This past week, DeepSeek [Chinese company] released a generative AI model that caused significant volatility to the technology sector. Not only did DeepSeek build a model that appeared to compete with other reasoning models like OpenAI and Gemini [Alphabet], but they were able to do it with limited access to GPUs and for less than $6 million. DeepSeek claims that they can lower the cost of training and inferencing by 10 to 30 times vs. the current large language models in the US. If true, this is simply amazing!

 

This is what's supposed to happen in technology! Costs come down and usage goes up. I just don't think anyone expected these large, well-financed US companies to be overtaken by a small Chinese company with limited access to capital and no access to Nvidia’s high end GPUs (due to US sanctions). The implications of this development are below:

 

• Costs will come down significantly
• Usage will go up significantly (lower cost equals increased demand)
• Past investments in AI models might go down (Microsoft investment in OpenAI)
• More artificial intelligence in all devices, especially smart phones
• Semiconductor demand could go down, however it's more likely that it will just get pushed out into the future
• Data centre demand will likely get pushed into the future as well

 

As the cost of inference (the process of running live data through a trained model to make a prediction or answer a question) comes down, usage goes through the roof. It's important to remember "Jevon’s paradox" which states that, as the cost of technology comes down, demand increases – leading to dramatic growth. Just think about mobile phones or the Internet. They have gone from being expensive and clumsy in the past to being pervasive and essential throughout every part of our life today.

 

In the end, this is good news for all of us. The large US tech companies have a little bit of egg on their face, as they thought no one could catch them. This should push the race for AI supremacy to be even more innovative and aggressive, at an accelerated pace. This will drive more growth, more cost reductions, more focus, and ultimately better value for humanity.

 

Let the competitions begin!

 

I have also included a note from our CIBC Economics team entitled “Retaliation 101”

 

As always, if you have any questions, please feel free to give us a call.

 

Have a great weekend.

 

Milan