Last Thursday (13 February), Alibaba confirmed it would be partnering with Apple (NASDAQ:AAPL) with regards to artificial intelligence (AI) features for iPhones in China. Both stocks rose as a result, with Apple up 6% in the past week. I don’t think the news got enough attention, as this could be a really big deal for both companies. Here’s why.
The background
Apple’s been struggling in China over the past couple of years. For example, it experienced a 17% decline in annual smartphone shipments in China in 2024. This was the largest fall since 2016. Apple hasn’t been able to keep up with domestic competitors in this space, and has been further hamstrung when trying to launch new AI features in hardware such as iPhones.
In line with local regulations, Apple has to collaborate with domestic firms for AI implementations. That’s where Alibaba comes in. In working together on this project, it means that Apple can add the features.
While technical details haven’t been publicly released yet, the integration’s expected to enhance applications such as voice recognition, natural language processing, and personalised user experiences.
Why this is big for Apple
In partnering with Alibaba, Apple’s pretty much solved the issue of getting AI features onto iPhones in the country. That in itself is big win, as I’m sure consumers there are currently buying competitor products with these AI features as a key consideration to purchase. So if Apple can rectify this, sales should increase.
Interestingly, the language model for AI that Alibaba uses is specifically trained for the Chinese culture and user behaviour. I believe this is a better fit than Apple’s own in-house AI model for the local market. Therefore, it’ll be able to benefit from this tailored model without having to have spent time or effort in developing it.
Finally, the move to choose Alibaba, which is a government-backed company, is important. It certainly pays to stay on the right side of regulators. So with this move, aligning with Alibaba could help Apple maintain favour with Chinese regulators in the future.
Action from here
Apple shares are up 33% over the past year. It’s true that with the stock close to all-time highs, there’s a risk things are a little overvalued. Another specific risk is that Apple might struggle to take market share in China even with the new partnership. It could take time before we see a material increase in sales.
However, I think that for long-term investors, it’s still a good opportunity to consider right now. The size of the market that could be opened up with this new tie-up, along with the implications of working with a local business, could be a large win in coming years.
This post was originally published on Motley Fool
