Jevons Paradox: Cheap AI From China Threatens Nvidia's Domination

JAKARTA - Supporters of artificial intelligence (AI) in Europe rely on a 160-year-old economic theory to explain why the surge in sector stocks still has the potential to continue, despite the emergence of a low-cost AI model from China, DeepSek.

Global tech stocks plunged on January 27 after the launch of DeepSek - which reportedly cost much cheaper than competitor AI models and required less sophisticated chips - sparking questions about a massive Western investment in chipmakers and data centers.

Di pusat aksi jual tersebut adalah Nvidia, raksasa chip AS dan ikon AI, yang kehilangan 17% nilai atau hampir 600 miliar dolar AS, mencatat penurunan modalasi pasar satu hari terbesar dalam sejarah perusahaan mana pun.

Since then, tech stocks have recovered, where the European market hit record highs, and the 19th century economic theory suddenly became a major topic of conversation: Paradox Jevons.

Named after British economist William Stanley Jevons, the theory states that when the use of a resource becomes more efficient, demand can increase - not decrease - as the cost of using it gets cheaper.

The Spike In Attention To The Jevons Paradox

"I haven't discussed it until Monday (last week), and suddenly this theory is everywhere," said Helen Jewell, Chief Investment Officer at BlackRock Fundamental Equities, EMEA, quoted by VOI from Reuters.

"This paradox highlights one of the current uncertainties," Jewell added. This hints that the big question for European investors is whether the data center and its supplier will remain in demand.

"One big question mark from the news last Monday (27 January) is how much energy will it take for this AI revolution?"

The sharp decline had an impact on companies directly or indirectly involved in AI. The maker of Dutch semiconductor equipment, ASML, and its sectoral competitors ASMI and BE Semi all fell 7%-12% on January 27 before recovering at the weekend, as did Siemens Energy, which provides hardware for AI infrastructure.

"The Jevons paradox attacks again!" said Microsoft CEO Satya Nadella, in an upload on X. "As AI becomes more efficient and accessible, its use will skyrocket, making it a commodity that we cannot stop using."

The Need For Data Centers To Stay In The Spotlight

On Friday, January 24, Tomasz Godziek, portfolio manager at Tech Disruptors Fund of J. Safra Sarasin Sustainable Asset Management, said that lower AI costs could be clear evidence of Paradox Jevons.

"In the end, this could trigger a new wave of AI investments, creating new opportunities, especially in software and inference technology," Godziek said.

The portfolio manager at Thematics Asset Management, affiliated with Natixis IM, also called the Jevons Paradox a reason they believed that the demand for AI chips might remain strong.

Mark Hawtin, head of the global equity team at Liontrust, said his investment thesis in AI was further strengthened by January 27, highlighting this paradox.

"Everyone suddenly became an expert in the Jevons Paradox," said Kunal Kothari, portfolio manager in Aviva Investors who manages British equity funds worth about 2 billion pounds ($2.5 billion).

"The decrease in productivity increases through GenAI is likely to benefit companies in the UK market in general, as they become more consumers of this technology," he added, pointing to data and software companies such as RELX, LSEG, Expertian, and Sage as potential benefits.

The need for a data center and a huge amount of energy to run it has prompted a lot of AI investment in Europe, given that there has been no local competitor to Nvidia, whose shares have shot up about 200% in the last two years.

"There is an implicit assumption that adoption and use of AI will require more chips, as well as greater data center capacity and power consumption," said Kasper Elmgreen, CIO equity and fixed income at Nordea Asset Management.

"What DeepSek is doing is questioning the needs of the line and what it can achieve by making much better software."

However, not everyone believes in this new logic, including Jordan airing, FICC's chief strategy at Mizuho EMEA.

"While many are optimistic that Nvidia pointed to the Jevons Paradox to help them sleep better at night ... this theory is less convincing in the short term after the surge in Nvidia stock meteorites," he wrote in a note.