake up call" for tech industries. Sam Altman has also already responded, announcing that OpenAI would accelerate the release of "better models."
News brief
Top headlines
- The White House has temporarily frozen all federal grants and loans, affecting billions of dollars in payments.
- Whole Foods store workers form first union under Amazon ownership.
- How the US may have unintentionally helped create an AI monster in China.
- Starting salaries for consultants remained flat for second straight year, report says.
- Jensen Huang lost close to 20% of his on-paper wealth on Monday after DeepSeek roiled the AI industry.
- An on-site natural gas plant will help power Stargate's first data center, public filings show.
DeepSeek's founder is being hailed in China as an 'AI hero of Guangdong' after the US market rout.
3 things in markets
Getty Images/Getty Images
1. What's inside those private-credit paychecks? Nonbank lending is having a moment, and there has ben a hiring boom to match. BI looked at salary data across 16 nonbank lenders to see what private credit is paying across all levels — and who's paying the most.
2. Not so fast on the rate-cut front. Despite President Trump's avowals that he'll "demand" interest rate cuts, the Fed is likely to hold rates steady tomorrow during its first meeting of the year. The labor market's looking good, the Fed likely has no reason to rush a rate cut, and Fed Chair Jerome Powell has been clear about keeping the central bank independent of politics.
3. London and Hong Kong still lead the pack of international hedge fund outposts. There's skepticism about whether these cities would remain financial hubs for US-based multimanagers. But neither has been toppled yet, as regulatory filings show robust head counts. Still, some firms are starting to set their sights on Dubai and Singapore.
3 things in tech
Yahoo!; Chelsea Jia Feng/BI
1. The latest great Y2k comeback: Yahoo! Though the company lost ground to Google and Meta years ago, it's tapping into turn-of-the-millennium nostalgia to appeal to new (and old) users. Lust for the early internet age is ardent — but Yahoo might need more than good memories to stay relevant.
2. Leaked Instagram deals offer big bucks to lure TikTok creators. With TikTok's future up in the air, Meta is presenting creators with contracts worth up to $300,000 to post a certain number of exclusive short-form videos on Instagram. While some people are biting, not everyone is interested in playing by Instagram's rules.
3. DeepSeek vs. ChatGPT. The Chinese firm's R1 is the latest release to challenge AI models from OpenAI, Google, and Meta — and for a fraction of the cost. BI tested out DeepSeek's chatbot and compared it to ChatGPT. R1 is impressive, but it still has some limitations.
3 things in business
Tara Anand for BI
1. Companies' new tool against whistleblowers. Across the US, companies large and small are wielding trade secret laws against employees who have accused them of discrimination or wrongdoing, BI has found. Professional activities employees describe as run-of-the-mill, like documents printed out to review at home, have been reframed by companies as trade secret misappropriation. Most of these trade secret suits end up getting settled, but often at the expense of the worker.
2. AI is giving CEOs FOMO, but employees are getting FOBO. Businesses are racing to adopt AI — but employees are dealing with the fear of becoming obsolete by the tech's advances. However, there's a return on investment for companies to ensure their workers don't feel left behind. Reverse mentoring and mandatory AI trainings can help, business leaders told BI.
3. Trump's RTO policy leaves federal workers wondering: What to wear? DC isn't exactly known for its fashion — one civil servant described it as "funeral director chic" — and its dress code is generally more conservative than corporate America's. Three stylists told BI their tips for federal workers no longer dressing for Zoom. Those who live more than 50 miles away from their offices won't be spared, either. Trump's administration told agencies to make RTO plans for them on Monday.
What's happening today
- Boeing, Starbucks, and General Motors report earnings.
- Bulletin of the Atomic Scientists adjust the "Doomsday Clock" minute hand. As of 2024, it is 90 seconds to midnight.
Federal Open Market Committee meeting.
The Insider Today team: Dan DeFrancesco, deputy editor and anchor, in New York. Grace Lett, editor, in Chicago. Ella Hopkins, associate editor, in London. Hallam Bullock, senior editor, in London. Amanda Yen, associate editor, in New York. Elizabeth Casolo, fellow, in Chicago. Lisa Ryan, executive editor, in New York.