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Apple Partners with Alibaba to Introduce AI Features for iPhones in China

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Apple has partnered with Alibaba to launch artificial intelligence features for iPhone users in China, a move aimed at addressing months of uncertainty over Apple’s AI strategy in the region, according to The Information. The collaboration could help Apple regain its competitive edge in the Chinese market, where it has been losing ground to local rivals such as Huawei, which has already incorporated AI tools into its smartphones since last year.

Apple’s stock rose by 1.5% following the news, while Alibaba’s U.S.-listed shares saw a 2.6% gain. Apple had initially chosen Baidu as its AI partner, but the Chinese company’s progress in developing models for Apple Intelligence did not meet Apple’s standards. As a result, Apple considered various other AI models from Tencent, ByteDance, Alibaba, and Deepseek but ultimately chose Alibaba for its ability to leverage vast amounts of user data related to shopping and payment habits, which could enhance model training and enable more personalized services.

The Chinese AI features co-developed by Apple and Alibaba are now under review by China’s cyberspace regulator for approval. This development is crucial as Apple’s iPhone sales declined during the holiday quarter, typically its best-performing period, largely due to the absence of AI features in its latest devices. Apple remains optimistic, forecasting strong sales growth for the current quarter.

Apple Shares Rise on Positive Forecast, but China Concerns Persist

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Apple’s stock rose by 2% on Friday, driven by a promising forecast that boosted optimism about a potential iPhone sales rebound. The world’s most valuable company is set to add over $81 billion to its market value of $3.573 trillion if the gains hold. The forecast predicts revenue growth in the low to mid-single digits for the current quarter, suggesting that demand for the iPhone 16 series is picking up despite initial concerns. The iPhone 16, launched without most AI-powered features, has benefited from recent updates, including ChatGPT integration.

Apple’s cautious approach to AI contrasts with the heavy investments made by competitors like Microsoft and Alphabet. However, analysts are reassured by the company’s steady results, particularly as AI spending becomes a focus for big tech companies. Despite these positive developments, Apple faces challenges in its third-largest market, China. The company has yet to secure a local partner for AI features in the region, and rivals like Huawei continue to gain market share. Apple’s sales in China declined by 11% in Q4 2024, but government stimulus measures are expected to mitigate the impact.

At least 12 analysts raised their price targets for Apple, with its stock rising by 30% last year, outpacing Microsoft’s 12% increase. However, Apple’s price-to-earnings ratio stands higher than its competitors, with a forward P/E of 31.12 compared to Microsoft’s 29.2 and Meta’s 26.7.

 

Apple’s Holiday Quarter Sales Affected by AI Delays and Chinese Competition

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Apple is expected to report modest revenue growth for its holiday quarter, with challenges stemming from delayed AI features and heightened competition from Chinese smartphone makers. Analysts predict a slow quarter for the tech giant as its iPhone 16 series, which launched in September, lacked AI features that its competitors, such as Google and Samsung, had already integrated into their devices. While Apple is planning to roll out improved AI capabilities, including updates to Siri, later in the year, these delays have hindered iPhone demand during the crucial holiday-shopping season.

Apple’s struggles with AI were further underscored when the company had to retract a news-summarizing AI tool that was criticized for inaccuracies by media outlets like the BBC. Jane Hepburne Scott, an investment manager at Aegon Asset Management, emphasized that Apple’s slower adoption of AI has contributed to a decline in its competitive standing and loss of market share.

Adding to Apple’s woes is fierce competition from Chinese smartphone manufacturers, particularly Huawei. The company’s global smartphone market share dropped to 23% in the last quarter of 2024, down from nearly 25% the previous year, with an even sharper decline in China, where its share fell by 10 percentage points to 17%. While the Chinese government has been subsidizing domestic smartphone purchases, these incentives primarily target budget-friendly phones, not high-end models like the iPhone.

Despite these challenges, Apple’s services division, which has been growing steadily, is expected to post a 12.9% increase in sales. However, the overall forecast for the quarter remains underwhelming, with analysts expecting just a 3.8% revenue growth for the period, significantly below the 6.1% growth from the September quarter.

Further complicating matters for Apple is the strengthening of the U.S. dollar, which has risen nearly 8% against major currencies, potentially making it harder for Apple to surpass sales expectations in international markets.