China Frustrates Apple's AI Push --- Tech giant needs a local partner because Western chatbots aren't available there

"Apple's presentation on artificial intelligence this month offered examples of how American iPhone users could soon enjoy AI tools such as a custom emoji generator. No one mentioned China, the second-largest market for iPhones.

There is good reason for the omission.

OpenAI's ChatGPT and other Western AI models aren't available in China, and that is prompting Apple to look for a Chinese partner to help offer its Apple Intelligence services, said people in the industry. So far, no deal has been announced, with the next iPhone model releases just months away.

In China, Apple is falling behind local rivals that have already incorporated AI functions into their phones. The iPhone dropped to third place by handset market share among smartphone brands in China in the first quarter of this year behind two local brands, according to Counterpoint Research.

Apple has held talks with several Chinese companies that make AI models including search-engine company Baidu, e-commerce leader Alibaba Group and a Beijing-based startup called Baichuan AI, people familiar with the matter said.

In the U.S., Apple is pursuing a two-pronged strategy to deliver AI services. It is building its own AI capabilities while also teaming up with OpenAI. Anticipation over Apple's future AI-related offerings has helped push the company's market capitalization back above $3 trillion.

In China, companies must seek Beijing's approval before introducing AI chatbots built on large language models trained with huge databases of text, images and video vacuumed up from the internet and other sources. Regulators vet the models to ensure they don't influence public opinion in a way the government doesn't approve.

As of March, Beijing's internet watchdog, the Cyberspace Administration of China, had approved 117 generative AI products, none of which is foreign-developed.

Early this year, Apple explored the possibility of obtaining approval for a foreign large language model to be used in its devices in China, but it found that Chinese regulators were unlikely to approve it, people familiar with the matter said. That realization prompted Apple to step up talks with potential local partners, they said.

Apple said the region that includes mainland China, Taiwan, Hong Kong and Macau accounted for 18% of its global revenue in the quarter ended March 30.

Its position is threatened by local companies. This year, Huawei is expected to account for 17% of China's smartphone market, up from 13% last year, while Apple's share is projected to drop to 16% from 18%, according to Counterpoint.

Apple said it remains well-placed in China. "China is the most competitive market in the world, and we feel confident about our position," Chief Financial Officer Luca Maestri told The Wall Street Journal in an interview last month.

In China, as in the U.S., smartphone makers are using generative AI in their sales pitches to entice users to upgrade because technology is advancing more slowly in other features.

The closest precedent for Apple Intelligence in China comes from Samsung Electronics, the world's largest smartphone maker by shipments. In January, Samsung introduced its Galaxy S24 smartphone series, with generative AI features such as real-time translation of calls and text messages, AI-powered photo editing, and Google searches triggered by circling an image on the phone.

In the U.S. and most of the rest of the world, the services are powered by Samsung's own generative AI engine plus the AI capabilities of Google, a longtime Samsung partner. Because Google's AI model, Gemini, isn't available in China, Samsung instead turned to two Chinese companies for the Galaxy S24 in China. Baidu is handling "circle to search," text summation and other AI functions, and software maker Meitu enables AI-based photo editing.

The capabilities of the Baidu-powered AI have drawn some unfavorable reviews from Chinese internet users. Some compared Google's AI on the Galaxy S24 with Baidu's and found Google was able to identify car models and buildings from photographs while Baidu couldn't. Others praised Baidu's technology, saying its Chinese-language translation was more authentic and its search results were more relevant to users in China.

A Samsung spokeswoman said the company chose to collaborate with Baidu because Samsung determined that Baidu offered the most competitive commercialized large language AI model in the Chinese market. Samsung declined to comment on comparisons between the AI versions, and Baidu didn't respond to a request for comment.

Samsung accounts for about 1% of China's smartphone market, and China isn't a major contributor to the South Korean company's profit.

Adapting products and services to Chinese rules is nothing new for tech companies. In China, Apple's iCloud service houses data on the servers of a government-owned company. Apple is rolling out its Vision Pro headset in China this month without its streaming service, Apple TV+, which isn't available in the country.

Apple has long enjoyed a relatively privileged place in the Chinese market because of its economic role in the country. Most iPhones are assembled in China by Taiwanese or Chinese contract manufacturers. Apple has said it has helped create some five million jobs in China, including in its supply chain and App Store ecosystem.

Still, the rise of Chinese patriotism could affect Apple's standing, said Tom Kang, a research director at Counterpoint. "China is increasingly targeting U.S. companies one by one. So it's whether Apple becomes a target or not -- that will be the key issue," he said." [1]

1. China Frustrates Apple's AI Push --- Tech giant needs a local partner because Western chatbots aren't available there. Huang, Raffaele; Sohn, Jiyoung.  Wall Street Journal, Eastern edition; New York, N.Y.. 20 June 2024: B.1.