Will disruptive AI new entrants have credit ratings implications beyond companies?
The AI world is undergoing a paradigm shift and January started off with a bang.
As we reflect on the entry of Deepseek, the new disruptive Chinese AI tool in the market, the expansive geopolitical reach of technology presents an opportunity to consider the impact that this revolution could have on credit ratings. Technological innovations know no sovereign borders and once released, particularly if released online, can experience very rapid uptake. The development and release of this new AI tool is placing pressure on the companies in the Magnificent 7 namely Apple, Nvidia, Microsoft, Amazon, Meta Platforms (formerly Facebook), Tesla, and Alphabet (Google). If the pressure is sustained, it could have credit ratings implications for most or all of them.
Since the release of DeepSeek, Nvidia’s share price suffered the sharpest daily fall of any stock in the history of the stock market. The entry of DeepSeek into the market is an example of Jevons Paradox, named for English economist Stanley Jevons, which states that when technological advancements increase the efficiency with which a resource is used, the rate of consumption of that resource increases. DeepSeek has been developed at a small fraction of the cost of its competitors such as ChatGPT, CoPilot, Gemini etc. and is available for free as compared to the tiered pricing structure of its competitors. If competition continues to drive down the cost of development of AI platforms and infrastructure, the existing moats of prominent AI companies will dwindle and the market will react, affecting the bottom line of these companies. This sits squarely within the intersection of how engineering innovation influences, and is influenced by policy, business, and the user interface. It also points to the growing realization that these three constraints, especially when they converge, are significant driving forces behind the direction in which solutions to many of the world's problems are being developed.
Table 1 shows that the credit ratings of the Magnificent 7 are strong, all in the upper echelons of investment grade. Credit rating agencies (CRAs) are charged with reporting on the financial health and creditworthiness of issuers (such as the rated Magnificent 7). As such, if there is continued pressure from competition, the CRAs will be forced to reexamine either the outlooks or the ratings of these companies. In particular, the government ties of companies like OpenAI and DeepSeek, and ensuing nationalistic sentiment, suggest that the private sector AI battle is part of a broader geopolitical skirmish between the United States and China. Given the size of these companies, and their inordinate influence on the economies of several countries, both investors and sovereigns should beware.
