Is Apple losing its grip in China? With yet another year-on-year fall in iPhone sales now tucked rather uncomfortably under its belt, it’s on increasingly shaky ground in the world’s largest smartphone market—a market it once relied on for growth. Despite clawing its way back into the top five manufacturers (having slipped out of it entirely earlier this year), it’s still losing a worrying amount of market share to growth from domestic brands like Huawei, OPPO, Honor, and Xiaomi.

And yet, in spite of this, Apple stocks recently hit a new all-time high. Why? The market has been buoyed by the belief that Apple Intelligence will coax the masses into buying a new phone, ending the curse of longer upgrade cycles. But in China, there’s a big problem with that idea.

Apple Intelligence currently can’t launch there (or in Europe, for that matter), because it doesn’t currently meet the country’s very strict regulatory requirements around AI—one of the biggest issues being its heavy reliance on ChatGPT for some requests, which has been banned in China since February 2023.

Is there a solution? And if there is, will it involve compromises a US company should think twice about taking, even with tens or hundreds of billions of dollars on the line? Tim Cook doesn’t think so.

“We’re engaged, as you would guess, with both regulatory bodies,” Cook said during a recent earnings call, referring to the European and China regulators.

“Our objective is to move as fast as we can, obviously, because our objective is always to get features out there for everyone. We have to understand the regulatory requirements before we can commit to doing that and commit a schedule to doing that.”

In this context, Apple’s decision to open up its biggest research center outside of the US in Shenzhen, China, earlier this month raises questions. At the very least, it could be seen as something of an olive branch—helping to heal the relationships that soured after it began shifting even more of its iPhone production to India earlier this year.

Perhaps this is precisely part of the necessary equation for Apple’s AI future in China. It needs to maintain favor in the way it simply does not in the West.

Key Challenges

“In China, Apple’s outlook remains stable as it still has a solid customer stickiness, but it won’t be an easy path. Cautious consumer sentiment and Huawei’s return with innovative products are the key challenges to Apple,” says Will Wong, senior research manager at IDC.

“Consumer sentiment” is a term heard quite regularly in relation to Apple’s position in China. The public often favors local brands as the better value and, at times, simply the better option.

In some, such feelings may have been turbocharged by the US government’s torpedoing of Huawei under Trump. In 2019 the Chinese mega-brand was not just competing for smartphone market supremacy in China, but globally. Then in May 2019, sanctions cut the ties between Huawei and Android-maker Google, eradicating Huawei phones’ appeal for almost all Western buyers.

Apple may not have chosen such a move, but it is as American as those Huawei sanctions nevertheless.

The timing of the Shenzhen research center also follows something of a pattern. Apple opened its first Chinese research center in 2016, which was also the year the company saw its first revenue downturn in 13 years.

“We do not have clear information about the focus of the new Apple research center in China,” says Wong. “Nevertheless, the initiative implies that China is still an important market to Apple, especially that it’s crucial to develop GenAI services that are dedicated to the local regulations and consumers’ needs.”

Those local regulations are numerous, at least compared to the light-touch, or even hands-off, approach taken to AI in the US and UK at present. At least a dozen sets of policies have been published since 2017 by various governing bodies, most notably the CAC, Cyberspace Administration of China.

“If a company wants to win in the AI era, the localized model training to inferencing, making sure of local context, partnerships, and regulations is key,” says Neil Shah of Counterpoint Research.

It is impossible for Apple to win this one on its own, though, thanks to yet another piece of Chinese legislation.

“There is still foreign investment access control, which applies to any internet-based business models. And this will mean a 50 percent maximum as foreign participation,” says Michael Tan, a partner at legal firm Taylor Wessing. He has worked on the subject of companies operating in and around China for more than two decades.

“In order to have this kind of AI feature offering for the market, you face quite a lot of regulatory hurdles, and particularly for American or foreign [companies], it could be very difficult. To arrive there they will have to team up with a local player,” says Tan. “I understand that for Apple products in that regard, they are currently talking to companies like Baidu.”

