On Jan. 31, the first trading day following the Lunar New Year holiday, South Korea’s stock market experienced significant turbulence, primarily driven by the unexpected impact of China’s AI startup, DeepSeek. The company’s cost-effective AI model, R1, has sent shockwaves through the semiconductor industry, challenging the long-held belief that substantial financial investment is necessary for AI development. This development has led to a sharp decline in AI-related stocks, including major players like SK Hynix, and has raised concerns about increased short-term volatility in the domestic semiconductor market.

The stock market, which reopened after a week-long holiday, saw semiconductor stocks take a substantial hit. SK Hynix’s shares plummeted by 9.86%, closing at 199,200 won, resulting in a market capitalization loss of 15 trillion won. Samsung Electronics also faced a decline, with its stock falling by 2.42%. Foreign investors were significant sellers, offloading 393.2 billion won and 700.5 billion won worth of SK Hynix and Samsung Electronics shares, respectively. This sell-off marked the largest scale since Sept. 19 of the previous year, with foreign investors selling a total of 1.234 trillion won worth of shares.

Other semiconductor-related stocks, such as Techwing and Hanmi Semiconductor, also experienced sharp declines, with drops of 8.18% and 6.14%, respectively. Power equipment stocks like HD Hyundai Electric and LS Electric were not spared, falling by 7.87% and 9.22%, respectively. The KOSPI index closed at 2,517.37, down 19.43 points (0.77%) from the previous trading day, while the KOSDAQ index saw a slight decline of 0.06%.

The won-dollar exchange rate surged by 21.4 won, closing at 1,452.7 won, influenced by external factors such as the U.S. Federal Reserve’s rate freeze and the shock from DeepSeek. Despite individuals and institutions being net buyers, the significant sell-off by foreign investors dragged down the index.

However, not all stocks were adversely affected. AI software stocks, including Naver and Kakao, saw gains of 6.13% and 7.27%, respectively. This rise in software stocks suggests a potential shift in market focus from hardware to software, as DeepSeek’s model could reduce hardware costs and accelerate software development. Lee Kyung-min, a researcher at Daishin Securities, commented, “DeepSeek provides a new turning point where the market’s interest in the AI industry could shift from hardware dominance to improved profitability for software companies.”

The emergence of DeepSeek and its cost-effective model R1 is expected to increase short-term volatility in domestic semiconductor stocks. As the market adjusts to this new dynamic, investors and industry experts will be closely monitoring the potential shift from hardware to software as the leading sector in the AI industry.