Chinese startup DeepSeek’s feat in generative artificial intelligence development is changing market dynamics here as well, with software companies like NEC replacing hardware makers as the driving force of Japan’s AI stocks.
DeepSeek’s announcement last month that it has developed advanced AI with less advanced and fewer chips has emboldened developers like startup Preferred Networks, one of Japan’s leading AI companies.
“If talented engineers work on it for about six months to a year, even companies with few GPUs can imitate it,” Daisuke Okanohara, Preferred Networks’ chief executive researcher, said, referring to graphic processing units seen as crucial to generative AI development.
The stock market has also been sensing the change. Comparing February 5’s stock prices to those on January 24, before DeepSeek’s breakthrough became widely known, hardware-based companies like electric cable maker Fujikura and chip-testing equipment maker Advantest fell 14% and 16%, respectively.
Meanwhile, NEC rose 17% and Nomura Research Institute 15%. Both companies, which focus on AI software, ranked within the top five of the Nikkei Stock Average in terms of price increase over that span.
The trigger for the sharp rise in software stocks was their strong results, which a fund manager at Nikko Asset Management attributed to “the growing expectation that AI services will become more widespread due to the low costs demonstrated by DeepSeek.”
The level of excitement seems more pronounced in Japan than in the US. Based on a simple calculation of software stock price changes from January 24, based on QUICK FactSet data, US stocks rose an average of 1% as of February 4, while Japanese stocks were up 8% as of February 5.
NEC is a prime example of those expectations. It is tenth in the world in papers submitted to prestigious international AI conferences.
The company is also developing and using cost-effective, high-performance AI models.
“We expect NEC’s domestic AI services to become more widely used, boosting earnings,” said Nissay Asset Management’s Kosei Mikuni. Nissay has included NEC shares in its active funds as a top stock.
DeepSeek managed to develop an AI that appears to be on par with US competitors at a fraction of the cost, an ingenuity born out of US sanctions that prevented it from procuring cutting-edge chips.
Japan finds itself in a similar situation, though the circumstances are different—Japanese developers have trouble procuring cutting-edge GPUs due to lack of funding, not export restrictions.
Looking at sales ratio by region for Nvidia, the leader in advanced AI chips, for the February-October 2024 period, the US accounted for the largest portion with 45%, followed by Singapore with 19%, Taiwan with 17%, and China with 13%.
Japan barely registered as one of the many countries and regions accounting for the remaining 6%. NEC mainly uses Nvidia Blackwell generative AI products from two generations ago.
There is room for AI use in Japan to grow. The percentage of companies using generative AI is 84% in the US and 85% in China, while in Japan only 47% use the technology, according to JP Morgan.
This slow adoption also gives Japanese AI-related companies plenty of opportunities to grow earnings if usage becomes more widespread.
But for companies like Fujikura and Advantest, there are concerns declining demand for cables and equipment for data centers will hit them hard as AI competition shifts away from GPUs.
“In addition to the unknown impact of DeepSeek, price movements have become large, and AI-related stocks are increasingly seen as risky,” said Rina Takeda, head of equity sales at Citigroup during a discussion with a hedge fund.
As several investors who had been bullish on data center and semiconductor stocks are considering reducing their holdings, she expects AI stocks to remain soft.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.