In a strategic move to enhance iPhone sales in China, Apple has partnered with Alibaba to integrate advanced AI capabilities into its devices. Marc Ostwald, Chief Economist and Strategist at ADM Investor Services International, provides expert insights into the potential market implications of this collaboration.
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00:00Alibaba is partnering with Apple to roll out artificial intelligence features for iPhone users in China.
00:07The AI integration comes at a critical time for the iPhone, which has faced declining smartphone sales in a key market.
00:14Shares in Alibaba surged more than 9% reaching their highest since January 2022.
00:20Mark Oswald is Chief Economist and Global Strategist at ADM Investor Services.
00:25Good to see you again, Mark. Welcome back to the program.
00:27So, Apple had a choice here, didn't they? But they've gone for Alibaba over other Chinese AI companies.
00:34Why did they choose them?
00:36I think it really boils down to retail footprint, where Apple needed a local partner for AI.
00:48And there are other partners. Indeed, we've had an announcement today that Baidu is also working with Apple on that front.
00:59But the most important thing is Apple's iPhone sales in China have been declining.
01:05The pace of growth has basically fallen quite dramatically in recent years.
01:12And with AI basically being at the center of the next stage of developments in terms of mobile telephony,
01:20it's key that they find a very strong local partner with a very large retail footprint.
01:26And I think that's the primary motivation.
01:29So, good news for Apple, then. Is it going to save their iPhone sales, though?
01:37I think it will to some extent. But one really has to then look at it in the broader context of what's happening with Chinese consumer spending.
01:47And it's clear that consumers don't feel that comfortable as yet.
01:54What would obviously help is if wages started to pick up again.
02:00And if the property crisis was resulted, we always end up in pretty much the same space with that.
02:07And Apple obviously being at the high end in price terms, in terms of its phones, faces a lot of stiff competition from locally produced phones.
02:17So, I think it will help, but probably more at the margin than in terms of giving a big boost, as big a boost as perhaps Apple are hoping.
02:30And what about for Alibaba? What does it mean for them and the broader AI market in China?
02:39Well, I think since we had the news broke about DeepSeek a couple of weeks ago, there is this realization,
02:48and it's probably the most important one in terms of all the AI development,
02:53that it can be basically done a lot cheaper, a lot less resource and energy intensively.
03:02And China being at the forefront of everything to do with renewable technology,
03:10it really has a strong chance here to break into the market.
03:16And what was thought to be some exceptionalism about the US AI market is probably now being undermined.
03:27And it's not before time, because at the end of the day, both in terms of the energy transition,
03:32and in terms of AI, broader AI implementation, particularly generative AI,
03:38the sort of cost base that's being implied at the moment is simply not sustainable.
03:43And it's not going to be the sort of mass market product that it will aim to be, and it will eventually become.
03:52But in the first instance, everything needs to work towards massively reducing the cost of it.
04:01And you mentioned Baidu just now. Let's talk about them.
04:04They've also announced that they're going to make their own AI chatbot free from April.
04:09Does that give them an edge? Does that change things in the AI space there?
04:16Certainly. Anyone who makes their AI bots basically effectively open source is stealing a march on their competitors.
04:30It's a question of what everybody else does then. Does that set the benchmark for everybody else?
04:37Does everyone else follow that route, or will others basically try and seek other enhancements?
04:45The biggest problem with AI is actually there's not really much of a consumer hook.
04:52If it's free, then people will just bounce around between whatever's there.
05:00And at the end of the day, if you're trying to enhance your company's offerings, be you a Baidu, a Tencent, an Alibaba, or elsewhere,
05:11you need some sort of hook, a subscription-type hook, to keep people in your space.
05:19And that's really where the big competition is going to be, not only in China but also globally.