Is Apple losing its hold in China? With yet another year-on-year decline in iPhone sales now regretfully recorded, the company finds itself on increasingly unstable footing in the world’s largest smartphone arena—a market that was once vital for its growth. Although it has managed to re-enter the top five manufacturers after having fallen out earlier this year, Apple continues to cede a troubling share of the market to rising domestic competitors like Huawei, OPPO, Honor, and Xiaomi.
Nonetheless, in spite of these challenges, Apple’s stock recently achieved a new record high. What accounts for this? The market’s optimism is fueled by the belief that Apple Intelligence will entice consumers to purchase new phones, breaking the pattern of extended upgrade cycles. However, in China, a significant obstacle looms over this notion.
Apple Intelligence is currently unable to launch in China (or Europe, for that matter), as it does not comply with the nation’s stringent regulatory standards regarding AI. A major hurdle is its dependence on ChatGPT for certain functionalities, which has been prohibited in China since February 2023.
Is there a path forward? And if one exists, will it require concessions that a US firm should cautiously contemplate, even with the potential for immense financial gain at stake? Tim Cook seems to believe otherwise.
“We’re engaged, as you would guess, with both regulatory bodies,” Cook mentioned during a recent earnings call, indicating the involvement of European and Chinese regulators.
“Our aim is to progress as quickly as possible, as we always strive to enhance features for everyone. However, we must first grasp the regulatory requirements before we can commit to a timeline for implementing those features.”
In this light, Apple’s recent decision to inaugurate its largest research center outside the United States in Shenzhen, China, earlier this month raises intriguing questions. At the very least, it could be interpreted as a peace offering—aimed at mending relationships that became strained after it began moving a larger share of its iPhone production to India earlier this year.
This might indeed be a crucial aspect of Apple’s strategic approach towards establishing a solid AI presence in China, a necessity for which it must cultivate positive relationships—something it seemingly lacks in Western markets.
“In China, Apple’s forecast remains steady as it maintains a strong customer loyalty, yet the journey ahead won’t be straightforward. The cautious mindset of consumers and Huawei’s comeback with innovative offerings present significant challenges for Apple,” states Will Wong, a senior research manager at IDC.
The phrase “consumer sentiment” frequently crops up when discussing Apple’s standing in China. Many consumers tend to prefer local brands as offering greater value and, at times, simply being the superior choice.
For some, these sentiments may have been intensified due to the US government’s actions against Huawei during the Trump administration. In 2019, Huawei was not only vying for smartphone market dominance in China but also on a global scale. However, in May 2019, sanctions severed the relationship between Huawei and Android-maker Google, diminishing the attractiveness of Huawei phones for nearly all Western consumers.
While Apple did not initiate these measures, it is undeniably linked to the context created by the sanctions imposed on Huawei.
The establishment of the Shenzhen research center seems to follow a notable trend. Apple launched its inaugural Chinese research center in 2016, coinciding with the company’s first revenue decline in thirteen years.
“We lack specific details regarding the objectives of the new Apple research center in China,” remarks Wong. “However, this move suggests that China remains a significant market for Apple, particularly as it’s essential to develop GenAI services that comply with local regulations and address the needs of consumers.”
The local regulations are extensive, especially when contrasted with the more lenient approach towards AI currently observed in the US and UK. Since 2017, various regulatory bodies, most notably the Cyberspace Administration of China (CAC), have issued at least a dozen sets of policies.
“For any company aiming to succeed in the AI-driven era, it is crucial to ensure that model training and inferencing are localized, while also considering local context, partnerships, and regulations,” explains Neil Shah of Counterpoint Research.
Apple faces significant challenges in advancing on its own, largely due to new legislation in China.
“There are still restrictions on foreign investment that apply to internet-based business models. This means that foreign participation is capped at a maximum of 50 percent,” explains Michael Tan, a partner at the legal firm Taylor Wessing, who has spent over twenty years advising companies dealing with China’s regulatory environment.
“To successfully introduce AI features to the market, companies encounter numerous regulatory obstacles. This is particularly true for American or other foreign firms, which might find it very challenging to navigate these rules. To overcome these hurdles, they will likely need to collaborate with a local partner,” Tan notes. “It is my understanding that Apple is currently engaging in discussions with companies like Baidu.”
