Doing everything on device is cheaper than running a large service, and exposes you to less risk. Ingesting a billion photos a day and running say, ML on them server side is more expensive than having the consumer pay for it on their local device.
It's unlikely any online service they can come up with from data will come close to their iPhone business, so it would mostly be a cost and distraction and a risk. That's why I say, investing in differential privacy or running photo recognition on device is a much smaller effort than scaling out a billion user service.
That's not to say what they're doing is bad, but I don't think it's a brave stand, and I don't buy it as a principled stand, because of the complete silence on China, not just obeying the government actions, but not even verbally protesting them -- even in Western media.
In the US, Apple, if compelled by an FBI warrant to hand over data, would do it, but would publicly resist and complain about it. Not only does Apple comply with Chinese demands, they don't even dare criticize the Chinese government or resist in any way. This to me is selling your soul for marketshare.
And Tim Cook's appearance at the Wuzhen conference extolling China's "open" internet just made him look like a tool.
I don’t expect them to break laws. And I don’t expect them to pull out of entire countries, let alone the most populous one on earth.