Apple’s challenge in China rises with new rival phones and AI delay

Introducing its iPhone 16 lineup at a California event, Apple promoted Apple Intelligence features for U.S. users such as an enhanced version of its voice assistant Siri. It didn’t say when the AI services would be available in China, its second-largest market after the U.S., although it said the system would start supporting the Chinese language next year.

The delay puts the iPhone maker at a disadvantage against rivals offering AI services, including Chinese handset makers such as Huawei, Honor and Oppo. Sales of iPhones in China have declined for four consecutive quarters, weaker than the overall Chinese market, according to market intelligence firm Counterpoint Research.

A half-day after Apple’s event, Huawei held its own announcement in China to release the Mate XT, a three-way foldable smartphone. The phone provides AI features such as text summaries, translations and photo editing.

Huawei’s handset business took a blow early this decade from U.S. sanctions, but it has come back with models that use advanced chips developed domestically. Helped by several models it has introduced since August 2023, Huawei’s smartphone sales have been growing rapidly in China, according to Counterpoint.

Lucas Zhong, an analyst at research firm Canalys, said some consumers in China were trading down to more affordable devices during the country’s economic slowdown. “Apple needs to differentiate itself further, but current economic conditions make that challenging," he said.

Apple said on its China website that the launch of Apple Intelligence was subject to regulatory approval. In China, any generative AI models that could influence public opinion need government approval.

Apple is building AI features for China by drawing on AI models developed by Chinese search-engine company Baidu, according to people familiar with the companies’ work. Those features include content generation and image search, the people said.

“If Apple Intelligence isn’t available in China anytime soon, I don’t think I have any reason to buy a new iPhone," said Henry Piao, who works for a state-owned investment fund in Shanghai.

Piao said he has considered shifting to a Chinese brand because of more attractive features and because his employer has encouraged buying domestic brands. Some government agencies and state-owned companies have restricted iPhones in the workplace owing to concerns about national security risks.

On the flip side, analysts said there was pent-up demand for the right product because many people in China and elsewhere have been holding off on getting a new phone.

“The hardware is ready, but the software is not," said Meng Bin, a sportswear designer in Beijing, of the new iPhone. He said he planned to wait to buy one until he had a better idea of when Apple Intelligence features would be available.

On the hardware front, Huawei and Samsung have both turned to foldable screens to draw a distinction with Apple. Huawei’s latest phone has three segments that can be collapsed like a Z-shaped folding screen or opened up flat to be a 10.2-inch tablet.

Analysts said the design showcased Huawei’s technology, but the price tag—starting at the equivalent of around $2,800 vs. $843, the starting price for the iPhone 16 in China—could deter consumers. Meanwhile, Huawei still faces manufacturing bottlenecks that could lead to shipment delays, analysts said.

In the first quarter of this year, Huawei surpassed Samsung to become the world’s biggest foldable smartphone maker by shipments, according to Counterpoint.

China accounts for more than half of the global foldable handset market. Huawei’s book-style foldable phone, Mate X5, has been a bestseller in the country since its introduction last September, Counterpoint said.

Yet another headache for Apple in China is a backlash against the commissions that it charges app developers. Apple’s standard fee for big companies is 30%, meaning if a user buys an app for $10 or makes a $10 in-app purchase, Apple wants to get $3 in each case.

The policy has sparked a global war with software makers and regulators, leading to lawsuits by app makers and consumers as well as antitrust scrutiny in the U.S., Europe and Japan.

Apple has pressured China’s biggest internet companies, including Tencent and TikTok parent ByteDance, to close loopholes on their platforms that in some cases allow content providers to avoid sharing revenue with Apple. The companies are negotiating over new commission practices, people close to the talks said.

Write to Raffaele Huang at raffaele.huang@wsj.com