Apple (AAPL)’s China AI Strategy: Why Remove the Alibaba (BABA) Guide?

Apple Inc. (AAPL) has developed its own large language model for the China market, in partnership with Alibaba Group Holding Limited (BABA), according to sources familiar with the matter. This move marks a shift from Apple's previous reliance on third-party Chinese AI models. Apple has been struggling in China's AI-equipped smartphone market, losing ground to domestic rivals like Huawei.

A proprietary model would grant Apple greater control compared to merely utilizing a partner's AI service. The question therefore arises: is Apple's self-trained model a significant technological advancement in China, or merely a more controlled dependence on local partners? If successful, Apple would become the first foreign company in China approved by Beijing to offer a proprietary AI model, a notable achievement considering the ongoing trade and diplomatic tensions between the US and China over AI.

Apple Intelligence is anticipated to launch in China following an upcoming iOS update, after receiving Beijing's regulatory approval. This approval process took approximately a year and required collaboration with both Alibaba and Baidu. Apple's dual-track approach addresses regulatory challenges that have hindered other US tech firms in China.

Apple has previously faced obstacles in the Chinese market, with the absence of AI features on Chinese iPhones contributing to consumer favoring of domestic brands equipped with built-in AI assistants. Despite the absence of public confirmation, Apple and Alibaba continue to develop this China-specific AI model. The dual partnership with Alibaba may gradually reduce in importance as Apple's self-trained model becomes more integral to Apple Intelligence.

This development indicates Apple's ongoing efforts to reduce reliance on Chinese AI partners. Hedge funds maintain a preference for Apple over Alibaba, despite the latter's earlier involvement in Apple's China AI strategy. Apple's stock remains a favored investment among hedge funds, although the analysts suggest exploring other AI stocks that may offer greater upside potential with less downside risk.