$Apple(AAPL)$ China's investigation of Appleple's App Store Monopoly : A Comprehensive Analysis

Innovation Stagnation

Apple has faced growing scrutiny over its perceived lack of groundbreaking innovation since the Steve Jobs era. Critics, including Meta CEO Mark Zuckerberg, argue that Apple has relied on incremental upgrades (e.g., camera improvements, battery life) rather than transformative products. Zuckerberg claims the iPhone’s evolution has stagnated, leading consumers to delay upgrades and hurting sales growth. Analysts note that competitors like Samsung and Huawei are outpacing Apple in areas such as foldable phones and AI integration, while Apple’s Vision Pro headset ($3,499) has struggled to gain mainstream traction due to its high price and niche appeal.

Cancellation of the Apple Car (Project Titan)

After a decade of development and $10 billion in investment, Apple abruptly canceled its electric car project in early 2024. The project faced technical hurdles (e.g., autonomous driving limitations), shifting strategies, and a cooling EV market. Instead, Apple redirected resources to generative AI, aiming to compete with rivals like Google and Microsoft. While the cancellation marks a setback, Apple retains intellectual property from the project, including autonomous vehicle patents and a fleet of test cars, which could be repurposed for future AI or software initiatives like CarPlay 2. Contrast this with the success of Xiaomi’s new SU7 EV which launched to wide acclaim and strong sales. Coupled with innovations such as Xiaomi’s smart home ecosystem and control of the EV with Xiaomi’s own line of smartphones, smartphone makers like Xiaomi are showing Apple China’s risk taking and innovation.

Slowing iPhone Sales and China Challenges

iPhone sales have declined globally, with a 16% drop in China (Q1 2025) attributed to fierce competition from Huawei and domestic brands offering advanced AI features and aggressive pricing. In the U.S., carrier upgrade rates have weakened due to lackluster hardware improvements and high interest rates affecting financing incentives. Apple’s reliance on incremental upgrades has made it harder to justify premium pricing, particularly in price-sensitive markets like India. Apple’s nemesis Huawei, crippled by US sanctions on both it’s chips and 5G innovations that almost killed it’s smartphone business is back with a vengeance. Huawei together with Honor, previously part of Huawei now have a combined 35.5% market share while Apple lags behind with 15%.

Vision Pro’s Rocky Launch and AI Lag

The Vision Pro’s high cost ($3,499) and limited use cases (e.g., movie-watching) have led to underwhelming sales, with production reportedly halted due to low demand. Meanwhile, Apple’s AI efforts, dubbed “Apple Intelligence,” lag behind competitors. The company is reportedly negotiating with Google to license Gemini AI models for iPhones, signaling a gap in proprietary AI development. Analysts warn that without breakthroughs in AI or AR, Apple risks losing its edge in consumer tech. Meta’s own VR experiment has costs it billions of dollars with little to show, did Apple just follow Meta with it’s own version of failure?

MacBooks, iPads, and Services Pivot

Growth in Apple’s personal devices (MacBooks, iPads) has stalled, with product revenue declining by 1% in FY2024. To offset this, Apple is prioritizing its services business (e.g., Apple Music, iCloud), which grew 13% in 2024 and offers higher margins. Services now account for 25% of revenue, and the company plans to expand AI-driven subscription models (e.g., $20/month for advanced features). While Apple’s ecosystem has provided Apple with a healthy profit margin especially the 30% cut of App Store sales, recent moves by China could threaten this revenue, in retaliation to Trump’s 10% tariffs on China exports to US.

Threats and Opportunities Ahead

Tariff Risks: A potential Trump administration could reintroduce tariffs on Chinese imports, impacting Apple’s supply chain and profitability. This adds pressure to diversify manufacturing outside China. Despite recent attempts to migrate some of its manufacturing capacity to India, Vietnam and Malaysia, Apple still produces over 90% of it’s products in China. The recent 10% tariff on China exports to US could have a negative impact on Apple’s margins unless it manages to obtain concessions from the Trump administration.

Conclusion

Apple’s current strategy prioritizes stability over disruption, focusing on services and iterative hardware updates. While this approach sustains its $3.5 trillion valuation, the lack of a “next iPhone” and AI/AR missteps pose long-term risks. The iPhone SE could revive growth in emerging markets but requires careful positioning to avoid self-cannibalization. To regain its innovative edge, Apple needs to up it’s game, the launch of a better version of Apple Intelligence will not be enough.

DeepSeek’s Sputnik moment which caused a trillion dollars overnight crash in Wall Street AI related stocks is a wake-up call to Apple Intelligence. After all, if users can download the DeepSeek app or OpenAI’s ChatGPT app with the same features as Apple Intelligence, how much of an impact will it have on Apple’s iPhone 17 launch? DeepSeek AI’s open source model could potentially allow millions of users to run the model locally in their new phones alleviating concerns over privacy and data sovereignty.

China's investigation into Apple's App Store monopoly mirrors the EU's into Apple's anti-competitive practices and compliance with new digital regulations. The outcome of these investigation could show the path for China to force Apple to pay fines or allow alternative marketplace for Apps., both of which will impact Apple's lucrative App Store services revenue model. 

I am neutral on Apple stock in 2025, how about you?

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