AI Policy Watch

Stargate, Microsoft, and OpenAI’s AI Gamble Faces Shockwaves from Chinese Breakthrough

• By John K. Waters
• 01/28/2025

A week after President Donald Trump unveiled the "Stargate Project," a $500 billion private-sector AI infrastructure investment backed by SoftBank, Microsoft, OpenAI, and Oracle, global markets have been rattled by an unforeseen challenge: a low-cost Chinese AI model that threatens the economic foundation of the U.S. AI sector.

DeepSeek, a Hangzhou-based startup, launched a free AI assistant that has already surpassed OpenAI’s ChatGPT in downloads. The model, reportedly 20 to 50 times cheaper to operate than OpenAI’s cutting-edge systems, triggered a dramatic selloff in tech stocks, wiping more than $600 billion from Nvidia’s market value and shaking confidence in the financial foundations of the AI boom.

Now, the U.S. government and the tech giants backing Stargate face a pivotal moment: Can they protect America’s AI dominance, or will China’s breakthrough upend the race for global supremacy?

A Market in Freefall
What was supposed to be a triumphant moment for U.S. AI leadership instead turned into an investor panic. The Nasdaq Composite plunged more than 3%, Nvidia suffered its worst single-day loss in history, and major AI stocks—from Broadcom (-18%) to Microsoft (-2.3%) and Alphabet (-3.4%)—saw steep declines.

The Philadelphia Semiconductor Index collapsed more than 10%, signaling fears that DeepSeek’s cost-efficient model could undermine the demand for high-end AI chips and the sprawling data center infrastructure that Nvidia, Microsoft, and OpenAI have bet their futures on.

Brian Jacobsen, chief economist at Annex Wealth Management, framed it as "a disruption of the entire AI narrative that has driven markets over the last two years."

"It could mean less demand for chips, reduced need for massive power production, and fewer large-scale data centers," he told Reuters.

If that prediction holds, it could threaten the long-term viability of the Stargate Project itself, which hinges on the assumption that AI computing will continue to require massive, high-cost data centers.

Still, technology stocks did rebound on Tuesday. Nvidia, for example, surged more than 6%.

What This Means for the Stargate Project
The Stargate Project, announced just last week at the White House by Trump, SoftBank CEO Masayoshi Son, OpenAI CEO Sam Altman, and Oracle co-founder Larry Ellison, was positioned as a national security asset that would cement U.S. AI dominance. SoftBank pledged to invest an initial $100 billion, with plans to scale up to $500 billion over four years. The initiative promised to re-industrialize America, create hundreds of thousands of jobs, and ensure AI remained under U.S. control rather than in the hands of adversaries like China.

However, DeepSeek’s breakthrough raises three fundamental questions:

• Does the U.S. need half a trillion dollars in AI infrastructure if Chinese firms can achieve similar results at a fraction of the cost?
• Will AI computing shift from massive data centers to cheaper, decentralized models?
• How will Microsoft and OpenAI adapt to a world where AI models can run efficiently on mobile devices, reducing the need for their cloud-based services?

For now, Microsoft and OpenAI remain locked into an exclusive partnership, where OpenAI’s cutting-edge models only run on Microsoft’s Azure cloud. But if DeepSeek’s technology allows for powerful AI without relying on cloud computing, this partnership could rapidly lose its strategic advantage.

The China Factor: A Sputnik Moment for AI?
Although the Stargate Project was designed to protect U.S. AI dominance, it has now been blindsided by China’s ability to disrupt the market seemingly overnight.

Venture capitalist Marc Andreessen called DeepSeek’s success AI’s "Sputnik moment," in a post on X. (For Pre-Moon-Landing readers, that's a reference to the then Soviet Union’s surprise launch of the first satellite in 1957, which shocked the U.S. into accelerating its own space program.)

President Trump downplayed concerns over the breakthrough, asserting that the U.S. would continue to lead in the AI sector. But he did characterize the development as "a wake-up call" for the American tech industry and suggested it could ultimately benefit the U.S.

"If you can achieve the same outcome at a lower cost, I see that as a positive for us," he told reporters aboard Air Force One.

And OpenAI CEO Sam Altman appeared downright sanguine about the news in a post on X: " DeepSeek's R1 is an impressive model," he wrote, "particularly around what they're able to deliver for the price. We will obviously deliver much better models, and also, it's legit invigorating to have a new competitor! We will pull up some releases."

DeepSeek’s DeepSeek-V3 model was trained using Nvidia’s H800 chips at a cost of just $6 million, a stark contrast to the billions that OpenAI and Alphabet have spent on their own AI research. This extreme cost efficiency has rattled the assumption that bigger spending equals better AI.

Now, policymakers in Washington are grappling with whether the U.S. should revise its AI strategy in response. Will Trump impose new restrictions on China’s AI sector? His administration has already revoked Biden’s 2023 AI safety executive order, removing regulatory oversight on AI development. And will the White House now shift toward defensive measures, such as export controls on AI chips?

Given their investment in the Stargate project, Microsoft and OpenAI might have significant influence on those decisions. Will they lobby for subsidies or tariffs to shield themselves from Chinese competition? Their AI business models depend on massive computing infrastructure. If AI shifts toward cheaper, decentralized models, their dominance could fade.

And what happens if investors abandon what some have called "the AI bubble?" AI stocks have soared for two years, but Monday’s crash suggests Wall Street is questioning whether the current market leaders can stay ahead. If DeepSeek’s cost-efficient model proves scalable, it could redirect capital away from AI giants like Nvidia and Microsoft toward new entrants.

A Defining Moment for AI Policy
Just a week ago, the Stargate Project was hailed as the future of AI industrial policy, a massive bet on U.S. dominance in artificial intelligence. But today, its entire premise is under threat. If DeepSeek’s low-cost model proves sustainable, it could undermine the need for trillion-dollar AI infrastructure investments. If the AI market shifts away from centralized cloud computing, Microsoft and OpenAI’s control over AI models may erode.And if the U.S. government fails to adapt, China may take the lead in AI innovation, just as it did with 5G networks and electric vehicles.

For now, the White House, Microsoft, OpenAI, and SoftBank are standing by their vision for AI. But Monday’s market collapse serves as a warning: The AI race isn’t just about who can spend the most. Ultimately, as is always true for tech, it’s about who can adapt the fastest.