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A man checks his phone near the Apple logo outside an Apple store in Shanghai, China, on September 13, 2023.
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Apple is hoping that upcoming AI features will boost iPhone sales, especially in China where demand is sluggish, but there's a problem: ChatGPT, which will soon be integrated into Siri, is banned in China.
During a presentation earlier this month, Apple (AAPL) unveiled a unique technology called Apple Intelligence that promises to bring exciting new AI to the company. It's adding features, announcing a partnership with OpenAI, and will also make limited use of its buzzy ChatGPT tool (ChatGPT will step in if Siri is up and needs further assistance answering a query).
The move shows how Apple is trying to quickly adopt the latest hot technology at a time when tech rivals such as Microsoft, Google, Meta and Samsung have already established their dominance in AI. The deal with OpenAI could help Apple close that gap.
But China was one of the first countries in the world to regulate the generative AI technology that powers these popular services. In August, the Cyberspace Administration of China, the country's largest internet watchdog, released new guidelines for the industry, requiring companies to get approval before deploying them. As of March, the agency had approved more than 100 AI models, all from Chinese companies.
Apple is looking for a Chinese AI company to partner with ahead of the iPhone's planned September launch, but has not yet reached an agreement, The Wall Street Journal reported on Thursday.
Apple did not respond to a request for comment.
The urgent search for a partner comes as Apple's smartphone sales plummeted 10% in the first quarter of this year, according to market researcher IDC, driven in large part by a sharp decline in iPhone sales in China, where nationalism, the recession and increased competition have also hurt sales and the company has lost momentum there, its second-largest market.
Restrictions on new AI tools may not be limited to China: In a statement sent to CNN after this article was published, Apple said it was “strongly motivated” to offer these features to customers around the world, but also faced regulatory challenges in the European Union.
The company said it doesn't expect to be able to roll out AI capabilities in Europe this year.
“Due to the regulatory uncertainty created by the Digital Markets Act (DMA), we do not expect to be able to bring three features – iPhone Mirroring, SharePlay screen sharing enhancements and Apple Intelligence – to EU users this year,” a spokesperson said in a statement.
“Specifically, we are concerned that the DMA's interoperability requirements may force us to compromise the integrity of our products in ways that put our users' privacy and data security at risk,” the company added. “We are committed to working with the European Commission to find a solution that allows us to provide these capabilities without compromising the safety of our EU customers.”
Concerns continue to grow over iPhone sales in China, where Chinese smartphone brand Huawei saw its smartphone sales grow 70% in the first quarter, according to Counterpoint Research.
If a solution isn't found by the fall, Chinese consumers will feel like they're missing out and may choose to wait until they get Apple's full AI experience, she added.
“Apple will likely look for a local partner in China instead of OpenAI because, quite simply, it has to,” said Nabila Popal, senior director at IDC Research. “Chinese consumers are You expect a premium smartphone to have the latest AI features and might be hesitant to spend more than $1,000 on it. It doesn’t have all the capabilities of AI.”
“Real growth for Apple in China will come in the long term as Apple Intelligence evolves to serve more use cases, expands language support beyond English, and enables Siri to leverage other local AI models to deliver features like ChatGPT,” Popal said.
Meanwhile, some Chinese AI companies may be better positioned to target Chinese consumers anyway, including offering more local dialects than currently found in foreign AI models, said Reece Hayden, an analyst at ABI Research.
Apple isn't the first foreign company to work with the Cyberspace Administration of China on AI and smartphones. In January, Samsung partnered with Chinese tech giant Baidu (BIDU) to use the company's AI models for its translation service. Samsung has also partnered with another AI company, Meitu, on photo editing tools. Elsewhere in the world, Samsung uses a combination of its own AI technology and Google's (GOOGL) Gemini AI model, which is banned in China.
However, Samsung accounts for less than 1% of the total Chinese market, according to Counterpoint Research.
The clock is ticking for Apple to secure partners ahead of the fall software launch, but Jeff Fieldhack, research director at Counterpoint, is confident the company can close the deals in time.
“Apple has a strong installed base globally and should be able to forge partnerships very quickly. Working with them will be a valuable asset for these companies,” he said, noting that the company will soon establish itself as an AI powerhouse in the country.
