The surge in popularity of Chinese artificial intelligence (AI) app DeepSeek has sparked a selloff of shares in major tech companies after it overtook rivals such as ChatGPT to become the top-rated free app on Apple’s App Store.

Nvidia, Microsoft and Meta were set to open down on Monday and the development knocked European share prices.

The app has grown in popularity since its launch, challenging the widely held belief that the US is the unassailable leader in AI and prompting questions about the scale of investments US firms are planning.

It is powered by the open-source DeepSeek-V3 model, which its researchers claim was developed for less than $6m – significantly less than the billions spent by rivals.

But this claim has been disputed by others in the AI space.

DeepSeek’s emergence comes as the US is restricting the sale of the advanced chip technology that powers AI to China.

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.

After DeepSeek-R1 was launched earlier this month, the company boasted of “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”, a reference to the satellite launched by the Soviet Union in 1957.

At the time, the US was considered to have been caught off-guard by their rival’s technological achievement.

DeepSeek’s popularity has startled markets. 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 such as 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.

Who founded DeepSeek?

The company was founded in 2023 by Liang Wenfeng in Hangzhou, a city in southeastern China.

The 40-year-old, an information and electronic engineering graduate, also founded the hedge fund that backed DeepSeek.

He reportedly built up a store of Nvidia A100 chips, now banned from export to China. Experts believe this collection – which some estimates put at 50,000 – led him to launch DeepSeek, by pairing these chips with cheaper, lower-end ones that are still available to import.

Liang was recently seen at a meeting between industry experts and the Chinese premier Li Qiang.

In a July 2024 interview with The China Academy, Liang said he was surprised by the reaction to the previous version of his AI model.

“We didn’t expect pricing to be such a sensitive issue,” he said.

“We were simply following our own pace, calculating costs, and setting prices accordingly.”