Audio excerpt - News Host 1:

“Stock markets opened just a few minutes ago and it’s not pretty. Down big. Especially the tech-heavy Nasdaq.”

Audio excerpt - News Host 2:

“Shares of Santa Clara’s Nvidia fell hard this morning on the popularity of a new Chinese artificial intelligence event.”

Audio excerpt - News Host 3:

“A little known Chinese company sending shockwaves through the stock market, and calling into question U.S. dominance in Artificial Intelligence.”

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RUBY:

The arrival of Deepseek wiped more than a trillion dollars off the value of America’s tech firms.

Toppling the U.S. from its unquestioned place leading the world’s AI race, and upstaging Donald Trump as he announced the 500 billion dollar Stargate Project.

The fact that a relatively small disruptor like Deepseek could do such damage calls into question everything Silicon Valley would like us to believe about Artificial Intelligence.

From Schwartz Media, I’m Ruby Jones. This is 7am.

Today, managing editor of The Saturday Paper Emily Barrett on why DeepSeek caused markets to crash, and what it means for the tech titans of today.

It’s Tuesday, February 4.

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RUBY:

So Emily, it's now been a week since Chinese AI Company, DeepSeek announced itself, and there were immediate impacts of that announcement. The value of tech stocks in the U.S. crumbled. But could we go back to before that happened? And can you tell me a bit about the AI landscape before Deepseek came along?

EMILY:

So this was all about America. They were unquestioned in their dominance of AI and, you know, the brightest minds in the country were at work on it. Everything for many years now has been set up for the American tech industry to succeed. And it's clear that it's been a huge focus of the incoming administration as well. As soon as he took office, President Trump announced Stargate.

Audio excerpt - Donald Trump:

“Stargate. So put that name down in your books, because I think you're going to hear a lot about it in the future. A new American company that will invest $500 billion, at least in AI infrastructure in the United States…”

EMILY:

U.S. companies have poured billions and billions of dollars into advancing AI, and a quarter of $1 trillion was projected for this year alone. And you only have to look at the front row of guests at Trump's inauguration to kind of get an idea that tech is at the forefront of American innovation and it's certainly at the forefront of American policy.

Audio excerpt - News Reporter (Inside Edition):

“As Donald Trump is sworn in today, the nation's richest and most powerful tech tycoons had some of the best seats in the House…”

EMILY:

And Trump has made no secret of the fact that he really wants to see money getting poured into tech in America as the dominating force over specifically China.

RUBY:

Okay. And so central to that investment is the production of computer chips. So what has the U.S. government been doing to make sure that there is enough supply?

EMILY:

Well, specifically, the Biden administration signed into law something known as the CHIPS Act that stands for Creating Helpful Incentives to Produce Semiconductors for America.

Audio excerpt - News Host:

“Well, President Biden signed the CHIPS Act into law today. The $280 billion plan includes 52 billion in subsidies for US computer chip companies. 24 billion in tax credits for new manufacturing facilities.”

EMILY:

This allowed for around 280 billion in new funding to support chip manufacturing in the U.S.. They really want to bring this industry onshore. It's a part of them securing their supply chains and a part of that competition with China. It included incentives for domestic production, tax credits and money for research and workforce training. And sort of complementary to that are policies that have actually been running since the time of the first Trump administration, which were restricting supply of AI chips to China for many years. And last year, actually, Sam Altman, who is the CEO of OpenAI, started trying to raise $7 trillion to try and remake the global chip industry, the U.S. economy. Just to put that in perspective, is worth about 30 trillion U.S. dollars and Australia is almost 2 trillion in U.S. dollars. So that's more than three times the total value of our economy.

RUBY:

Wow.

EMILY:

Yeah. And it's not just America who wants chips. The race to manufacture and to buy chips has definitely intensified. And so America has also been reliant on manufacturers in Taiwan, and they've been trying to thwart China by putting export bans on the leading US chip manufacturer, Nvidia. You know, this is a hugely important strategic commodity.

RUBY:

Okay. And so then along comes DeepSeek. Tell me more about the company itself.

EMILY:

Yeah, DeepSeek’s a really fascinating company and there's not an awful lot known about it. So it emerged in 2023. It's led by a 40 year old man. His name is Liang Wenfeng. He was a hedge fund executive. He founded a hedge fund called High Flyer. It's a quant hedge fund worth $8 billion that's understood to be the financier of DeepSeek. And the technology that was launched was called R1, launched crucially at the same time as sort of an open source research document that people can actually access generally to, you know, see exactly how this was created, how DeepSeek came about, what it's based on, how its model works.

The most important thing for the market reaction was that DeepSeek is able to do what it does on a fraction of the budget of what ChatGPT can do. So it means that software developers can use DeepSeek much more efficiently, much more cheaply than they could use ChatGPT. So really, I mean, what it's done is it has done the traditional job of a disruptor.

