Jefferies' Chris Wood says the likely long term result of the US AI boom is massive capital destruction, as cheap Chinese open models win share
BREAKING: The AI boom will most likely destroy massive amounts of capital in the US in the longterm, as cheaper, open-source Chinese models capture market share, per Jefferies.
Context
If cheaper Chinese models keep pulling down token prices, the trillions US hyperscalers are spending on data centers may never earn the expected returns.
The underlying Jefferies note by Chris Wood was reported by Bloomberg on October 9, so this is a few days old. unusual_whales is relaying it secondhand. Wood has long held this view, writing that it has always been his base case.
Deep dive
On October 13, unusual_whales posted: BREAKING: The AI boom will most likely destroy massive amounts of capital in the US in the longterm, as cheaper, open source Chinese models capture market share, per Jefferies.
The Economic Times quoted the Jefferies report: GREED and fear's base case has always been that the most likely longer term outcome of the AI story in market terms will be massive capital destruction in the US with market share going to cheaper open source Chinese large language models. Bloomberg reported that Wood, Jefferies' global head of equity strategy, added that there is a growing realization that China has become a technological peer to the US in AI.
The Register reported that the note estimates about half of the roughly $2.3 trillion contracted backlog at Microsoft, Alphabet, Amazon and Oracle belongs to OpenAI and Anthropic. It cited OpenRouter data showing Chinese models processed 76.12 trillion tokens in the week ended September 27, up from 4.37 trillion in late April, and pointed to Moonshot AI's Kimi K3.
The note says it can no longer be assumed that large language models will ever be profitable given the collapse in token pricing, and asks whether the four hyperscalers will really spend $993 billion on capex in 2027.
What to expect next
Watch the hyperscalers' upcoming earnings and 2027 capex guidance, which will show whether they keep spending at the pace Jefferies questions.
Also watch OpenRouter usage data for Chinese models and the pricing of US frontier models, since a continued fall in token prices is the core of Wood's argument. Investor reactions to Anthropic's reported investor day this week, covered in story 33, will also test whether markets share the concern about returns.