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It’s hard not to feel sorry for Australia’s tech sector on Tuesday.
Ever sucked up in the riptide of Wall Street whether we like it or not – compared to which the ASX is, unfortunately, small fry – we’re vulnerable to volatility on U.S. markets.
Bad news, then, NVIDIA staged the biggest overnight loss ever recorded in share market history. That peak AI stock listed on the NASDAQ has been seen as proof manifest of American exceptionalism through the post-lockdown years.
But now an (apparent) technological AI breakthrough from China, the world’s still-struggling second-largest economy, has reminded us just how influential the Red Dragon economy can be.
(Perhaps poetically, it’s Year Of The Snake over there.)
But it isn’t just DeepSeek, and by extension the AI industry, where China has come hot out the gate of in 2025.
Not the first potential disruptor
What I think is most interesting is over Christmas, the world seemed to mostly miss another big piece of market-rattling news from the Red Dragon.
That was China’s (ultimately self-reported) success in making vortex lance steelmaking work – a technological breakthrough that would allow it to use its own low-grade ores.
If China can now make the steel it needs to build from its own lower-grade iron ores, that means it doesn’t need to rely on the Pilbara anymore, for which Australian economic implications should be obvious. And thereafter, our share market.
(Consider also Rio Tinto’s ongoing construction of a Chinese-backed mega iron ore mine in West Africa which, despite reassurances, is guaranteed to hurt the Pilbara in the long run.)
Of course, AI is hot right now and steelmaking isn’t, so it isn’t hard to see (coupled with holidays) why DeepSeek is getting more attention than vortex lance steelmaking technology.
But put the two together, and you get a different image of China compared to its fairly poor run the last few years. On two major economic fronts, Chinese innovation appears to be giving the West a run for its money.
But first, let’s look at DeepSeek. Here’s a quick rundown if you’ve not caught up:
Why does DeepSeek matter?
Its DeepSeek AI model released last week and properly soaked in by Western audiences on the weekend has absolutely left AI sentiment with a bone-deep bruise.
Here’s a speedrun:
- NVIDIA’s value proposition has long been based on a perception only it can produce the chips needed to make AI work (known as GPUs).
- Biden-era microchip export bans to China helped prop up the belief that America was the dominant leader in AI.
- But now China’s DeepSeek AI model appears to be as good as what OpenAI is using
- DeepSeek claims – and it’s still early days – that it can run AI models for cheaper than the US due to breakthroughs.
- It appears export curbs on microchips could have forced China to innovate into disrupting the AI market by finding new ways to optimise computing power.
- But this would mean that NVIDIA isn’t the only company capable of ‘doing’ AI – smashing its valuation, and that of all of its peers.
Fallout for Australia profound
The fallout Down Under has been predictable. While the ASX was perfectly flat on Tuesday, our tech sector has been rattled. Take a look at the following lunchtime metrics on some of our biggest (or best-known) tech stocks:
- NextDC (ASX:NXT) down -6.2% ($14.91.sh)
- Goodman Group (ASX:GMG) down -8% ($35.04/sh)
- Digico Infrastructure REIT (ASX:DGT) down -10.8% ($4.25/sh)
- HMC Capital (ASX:HMC) down -5% ($8.97/sh)
- Brainchip (ASX:BRN) down -16% (32.5cps)
(Spare a thought for recently-listed Digico, which only just last week meaningfully got back above its launch price.)
This follows Wall Street darling NVIDIA falling more than 15% overnight, wiping off close to a trillion in market value.
It wasn’t just NVIDIA either. The NASDAQ-listed Super Micro Computer has tanked -12.5% overnight; American Superconductor Corp fell -10%.
The Magnificent 7 largely took hits as all those companies, currently AI-mad, now feel the pain of shareholder doubt.
(Interestingly, Taiwan-based TSMC, where NVIDIA gets many of its chips from, is actually green in Tuesday trades over in Taipei.)
DeepSeek cyberattack underscores global interest
Perhaps most telling that DeepSeek is rattling markets is evidence of a cyberattack already hitting the platform.
While it’s still a bit vague if it’s a directed cyberattack or just the hug of death (a term for when too many people access a website at once), at any rate, its ascension to the top of popular app markets is further proof DeepSeek is currently living in everybody’s head rent-free.
And that could, in turn, steal attention away from Wall Street stocks – which would almost definitely mean contagion downside for Australian stocks exposed to AI.
And/or data centres, which have now become synonymous with the emerging chatbot tech it isn’t even clear people actually want.
Competition was inevitable
SAXO Markets’ Charu Chanana told HotCopper there’s a real risk here China could have seriously just taken the wind from Wall Street’s sails when it comes to AI.
“NVIDIA may not be in the pole position forever,” Chanana said.
“By developing cutting-edge AI models with less advanced and more cost-efficient hardware, DeepSeek challenges the heavy investments US tech companies are pouring into high-cost AI infrastructure.”
“Reports suggest DeepSeek-R1’s API costs just USD 0.55 per million input tokens and USD 2.19 per million output tokens, compared to OpenAI’s API, which costs USD 15 and USD 60 respectively.”
I won’t bore you with an explainer of what tokens are, but obviously, DeepSeek’s claims it can operate an AI model far cheaper than its US competitors are the thing to take note of.
OpenAI’s Sam Altman took to Twitter on Tuesday afternoon Australian time to run damage control.
“deepseek’s r1 [sic] is an impressive model, particularly around what they’re able to deliver for the price,” Altman twote. “we will obviously deliver much better models and also it’s legit invigorating to have a new competitor! we will pull up some releases.”
Legit, spoken like a true Millennial. His erstwhile claims that “the world is going to want to use a LOT of ai [sic]” remains to be seen.
So has China got its groove back?
That’s neither here nor there, really.
As for what happens next, the world will be constantly refreshing Wall Street futures and scanning Twitter and other platforms for the latest opinions from the AI czars currently in charge of market sentiment.
But the biggest story, in my view, is that China is back.
After years of headlines on China’s post-COVID-19 deflation issues, suspension of the once-many press conferences around economic issues, constant and underwhelming stimulus promises, and construction sector malaise (many written by yours truly), it’s clear the Red Dragon is back.
Can it continue to roar?
With vortex lance technology still in its early days, as well as DeepSeek, it’s entirely possible that 2025 could be the year that we start taking China a bit more seriously. Again.
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