Reliable Apple analyst Ming-Chi Kuo warns that China is rapidly catching up to Apple in a ‘core technology’ (AAPL)

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The most-closely followed Apple analyst warned in a Wednesday note that Chinese smartphone companies are rapidly catching up to Apple in augmented reality technology, which CEO Tim Cook has called “profound” and a “core technology” for the company going forward.

The example Ming-Chi Kuo provides is a Tencent game called Honour of Kings, which will release an augmented reality version in May. It’s a big game, with over 200 million players worldwide.

It’s also a much more advanced augmented reality experience than Pokemon Go, he writes, and uses algorithms from $3 billion artificial intelligence startup SenseTime.

Oppo

“Apple’s first-mover lead in AR eroded by OPPO,” reliable Apple analyst Ming-Chi Kuo at KGI Securities wrote.

Apple launched ARKit last summer, which easily allows developers to make rich experiences where computer models interact with surfaces in the real world. Apple was the first major technology company to announce software like that, and had a chance to capture the entire development market.

“However, since the debut of the ARKit nearly a year ago, there has been no heavyweight AR application on iOS,” Kuo wrote.

Which is why he believes Apple should be concerned that it’s launching on Oppo phones running Android at the same time as iOS, on less-advanced hardware. Although Apple’s iPhones have closely integrated hardware and software, including its own chip and camera designs, somehow Oppo is nonetheless delivering the same experience with less specialized parts, like Qualcomm processors, and less advanced cameras.

Here’s the takeaway from the note:

“Apple should be alerted by: (1) OPPO’s progress in AR, which has outpaced even Google’s ARCore, suggesting China’s AR industry standards are in the making; and (2) potential further negative impact on iPhone sales in China if Chinese firms’ software-hardware integration ability strengthens.”

Kuo believes that Apple’s software development is lagging behind its hardware development. “We recommend investors closely monitor Apple’s software developments (to be revealed at WWDC), because we believe its biggest challenges in innovation in recent years have been software rather than hardware,” he concluded.