Greater China accounts for 19% of Apple’s total sales. The company has struggled in China for the past two years, with an average quarterly decline of 5%. Over the past six quarters, despite comps getting easier, the China business continued to be under pressure, declining by an average of 7% in each quarter.

The two-year pullback can be segmented into two buckets: 2023 and 2024.

2023: Early in the year, China’s slowing economy and weaker consumer spending made ultra-premium smartphones a harder sell. Consumers became more price-sensitive, delaying upgrades or opting for more affordable alternatives. Apple, with its higher average selling price, struggled in this environment, even after implementing price cuts and trade-in incentives. Xiaomi and other domestic brands thrived in the mid-range and value segments, which saw improved growth.

2024: Last year was Apple’s most challenging year in China since 2016, when sales declined by 17%. The decline was driven by two factors. First, Chinese consumers favoring domestic brands in a shift toward patriotic consumption and the rumored banning of iPhones among government employees, which we estimate accounts for between 5-10% of iPhone sales in China. Second, the absence of AI capabilities on the iPhone in China. Xiaomi and other Chinese Android makers have aggressively pushed AI-powered features to differentiate their products. On-device AI models, including LLMs, and AI-powered assistants have become major selling points, with Xiaomi’s MiLM showcasing real-time generative AI tasks directly on smartphones.

To put the trend in China’s smartphone sales into perspective, it’s helpful to compare our estimated calendar-year iPhone growth in China to Xiaomi’s smartphone growth during the period from 2022 to 2024:

This translates to the iPhone’s market share in China declining from about 20% at the beginning of 2023 to around 15% by the end of 2024. Xiaomi is estimated to hold around 16% market share at the end of 2024, surpassing Apple.

Apple investors, present company included, have been waiting since last September for news on who would fill the gap and become Apple’s LLM partner in China.

The company has been rumored to be working with both Baidu and Alibaba, but expectations have shifted to Alibaba following a report from The Information on Feb 11, stating that Apple has partnered with Alibaba and submitted AI features for regulatory approval in an effort to bring Apple Intelligence to the region. While it was only a matter of time before Apple Intelligence’s China features were activated, it’s still notable that the company is making progress.

I believe the reporting from The Information, which is credible, suggests a June or September quarter launch of Apple Intelligence in China. If accurate, it would boost the case for accelerating iPhone growth in FY26. Currently, the Street is expecting 1% growth this year, increasing to 10% next year.

As for FY25, while I was wrong that the large upgrade pool would yield upside to iPhone growth in the Dec-24 quarter, I continue to believe that pool, which is massive (up 39% in FY21), will translate to modest upside to iPhone growth this year, closer to 3% y/y growth.

As for FY26, the 10% target is high and will depend on how FY25 plays out. If I’m correct that iPhone growth reaches 3% this year, the 10% growth expectation for FY26 is likely too high. In this case, I would expect growth closer to 7-8%. If I’m wrong on FY25 and it comes in closer to 1%, I believe the 10% growth expectation is achievable, in part due to the late fiscal year rollout of Apple Intelligence in China.

Whether sales fall into FY25 or FY26 is beside the point; what matters is that iPhone growth should quicken over the next eight quarters as Apple Intelligence features get rolled out to Europe and China.

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