Japan chip stocks extend losses as DeepSeek worries fuel Wall Street tech rout

Shares in Japan’s chip-related companies extended declines for a second day as Chinese startup DeepSeek’s AI competitiveness calls into question the United States’ leadership in the field.

Semiconductor testing equipment supplier Advantest slid over 10%, Tokyo Electron fell 3.6%, while Renesas Electronics traded 2.29% lower Tuesday.

Softbank Group, which owns chip designer Arm, slid 5.26%. Data center-related shares also continued to take a hit, with wire and cable firms Furukawa and Fujikura dropping 8.22% and 8.1%, respectively.

DeepSeek released a free, open-source large language model in late December, claiming it was created in only two months with a budget of under $6 million. Last week, the lab introduced R1, a reasoning model that outperformed OpenAI’s latest o1 in several third-party tests.

“There will be a lot more pain to follow today as we follow the U.S. down,” said Andrew Jackson, head of equity strategy at ORTUS Advisors. 

“The big questions is whether the U.S. will U-turn on their approach and deregulate chip and SPE restrictions seeing as they are (currently) ineffectual or try and ramp things up even more,” Jackson wrote in an email. DeepSeek had to navigate strict semiconductor restrictions imposed by the U.S. government on China, which limited access to advanced chips.

The Chinese artificial intelligence company aims to stand out from its competitors by focusing on its reasoning abilities, where the model creates a “chain of thought” before providing the final answer to improve the accuracy of its responses.

“DeepSeek is a risk to the U.S. exceptionalism narrative, further questioning the ‘Magnificent 7’ dominance,” Citi analysts wrote in a note.

Chip giant Nvidia lost almost $600 billion in market cap on Monday, logging the largest drop for a company in a single day in the U.S. The company posted its worst day in the market since March 2020 after its stock price plunged 17%. However, a rotation into more defensive areas of the U.S. market helped ease Monday’s losses.

Overnight, other chip-related shares in international markets also fell. Netherlands-based chip companies ASML and ASM International saw declines during European trading hours. Micron and Arm Holdings dropped more than 11% and 10%, respectively.

DeepSeek either builds on existing inference infrastructure, or will itself stimulate new AI demand, said Richard Kaye, an analyst at global asset management group Comgest. 

“In both cases, semiconductor intensity remains high,” Kaye told CNBC via email.

“The deep fall in semiconductor equipment stocks, Tokyo Electron, ASML, Applied Materials, is quite a mistake,” he added.