Is China's DeepSeek a Blessing or a Curse for Korean Chipmakers?

Stock markets in Korea ended lower on a recent Friday as tech shares faced a significant downturn, a development linked to the rising competition in the artificial intelligence (AI) sector. This downturn follows a weeklong holiday and was particularly impacted by news regarding Chinese AI startup DeepSeek.

DeepSeek recently launched its inference model, R1, which claims to match the performance of models by industry giants such as OpenAI. What’s striking is that DeepSeek managed to develop this model at a training cost of just over $5.5 million, primarily using lower-grade Nvidia GPUs designed for the Chinese market. This announcement has raised concerns about the competitiveness of major firms like Nvidia, which has invested heavily in AI technology.

According to experts, the dynamics of the AI market are changing. The previous notion that large investments are essential for growth may no longer hold true. Companies are now likely to pursue more efficient strategies instead of simply aiming to acquire the latest GPUs. This shift might prove detrimental for domestic memory semiconductor companies, such as Samsung Electronics and SK hynix, that have been supplying high-capacity high-bandwidth memory (HBM) chips to Nvidia.

Following DeepSeek's announcement, investors reacted by selling off shares of Nvidia, which commands a 70 percent share of the AI semiconductor market. On January 27, Nvidia observed a market capitalization drop of around $589 billion, and its stocks showed no immediate recovery signs. Stocks connected to Nvidia's AI ecosystem are also struggling.

If demand for Nvidia's high-performance GPUs wanes, as many anticipate, SK hynix could face significant revenue declines since it primarily supplies HBM3e to Nvidia. HBM3e chips are crucial for enhancing GPU performance, and SK hynix generates 40 percent of its overall DRAM sales from this segment. Similarly, Samsung is currently evaluating its quality to start supplying Nvidia.

The market reactions were pronounced, with stock prices reflecting uncertainty; Samsung's shares fell by 2.4 percent, while SK hynix's dropped by 9.8 percent on Korea's first trading day since the Lunar New Year break. Previous influences from AI infrastructure development, such as stocks in power and electricity, also took a downturn.

In light of these developments, executives from Samsung have indicated an ongoing evaluation of industry trends. "We are closely monitoring industry trends and considering multiple scenarios," stated Kim Jae-joon, executive vice president at Samsung's device solutions division. He emphasized the need for swift responses to changes in this rapidly evolving market.

Geopolitical tensions further complicate the situation for Korean chipmakers. Sources indicate that the U.S. government may consider restricting exports of Nvidia's low-end H20 chip to China. This chip incorporates Samsung's HBM technology. Should this ban occur, it could prompt China to bolster support for its domestic semiconductor sector, which may lead to a shift in demand away from Korean products.

Experts note that a full-scale ban by the U.S. could adversely affect Korean DRAM manufacturers, as they provide HBM for Nvidia's GPUs. Such measures would further contribute to the existing uncertainties faced by the industry.

Despite these challenges, analysts maintain that strong global demand for chips continues to favor Korean manufacturers. Nvidia's substantial market share is not expected to dissolve anytime soon, especially since DeepSeek’s R1 was developed using Nvidia GPUs.

“The same algorithm, when applied to high-performance Nvidia chips, could yield even better results than what DeepSeek achieved,” remarked Lee Jong-hwan, a professor of semiconductor engineering. Furthermore, technological advancements introduced by DeepSeek's innovations may facilitate broader growth within the AI sector.

“As market demand rises, opportunities for growth in the AI semiconductor space are likely to surface,” Lee added. Both Samsung and SK hynix also offer low-grade options that cater to this area, which could lead to additional growth in the HBM market.

In conclusion, while recent developments highlight a competitive landscape and existing uncertainties, there remains a strong undercurrent of demand for memory chips. Analysts expect that the ongoing pursuit for advancements in AI technology will shape future market dynamics positively for the semiconductor industry, providing an environment that could ultimately benefit Korean tech companies in the long run.

China, Korea, Nvidia