Apple's new China problem: ChatGPT banned in China

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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) showed off a proprietary technology called Apple Intelligence that powers exciting new AI features, and also announced a partnership with OpenAI for limited use of the company's much-talked-about ChatGPT tool (ChatGPT will step in when Siri kicks in and needs further assistance answering a query).

The move shows how Apple is trying to quickly adopt hot new technologies at a time when tech rivals like Microsoft, Google, Meta and Samsung have already gained a foothold in AI. A deal with OpenAI could help Apple close the 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 top 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 need to find a partner comes as Apple's smartphone sales plummeted 10% in the first quarter of this year, according to market research firm IDC, largely due to plummeting iPhone sales in China, where the company has been losing momentum as nationalism, the recession and increased competition have also hurt sales.

Meanwhile, Chinese smartphone brand Huawei's smartphone sales grew 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.

Nabila Popal, a senior director at IDC research, said Apple will likely look for a local partner in China instead of OpenAI. Simply put, it has to: Chinese consumers expect premium phones to have the latest AI features, and they may be hesitant to spend more than $1,000 on a device that doesn't have a full range of AI capabilities.

Popal said Apple's real growth 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 offer features like ChatGPT.

Meanwhile, some Chinese AI companies may be better positioned to target their home-grown consumers anyway, including by offering more local dialects than currently found in foreign AI models, said Reece Hayden, an analyst at ABI Research.

Apple would not be 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 its AI models for a translation service. It has partnered with another AI company, Meitu, on a photo editing tool. Elsewhere in the world, Samsung uses its own AI technology as well as 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 get the deals done in time.

Working with Apple will be valuable for these companies as the company should be able to forge partnerships very quickly as it has a strong global installed base, he said, noting that Apple will soon establish itself as a leading AI player in the country.

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