DeepSeek has called into question the approach of its competitors. So some observers have been saying for a while that actually U.S. tech companies are overvalued and they obviously now feel a little vindicated by this news and by the market reaction. Among them are people like Ed Zitron who is a tech analyst who says that Silicon Valley had just become complacent and it was too interconnected to be truly competitive. OpenAI, it's fair to say, has been making its name on promises and imaginative concept. It hasn't been profitable. And so critics like Zitron are coming to a point of having to ask, is this technology, is the benefit of it clear? Do we know what it's actually good for?

RUBY:

Coming up after the break - what is AI actually good for?

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RUBY:

So, Emily, AI is clearly very important to Donald Trump. As you said, he announced Stargate as soon as he became president. So how does the emergence of DeepSeek complicate his plans for America's dominance here?

EMILY:

Yeah, it's really interesting that China has in a way, sort of shown that they can get around the trade restrictions and the sorts of kerbs that the administrations have been trying to put on China for quite some time. They got around that this time by simply using fewer of the chips. The U.S., up until this sort of point, had still seemed fairly convinced that the battle was about money and skills. China has shown that it has no shortage of the latter. It's also proven that money may not be quite as much of a factor because it can innovate more cheaply.

It's also important to keep in mind that Trump is doing a bunch of things that are potentially hurting the industry right in even in the U.S.. Trump, we know that he's a fan of tariffs. The industry isn't a fan of that. There have been multiple meetings already. Nvidia's CEO has gone to see Trump, and people broadly across the tech industry know that putting tariffs on supply only pushes up costs domestically. And we know that he's not a fan of anything that Biden did. So he's trying to differentiate his administration by, first of all, trying to unpick parts of the Inflation Reduction Act. And a key part of that was the Chips Act.

RUBY:

And Emily, what does all of this say to you about Silicon Valley and the tech titans? Is it the case that actually it's a far less innovative environment there than the CEOs of these companies would pretend and have these CEOs become very, very rich off the back of tech that, was perhaps overvalued?

EMILY:

I think that's a really good way of summarising it, frankly. There's a view out there that's emerging, possibly gaining some strength now that the tech sector had become very complacent, that all the money that's been thrown at tech year after year after year after year is was really not encouraging them to innovate in the way that we're now seeing China able to do. And what was really needed in the US industry was a genuine threat. So, you know, part of this is not only were the AI executives and sort of thinkers no longer thinking in a disruptive way, were they thinking creatively enough about how to bring value for money to the sector? But what is the compelling use case of AI?

People are very captured by the potential of AI, and that was also helped by the fact that Sam Altman wrote an open letter along with a few other executives that was literally raising the threat of an untrammelled AI, what it could potentially do. We've all got those images in our heads of some sort of Terminator, you know, machines against mankind of debate here. But when we think of AI at this point, we think about ChatGPT.

Now, what you'll hear constantly from executives like Sam Altman is, you know, these analogies to Apple in the early days or to Uber in the early days when you know, yes, there was some investment. Yes, there was a lot of money being thrown around. It wasn't entirely clear that these businesses were going to be that successful. When were they going to post profits? When were they going to become the giants that we know them as today? And his argument would be, you know, OpenAI is on the way to that. It's yet to turn a profit.

But the difference that people like Ed Zitron are pointing out is we knew what Apple was proposing. The iPhone was a pretty clear proposition. We may not have known at the time exactly how integral it was going to become to all of our lives. But it was clear what it could do. AI is a complicated, multi stranded project that a lot of people have trouble conceptualising, let alone seeing in terms of their daily lives. Yes, we know that can help kids cheat on their tests. We know that big data is a very useful way of sort of crunching down lots of information into key findings. But as far as really understanding a clear cut message of how AI is benefiting us in our daily lives, it's something that still maybe has to be sold and maybe that's what the market is telling us.

RUBY:

Emily, thank you so much for your time.

EMILY:

Very welcome. Thanks a lot.

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RUBY:

Also in the news today,

Journalist Antoinette Lattouf has given evidence in the federal court in her case against the ABC for wrongful dismissal.

Lawyers for Lattouf revealed private messages between senior ABC executives, arguing they demonstrate the decision to dismiss Lattouf from her ABC Radio Sydney position was influenced by "pro-Israel" lobbying and went against internal editorial advice.

It was revealed former ABC chair Ita Buttrose pushed for Antoinette Lattouf to be taken off-air, asking why she could not “come down with flu, or COVID or a stomach upset?” after receiving a tranche of complaints about her presence as a fill-in presenter.

Under cross-examination by the ABC’s barrister, Lattouf also agreed that she was someone “sympathetic to the plight of the Palestinian people” and “critical of the conduct of the state of Israel”.

And, Greens senator Sarah Hanson-Young says her party will bring on debate on a bill to ban gambling advertisements.

Prime Minister Anthony Albanese has previously stated his government has no plans to ban gambling advertisements, despite being a recommendation of the Peta Murphy report into gambling harm.

I am Ruby Jones. This is 7am. See you tomorrow.

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