Baidu is often viewed as the Chinese equivalent of Google. It operates a search engine and launched its AI assistant, Ernie, in 2019. Since then, Ernie has gained over 300 million users and was recently rebranded with a name more familiar to the Chinese market: Wenxiaoyan.
Is the specter of Ernie poised to disrupt Chinese iPhones? Apple might have limited alternatives.
“Amazon essentially faced a ban from the market, particularly concerning their Cloud service,” Tan indicates, referencing Amazon’s unsuccessful attempt to launch AWS (Amazon Web Services) in 2017. “If the goal is to operate it as an entirely Amazon-run enterprise, it’s infeasible, necessitating a collaboration with a local joint venture partner, similar to Microsoft’s approach.”
This scenario isn’t unfamiliar for Apple. Starting in 2017, China’s regulators began tightening their grip on Apple, instituting new laws that barred the use of Apple’s own servers for running iCloud services for users in China.
The answer was GCBD, or Guizhou-Cloud Big Data, which is not only a Chinese entity but also state-owned. Seven years later, it continues to oversee Apple’s iCloud operations in China. In a practical sense, the Chinese government has custody over the emails of iPhone users.
In 2021 The New York Times conducted an investigation into the compromises Apple has made to maintain its presence in the Chinese market. The report highlighted accusations regarding the security of users’ data and the suppression of apps that do not comply with the Chinese Communist Party’s (CCP) content regulations. It’s an enlightening read.
Tim Cook has openly reconciled with the demands that come with operating in China.
“Your choice is: Do you participate, or do you stand on the sideline and yell at how things should be,” he remarked during a discussion on China at a 2017 Fortune Global Forum event. “My own view, very strongly, is you show up and you participate, you get in the arena because nothing ever changes from the sideline.”
However, since then, the requirements for Apple’s compliance have only intensified. The algorithms that dictate the public’s online experience must be registered with Chinese authorities, and recent AI regulations concentrate on controlling the specific public-facing models that Western tech companies aim to engage with.
“You need to file with regulators. You might need to submit a lot of details about things like coding … many tech companies may not be willing to do that,” says Tan.
The issue lies in the fact that China has the ability to implement such measures due to the favorable balance of power—more so than it has in the past.
“China is no longer just playing a following role in many technology fields,” adds Tan. “It is already advancing and taking the lead.”
From a Western perspective, the regulations established for generative AI in China range from admirable to concerning.
“The regulation encompasses a series of ambiguous censorship conditions, such as requiring deep synthesis content to ‘align with the correct political direction,’ avoid ‘disturbing economic and social order,’ and refrain from generating false news,” states Carnegie Endowment’s report on the current situation in 2023.
“Deep synthesis” is the term employed by the CAC to denote generative AI. China’s regulations would lead to a scenario where a virtual assistant would refrain from discussing the Dalai Lama, recognizing Taiwan as a separate nation, or acknowledging the existence of the Uyghurs. The extent of these limitations remains uncertain.
Considering the currently relaxed state of Western large language models, envisioning a chatbot that consistently adheres to these restrictions appears challenging, especially in regard to matters such as Taiwan’s sovereignty. Nevertheless, it seems that numerous Chinese tech firms have succeeded in complying with these limitations, at least to the satisfaction of regulators. In August 2024, the South China Morning Post disclosed that 188 LLMs have received approval for use thus far, a significant increase from just 14 in January 2024.
One could argue that Apple’s implementation of a customized version of one of these LLMs to support China’s iteration of Apple Intelligence is simply standard operational practice. Apple has already been censoring its app store to comply with China’s regulations and collaborates with local entities.
Apple’s integration of generative AI technology into its devices places the company in a precarious situation regarding its relationship with the Chinese government. As a major player among US companies, this connection may raise eyebrows.
In August, Zhuang Rongwen, the head of the Cyberspace Administration of China, commented that generative AI, including chatbots, was “forcefully driving economic and societal growth.” A report from The New York Times in 2021 indicated that the government had no actual need for data from Chinese iPhone users to monitor its residents due to their already robust surveillance methods. However, with the rise of generative AI, Apple risks unwittingly becoming a more integral part of the Chinese Communist Party’s objectives.
