After DeepSeek-R1 was launched earlier this month the company boasted of, external “performance on par with” one of ChatGPT maker OpenAI’s latest models – when used for tasks such as maths, coding and natural language reasoning.

Silicon Valley venture capitalist and Donald Trump advisor Marc Andreessen described DeepSeek-R1 as “AI’s Sputnik moment”, external, in a reference to the first artificial Earth satellite that was launched by the Soviet Union in 1957.

Advanced chips power the training of AI models like ChatGPT and DeepSeek.

But since 2021 the US government has widened its restrictions on advanced chips being sold to China.

In order to continue their work without steady supplies of imported advanced chips, Chinese AI developers have shared their work with each other and experimented with new approaches to the technology.

This has resulted in AI models that require far less computing power than before. It also means that they cost a lot less than previously thought possible, which has the potential to upend the industry.

Shares in AI-related companies based in the US, such as Nvidia, Microsoft and Meta were down on Monday morning – and the development knocked European share prices.

ASML, the Dutch chip equipment maker, saw its share price tumble by more than 10% while shares in Siemens Energy, which makes hardware related to AI, plunged by 21%.

“This idea of a low cost Chinese version hasn’t necessarily been forefront, so it’s taken the market a little bit by surprise,” said Fiona Cincotta, senior market analyst at City Index.

“So if you suddenly get this low-cost AI model, then that’s going to raise concerns over the profits of rivals, particularly given the amount that they’ve already invested in more expensive AI infrastructure.”

And Singapore-based technology equity advisor Vey-Sern Ling told the BBC it could “potentially derail the investment case for the entire AI supply chain”.

But Wall Street banking giant Citi cautioned that while DeepSeek could challenge the dominant positions of American companies like OpenAI, issues faced by Chinese firms could hamper their development.

“We estimate that in an inevitably more restrictive environment, US’ access to more advanced chips is an advantage,” its analysts said in a report.

Last week, a consortium of US tech firms and foreign investors announced The Stargate Project, a company which is putting $500bn into AI infrastructure in Texas.