Apple’s AI push faces big challenges in China

Apple Intelligence is the Cupertino giant’s effort to bring AI to all of its devices, and includes an improved version of Apple’s voice assistant, Siri, as well as the ability to automatically organize emails and transcribe and summarize audio footage.

Apple said it plans to roll out Apple Intelligence in U.S. English this fall, with additional languages, features and platforms available over the next year, but the company was silent about its availability in China during an AI announcement at its annual developers conference this month.

Analysts told CNBC that this likely has to do with China’s strict rules on AI, as Apple tries to figure out how to approach the complex market.

“Given China’s regulatory environment, it’s a different world when it comes to AI, which is why China was such a big part of Apple’s big announcement last week,” Brian Ma, vice president of devices research at IDC, told CNBC in an email.

Beijing has enacted a range of regulations over the past few years, focusing on areas ranging from data protection to large-scale language models – the massive datasets that underpin applications like ChatGPT.

China’s AI market is highly regulated. Some rules include a requirement that LLM providers obtain approval for commercial use of their models. Generative AI providers are also responsible for removing “illegal” content.

These rules will be difficult for Apple to comply with.

First, Apple Intelligence’s capabilities are based in part on Apple’s own language models that run both on the phone and on the company’s servers.

Under Chinese rules, Apple would need to get its AI models approved by authorities.

Second, one of the biggest announcements this month was that Apple’s voice assistant Siri can now use OpenAI’s ChatGPT for certain requests, but ChatGPT is banned in China, so Apple needs to find an equivalent domestic partner.

Baidu and Alibaba, two Chinese tech giants with their own law schools and voice assistants, have been positioned as potential partners for Apple.

Meanwhile, China’s internet is heavily censored, and regulators are concerned that AI services could generate content that goes against Beijing’s views and ideology.

Canalys analyst Nicole Peng told CNBC in an email that Apple will likely have to build on-device AI models as well as cloud-based AI models that comply with local regulations.

Another element to Apple’s AI success in China is for the company to create localized AI experiences on its devices that appeal to Chinese users, according to Ben Wood, chief analyst at CCS Insight.

“Localizing the Apple Intelligence experience will be a significant challenge for Apple,” Wood told CNBC. “As with any technology deployment, there will be nuances in how the service is delivered to respect the specific practices, regulations and use cases of specific countries.”

A key part of Apple’s pitch when announcing AI was its focus on privacy. The company announced private cloud computing, where the AI ​​would be processed on Apple-owned servers. Apple said that no processed data would be stored.

Whether the tech giant can fully own its servers is another matter: iCloud data in China is stored on servers in China operated by third parties.

This means Apple could demand similar partnerships for its AI computing servers, opening the tech giant up to criticism over how private its data actually is.

“Maintaining complete user privacy in the AI ​​era in a highly regulated market like China will be Apple’s biggest test yet,” Neil Shah, a partner at Counterpoint Research, told CNBC. “Having its own fully controlled private computing servers in China will be difficult for Apple.”

CCS Insights’ Wood said Apple’s focus on privacy could help it bring its AI features to market. China passed significant data protection legislation in 2021 that seeks to limit how information is collected and stored.

“Apple’s continued focus on privacy and security practices may help appease local regulators, and the company is not afraid to make concessions when necessary,” Wood said.

CNBC reached out to Apple about private cloud computing and the company’s AI ambitions in China. A spokesperson did not directly answer those questions but directed CNBC to a Fast Company interview with Craig Federighi, Apple’s senior vice president of software engineering.

Federighi expressed his desire to bring Apple Intelligence to China.

“We’re eager to find ways to offer all of our best product features to all of our customers,” he said in an interview with Fast Company, adding that “in some parts of the world, there are regulations that need to be worked out.”

Apple executives said the process of bringing AI products to China is underway, but did not provide a timeline.

Smartphone makers around the world are promoting AI features as a way to sell premium phones to consumers who want to keep their devices for a long time.

Apple faces many challenges in China, where its market share fell to 15% in the first quarter of 2024 from 20% in the same period last year, according to data from Canalys. Huawei, whose smartphone business was hit by U.S. sanctions, has bounced back and is now China’s largest smartphone maker, competing with Apple with phones targeted at the premium segment.

Apple’s lag behind domestic rivals in adopting AI features in China is unlikely to hurt iPhone sales.

“For Apple, adopting China-level Apple Intelligence will be a marathon, not a sprint — it will be phased in over several years until Apple feels confident and will have to face off against the competition until then,” Counterpoint Research’s Shah said.

Wood said Apple’s control over the integration of hardware and software allows it to offer a different experience than its competitors.

“Apple has an uncanny ability to explain its services and features better than its competitors, even when they’re essentially offering the same experience or a subset of what their competitors can offer,” Wood said.

“Despite the current AI focus of rival China-based smartphone makers, Apple should still be in a strong position.”