Alibaba & Apple – Incompatible with China

Apple’s privacy server may have to go

• Alibaba looks like it will be the launch partner for Apple Intelligence in China but the system that Apple has created remains replete with privacy features that are likely to have to be compromised if Apple wishes to launch its service in China.
• Alibaba’s AI ambitions have been boosted by the possibility that it is working with Apple to provide Apple Intelligence for the local market which is a ringing endorsement of both the quality of its Qwen model and its neutrality.
• This will not be Qwen powering Apple Intelligence but simply replacing ChatGPT as the external location that Apple Intelligence points to when the user asks for something that Apple Intelligence is not equipped to deal with.
• This is a major boost for Alibaba which has been struggling with its core ecommerce business in China as a result of weak domestic consumption and aggressive local competition.
• Alibaba was one of the first to start producing generative AI and the fact that Apple has selected Qwen over Baidu’s ERNIE has given the market confidence that Alibaba will be one of the AI players in China.
• Despite this, Apple Intelligence in China is fraught with problems as the privacy features that it launched so proudly outside of China and the EU.
• Apple Intelligence is similar to CoPilot in that it consists of a runtime where a number of small language models (SLMs) have been trained to carry out specific tasks such as writing emails, drawing emojis and so on.
• When the request needs a bit more computing power it processes the request in conjunction with a completely secure server that no one, not even Apple has access to.
• This ensures that data used in prompts remain completely private even if they are processed in the cloud.
• It is only when a request is made that both the SLM and the LLM in the secure server can’t handle that the request is sent with the user’s permission to the public server of ChatGPT (Qwen in China’s case) to get an answer.
• The problem with Apple Intelligence in China is not Qwen which has already been approved by the regulator but with the data being processed on the device and in the secure server.
• To get this approved, Apple will need to allow the state to get access to all of the private data processed on its secure server which goes completely against how the server was built and created in the first place.
• One way to get around this is to scrap the private server in China altogether and do everything that is not processed on the device on the public server running Qwen.
• This will completely trash any claim that Apple can make to being an advocate for privacy in China, but then again the majority of Chinese citizens seem to be comfortable with the idea that the CCP is constantly checking in on their activities.
• For Apple, it is a trade-off of tarnishing its privacy reputation or having one of its core differentiators unavailable in China.
• Given the competitive environment in China where Apple has been losing market share and reporting weak numbers from China, it appears to have chosen its revenues over its reputation.
• The real winner here is Alibaba which gets a big boost for its AI reputation and one can only hope that this is the catalyst that returns Alibaba back to a more sensible valuation.
• Alibaba remains by far the cheapest e-commerce company in the world and if it gets a bit of AI pixie dust sprinkled over its valuation then there is a lot more upside to go.
• I have been waiting for a turnaround in Alibaba with my battered position and I can only hope that this is it.