China’s DeepSeek is reshaping the landscape of artificial intelligence, triggering a shift in Japan’s AI market. With software companies like NEC stepping into the spotlight, the balance of power is moving away from traditional hardware makers, creating new investment opportunities.
DeepSeek’s recent breakthrough—developing cutting-edge AI with fewer and less advanced chips—has energised the sector. Japanese AI developers, including Preferred Networks, are now emboldened by the prospect that even firms with limited GPU resources can achieve similar success within a year. This revelation is already sending ripples through the stock market.
The financial impact is striking. Since DeepSeek’s breakthrough became widely known, hardware-focused companies such as Fujikura and Advantest have seen their stock prices fall by 14% and 16%, respectively. Meanwhile, software-driven firms are on the rise—NEC has surged by 17% and Nomura Research Institute by 15%, positioning them among the top-performing stocks on the Nikkei Stock Average.
Investors are taking note. A fund manager at Nikko Asset Management highlighted that DeepSeek’s innovation has fuelled expectations for broader AI adoption, making software stocks increasingly attractive. This enthusiasm is even more pronounced in Japan than in the US—while American software stocks saw an average increase of just 1%, their Japanese counterparts climbed by 8% in the same period.
NEC is a prime example of this shift. Ranked tenth globally in AI research paper submissions, the company is making strides in cost-efficient, high-performance AI models. Nissay Asset Management has already positioned NEC as a top stock in its active funds, betting on the expansion of domestic AI services to drive future earnings.
DeepSeek’s achievement highlights a broader trend: the ability to compete with US AI giants without relying on cutting-edge chips. This innovation stems from necessity, as US sanctions restrict China’s access to top-tier processors. Japan faces a similar challenge, not due to sanctions but a lack of financial resources to acquire advanced GPUs.
Nvidia’s sales distribution further underscores Japan’s current AI limitations. During the February-October 2024 period, 45% of Nvidia’s AI chip sales were in the US, with significant portions also going to Singapore, Taiwan, and China. Japan barely registered, lumped into the 6% of minor markets. NEC, for instance, relies on Nvidia’s older Blackwell AI products, two generations behind the latest technology.
Despite this, Japan’s AI sector has room for growth. Generative AI adoption remains low, with only 47% of Japanese companies using the technology compared to 84% in the US and 85% in China. This gap represents a major opportunity for Japanese AI firms to expand and capture market share as AI adoption increases.
On the other hand, the shift away from GPUs raises concerns for hardware companies like Fujikura and Advantest. As AI efficiency improves and software takes centre stage, demand for cables and data centre equipment is expected to decline. Investors who previously favoured semiconductor and infrastructure stocks are now reconsidering their positions, leading to increased market volatility.
While DeepSeek’s breakthrough is accelerating change, uncertainty remains. AI-related stocks are experiencing greater fluctuations, and some investors are becoming cautious about the sector’s risks. However, as software gains prominence, companies like NEC stand to benefit from Japan’s AI expansion, making them key players in the next phase of the industry’s evolution.
Fidelity Japan Trust PLC (LON:FJV) aims to be the key investment of choice for those seeking Japanese companies exposure. The Trust has a ‘growth at reasonable price’ (GARP) investment style and approach – which involves identifying companies whose growth prospects are being under-appreciated or are not fully recognised by other investors.
