Apple’s new China problem: ChatGPT is banned there

(CNN) — Apple is banking on its upcoming AI features to boost iPhone sales especially in China, where demand has been lagging. But there’s a problem: ChatGPT — soon to be integrated into Siri — is banned in China.

In a presentation earlier this month, Apple (AAPL) showed off its proprietary technology called Apple Intelligence to power compelling new AI features and announced a partnership with OpenAI to also use its viral ChatGPT tool in a limited capacity. (When Siri is activated and needs more assistance answering an inquiry, ChatGPT can step in.)

The move signaled how Apple is trying to expedite the latest buzzy technology at a time when tech rivals, such as Microsoft, Google, Meta and Samsung, have already found their AI footing. A deal with OpenAI could help Apple close the gap.

But China is 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, rolled out new guidelines for the industry, requiring companies to seek approval before deployment. The organization has approved more than 100 AI models as of March, all from Chinese companies.

According to a report from the Wall Street Journal Thursday, Apple is looking for a Chinese AI company to partner with ahead of the iPhone’s expected September launch, but it hasn’t reached a deal yet.

Apple did not respond to a request for comment.

The need to find a partner — and quickly — comes at a time when Apple’s smartphone sales tumbled a stunning 10% in the first quarter of this year, according to market research firm IDC, due largely to iPhone sales sharply dropping in China. The company has lost momentum in China as nationalism, a rough economy and increased competition have also hurt sales. China is the company’s second-largest market.

Trouble in the EU

Limitations on its new AI tools may not be specific to China. In a statement sent to CNN following the publication of this article, Apple said it “highly motivated” to bring the features to customers around the world, but it is facing regulatory challenges in the European Union, as well.

The company said it doesn’t believe it will be able to roll out its AI features in Europe this year.

“Due to the regulatory uncertainties brought about by the Digital Markets Act (DMA), we do not believe that we will be able to roll out three of these features—iPhone Mirroring, SharePlay Screen Sharing enhancements, and Apple Intelligence—to our EU users this year,” a spokesperson said in a statement.

“Specifically, we are concerned that the interoperability requirements of the DMA could force us to compromise the integrity of our products in ways that risk user privacy and data security,” it added. “We are committed to collaborating with the European Commission in an attempt to find a solution that would enable us to deliver these features to our EU customers without compromising their safety.”

Resurgent competitors

In China, concerns around iPhone sales continue to mount as Chinese smartphone brand Huawei’s smartphone sales growth was 70% in the first quarter, according to Counterpoint Research.

If a solution is not worked out by fall, Chinese consumers may feel short changed and choose to wait until they can get the full AI experience with Apple, she added.

“Apple is very likely to seek a local partner in China in place of OpenAI, because simply put, it needs to,” said Nabila Popal, a senior director at IDC Research. “Chinese consumers are expecting their premium phones to have the latest AI functionality and may hesitate to spend over $1000 for devices that don’t have all the AI bells and whistles.”

“The real growth in China for Apple will come in the long term, as Apple Intelligence evolves offering more use cases, extends language support beyond English and when Siri can leverage other local AI models to provide the ChatGPT-like function,” Popal said.

In the meantime, some AI companies in China may be better suited to target its consumers anyway, such as by offering more local dialects than what’s currently found in foreign AI models, Reece Hayden, an analyst at ABI Research, noted.

Apple wouldn’t be the first foreign company to work with the Cyberspace Administration of China for AI and smartphones. In January, Samsung teamed up with Chinese tech giant Baidu (BIDU) to use its AI model to help power its translation service. It works with another AI firm Meitu for photo editing tools. In other parts of the world, Samsung uses its own propriety AI technology, along with Google’s (GOOGL) AI model Gemini, which is also banned in China.

Samsung, however, accounts for less than 1% of the total market in China, according to Counterpoint Research.

Although the clock is ticking for Apple to secure a partnership ahead of its fall software launch, Jeff Fieldhack, a research director at Counterpoint, believes it will be able to ink a deal in time.

“Apple should be able to have a partnership aligned very quickly because it has such a strong global install base, and it would be a gem for these companies to work with them,” he said, noting that they’d soon be established as an an AI power player in the country.

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CNN’s Joyce Jiang contributed reporting