In line with the global trend, stocks of hardware manufacturing companies in Japan have fallen sharply. On the contrary, stocks of software companies seem to be "taking off".
The rise of Chinese AI startup DeepSeek is changing the dynamics of the market, with software companies like NEC replacing hardware makers as the main drivers of Japan's AI stock market, according to Kr Asia.
DeepSeek's emergence has energized some developers like startup Preferred Networks, one of Japan's leading AI companies.
"With a talented engineering team working for about six months to a year, even companies with few GPUs can replicate the new technology," said Daisuke Okanohara, director of research at Preferred Networks, referring to graphics processing units, which are considered crucial to the development of generative AI.
TECH STOCKS RISE
The stock market has also seen some changes. Compared to the stock prices on February 5 and January 24, before DeepSeek's model was widely announced, hardware companies such as cable maker Fujikura and chip testing equipment maker Advantest fell 14% and 16%, respectively.
Meanwhile, NEC rose 17% and Nomura Research Institute rose 15%. Both companies focus on developing AI software, making them among the top five companies with the strongest stock price increases according to the Nikkei Stock Average.
Interest in the Japanese market seems to be greater than in the United States. Based on a simple calculation of software stock price movements since January 24, according to QUICK FactSet data, U.S. tech stocks have risen an average of 1% through February 4, while Japanese stocks have risen 8% through February 5.
NEC is a prime example of these expectations. The company ranks 10th in the world in the number of papers submitted to prestigious international AI conferences. NEC is also developing and using high-performance, cost-effective AI models.
"We expect NEC's domestic AI services to be more widely used and improve revenue," said Kosei Mikuni of Nissay Asset Management. Nissay has decided to include NEC in its active fund group as a top holding.
MARKET OUTLOOK
DeepSeek has successfully developed an AI model that rivals some US competitors at a modest cost. This innovative achievement was born out of US sanctions, which prevented Chinese tech companies from purchasing advanced chips. Japan is also facing a similar situation, with Japanese developers having difficulty purchasing advanced GPUs, but due to lack of funding, not export restrictions.
Looking at the revenue share by region of Nvidia, a supplier of advanced AI chips, in the period from February to October 2024, the US accounted for the largest share at 45%, followed by Singapore at 19%, Taiwan at 17%, and China at 13%. Japan is not listed among the countries and regions that account for the remaining 6% of the market share. NEC mainly uses Nvidia Blackwell generative AI products from the previous two generations.
According to JP Morgan, the rate of AI-based businesses in China is 85% and the US is 84%, while in Japan only 47% of companies use this technology. The delay in AI application also brings many opportunities for related companies in Japan to increase profits if the use of this technology becomes popular in the future.
"In addition to the impact of DeepSeek, stock price volatility is increasing and AI-related stocks are increasingly considered risky," said Rina Takeda, head of equity sales at Citigroup. Some investors in data center and semiconductor stocks are considering reducing their holdings, and Ms. Takeda predicts that the growth momentum of AI stocks will continue to be weak in the future.
OUTSIDE JAPAN
In addition, in China, a number of tech giants have been quick to incorporate DeepSeek into their ecosystems.
Alibaba, Tencent, Baidu, and TikTok parent Bytedance have all announced plans to offer DeepSeek through their own cloud platforms. The country's three major telecom operators, along with electronics maker Lenovo and auto brand Geely, have also adopted DeepSeek into their products.
Several Chinese Big Tech brands, which have dominated the country's internet market for more than a decade, have begun rolling out their own large language modeling projects in the past two years since ChatGPT launched in late 2022. While there are some competing products, DeepSeek remains the biggest player at the moment.
The new move reflects a broader trend. Even major US tech companies, including Nvidia, Microsoft, and Amazon, have announced that they will be using DeepSeek in their ecosystems.
Beyond China, DeepSeek’s achievements have quickly drawn scrutiny from governments. Last week, Taiwan and Australia announced bans on government officials using the new AI service due to data security risks. Several South Korean government departments have also issued bans.
Last month, Italy imposed a blanket ban on DeepSeek after the company failed to address privacy concerns raised by the government. Since then, other countries have also raised concerns about the app’s data security practices.