Siri, Meet Ernie

Baidu might be best described as the Chinese alternative to Google. It runs a search engine and launched its own AI assistant, Ernie, in 2019. Since then Ernie has amassed more than 300 million users, and was recently renamed to the more China-centric name of Wenxiaoyan.

Is the ghost of Ernie going to haunt Chinese iPhones? Apple may have no better choice.

“Amazon, they were more or less kicked out of the market, with their Cloud service,” says Tan, referring to Amazon’s attempted, and failed, launch of AWS (Amazon Web Services) in 2017.  “If you want to run that as a full Amazon-owned business, it’s not possible, so you have to team up with a local joint venture partner, as Microsoft has been doing.”

This would also be nothing new for Apple. China’s regulators began putting the squeeze on Apple as early as 2017, when new laws meant Apple’s own servers could no longer be used to run iCloud for Chinese users.

The solution was GCBD, Guizhou-Cloud Big Data, which is not just a Chinese company but a state-owned one. Seven years on, it still runs Apple’s China iCloud operations. The Chinese state is the steward of iPhone users’ emails, at least in a practical sense.

In 2021 The New York Times undertook an investigation into the compromises Apple has had to undertake to get along with the Chinese state. Those charges include compromising the security of users’ data, and the removal and barring of apps that don’t match the CCP’s content guidelines. It’s quite the read.

Tim Cook has publicly made peace with the lengths required to exist in the Chinese market.

“Your choice is: Do you participate, or do you stand on the sideline and yell at how things should be,” he said during a discussion on China during 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.”

Since then, though, the expectations of the level of Apple’s capitulation have only grown more onerous. Algorithms that determine what the public sees online or through AI have to be registered with the Chinese authorities, and new AI legislation is largely focused on controlling the exact public-interfacing models that Western tech companies want to get involved 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 problem is, China can afford to put in place such measures because the power balance is in its favor—more so than ever.

“China is no longer just playing a following role in many technology fields,” adds Tan. “It is already advancing and taking the leading role.”

Business as Usual?

From a Western view, the rules put in place for generative AI in China veer between the admirable and the worrying.

“The regulation includes a number of vague censorship requirements, such as that deep synthesis content ‘adhere to the correct political direction,’ not ‘disturb economic and social order,’ and not be used to generate fake news,” reads Carnegie Endowment’s paper on the state of affairs in 2023.

“Deep synthesis” is the term the CAC uses in place of generative AI. China’s restrictions would result in a Siri that wouldn’t talk about the Dalai Llama, that wouldn’t refer to Taiwan as a separate country or acknowledge the Uyghurs. And who knows what else.

Given the current lax state of Western LLMs, it’s hard enough to picture a chatbot that couldn’t be cajoled into saying China is a part of the sovereign state of Taiwan, let alone falling into line 100 percent of the time. But clearly many Chinese tech companies have managed to adhere to the restrictions, to the satisfaction of the regulators at least. In August 2024, the South China Morning Post reported 188 LLMs had been approved for use to date, up from just 14 in January 2024.

It could be argued that Apple effectively adopting a custom version of one of these LLMs to fill out China’s version of Apple Intelligence represents business as usual. Apple already censors the app store to comply with China’s policies. It already cooperates with local entities.

However, with Apple Intelligence generative AI positioned at the heart of iPhones and other devices, the company seems more at risk of being accused of being a little too embedded in the wants and whims of the Chinese state for comfort, for a US company.

In August, Zhuang Rongwen, director of the Cyberspace Administration of China, said generative AI, such as chatbots, was “forcefully driving economic and societal growth.” The New York Times’ 2021 report suggested the government didn’t really need Chinese iPhone users’ data to surveil its citizens, as it already had stronger methods. But with GenAI, Apple may inadvertently become a more active participant in the CCP’s goals.