The US-China tech rivalry has entered a new phase, sending shockwaves through global markets. China’s breakthrough in artificial intelligence (AI) with its homegrown Large Language Model (LLM), DeepSeek, is challenging the dominance of US tech giants. This innovation emerges despite aggressive US government efforts to block China’s access to advanced semiconductor technology—a strategy often referred to as “chip export controls” or the “semiconductor ban.” These restrictions aim to stifle China’s tech ambitions by cutting off critical components, but the ripple effects are now being felt across global markets, particularly in US tech stocks.
The Geopolitics of Chip Export Controls: US-China Tensions and Their Impact
For years, the US has sought to curb China’s access to high-performance chips essential for AI development, citing national security concerns. Companies like NVIDIA, AMD, and Intel have been caught in the crossfire of these policies, with export controls preventing them from selling their most advanced chips to Chinese entities. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, has been another pivotal player, supplying cutting-edge chips while balancing the geopolitical tensions between the US, China, and Taiwan.
Despite these restrictions, China has displayed remarkable resilience. DeepSeek, a Chinese AI company, has managed to train its LLM using domestically produced chips and innovative cost-cutting techniques. By leveraging Semiconductor Manufacturing International Corporation (SMIC) and optimizing AI algorithms, DeepSeek has bypassed US sanctions and drastically reduced its dependence on imported technology. Recent reports indicate that the training expenses for DeepSeek’s LLM were approximately $6 million—a stark contrast to the estimated $78 million required to develop models like OpenAI’s GPT-4. This disparity underscores DeepSeek’s efficient approach, which challenges the prevailing notion that advanced AI requires immense financial resources.
The Impact on US Tech Stocks
The emergence of DeepSeek has sent US tech stocks into a tailspin, particularly those heavily reliant on AI and semiconductor technologies. NVIDIA, a leader in AI chips, has been one of the hardest hit. Its stock plummeted by 16% overnight as investors grew increasingly concerned about losing market share to Chinese competitors. Other major players like AMD, Intel, and even Microsoft, which relies on NVIDIA GPUs for its Azure cloud platform, have seen declines as the market adjusts to the new reality of Chinese AI innovation.
Key companies affected:
- NVIDIA (NVDA): Down 16% overnight due to fears of reduced demand for its high-end GPUs in China.
- AMD (AMD): Facing similar pressures, with shares dropping by 8%.
- Intel (INTC): Struggling to maintain its position in the AI chip market, with a 6% decline.
- Microsoft (MSFT): Vulnerable to shifts in the AI landscape due to its reliance on NVIDIA GPUs for Azure.
Australian Tech Stocks: Usual Suspects and Overlooked Gems
Even Australian tech firms are not insulated from these changes. Companies often cited in mainstream media, such as Afterpay, WiseTech Global, and Appen, have all felt the impact, with stock price declines ranging from 5% to 10%. WiseTech Global, which relies on global supply chains now under strain, saw a 7% dip. Similarly, Appen, specializing in AI training data, is facing intensified competition from Chinese firms that have quickly gained ground.
However, our research extends beyond the usual suspects to uncover lesser-known impacts. The Semiconductor ETF (ASX: SEMI), which tracks global semiconductor stocks, was hammered, dropping approximately 7%. Small and micro-cap stocks such as Brainchip Holdings Ltd (ASX: BRN), Weebit Nano Ltd (ASX: WBT) and InFocus Group Holdings Ltd (ASX: IFG) also faced steep declines, highlighting how deep the ripple effects go. Amidst the doom, a bright light emerged: Dropsuite Ltd (ASX: DSE), an AI-related company, received a takeover bid and surged by about 30% at the time of writing. Further information on how these lesser-known companies related to Ai are given at the end of the article for those readers interested.
Innovation Beyond Sanctions
China’s ability to achieve these breakthroughs, despite stringent US sanctions, underscores the limitations of export controls in the long term. While these measures may slow progress temporarily, they also serve as a catalyst for innovation. DeepSeek’s rise exemplifies this dynamic, demonstrating that Chinese companies can still compete with US giants like OpenAI and Microsoft, even with fewer resources. Additionally, China’s vast data pool and strong government support for AI research have provided a fertile ground for advancements. The government’s strategic investments in AI are paying dividends, allowing companies like DeepSeek to develop competitive technologies.
A Fragmented Global Tech Ecosystem
The broader implications of DeepSeek’s success are profound. The US-China tech rivalry is now reshaping the global tech landscape, leading to a more fragmented ecosystem. Investors are increasingly aware of the need to diversify their portfolios, considering the growing influence of Chinese tech firms. Meanwhile, policymakers face the challenge of navigating a world where technological innovation is no longer dominated by a single country. For decades, US tech companies led the charge in AI and semiconductor development, but DeepSeek’s rise signals that the balance of power is shifting.
The New Reality for Investors and Policymakers
The rise of DeepSeek also calls into question the long-term effectiveness of US export controls. While they can create short-term bottlenecks, these restrictions have inadvertently pushed China toward greater self-reliance and innovation. DeepSeek’s ability to compete with models like OpenAI’s GPT-4 shows that cutting off access to advanced chips is not a guaranteed path to stalling Chinese advancements.
Ultimately, the world is witnessing a seismic shift in the global tech ecosystem. The emergence of DeepSeek as a formidable competitor highlights the end of an era of uncontested US dominance in AI and semiconductors. Investors, tech companies, and governments alike must adapt to this new reality, where innovation knows no borders and geopolitical rivalries drive technological advancements in unexpected directions.
Small and Micro-cap stocks Covered
BrainChip Holdings Ltd (ASX: BRN) is a leader in neuromorphic computing, creating processors that mimic the way human brains process information. Their Akida™ chips are particularly valuable for edge AI applications, offering real-time processing with minimal energy consumption—a crucial feature for AI workloads in automotive, healthcare, and IoT industries.
Weebit Nano Ltd (ASX: WBT) focuses on the development of Resistive Random-Access Memory (ReRAM) technology. ReRAM provides a faster, more energy-efficient memory solution compared to traditional flash memory, making it a key enabler for AI systems requiring high-speed data processing, especially in data centers and edge devices.
InFocus Group Holdings Ltd (ASX: IFG) combines enterprise-scale capabilities across multiple domains, including data analytics, business intelligence, software and platform development, cybersecurity, artificial intelligence, and machine learning. Their diversified approach positions them as a valuable partner for businesses looking to leverage AI and advanced technologies to enhance operations and decision-making.
Dropsuite Ltd (ASX: DSE), specializing in cloud backup and recovery services, has carved a niche in the growing market for data protection. Their AI-driven tools ensure seamless data management, which has likely contributed to their valuation—culminating in a recent takeover bid that propelled their stock price by 30%.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial advice. It is not intended to be a substitute for professional financial advice, and you should not rely solely on this information for your investment decisions. Please consult a licensed financial advisor or conduct your own research before making any investment decisions. Aussie Bugger is not responsible for any financial losses or gains resulting from your investment choices. Remember, all investments carry risks, and past performance is not indicative of future results.