12//5/2008

Apple
esiPhone
eStrategyyinChinaa |
Te
eam7PaulaC
Cullinan,LouLLanzilotta,Rob
bLytle,MikeR
Ricciardi

Contents
ExeecutiveSumm
mary............................................................................................................................................................4
StrrategicDirectiion.............................................................................................................................................................6
CorrporateStrategy............................................................................................................................................................8
IntternalAudit......................................................................................................................................................................9
FinancialAn
nalysis........................................................................................................................................................9
CoreCompeetencies...................................................................................................................................................10
OrganizationalAnalysis.............................................................................................................................................10
Marketing...................................................................................................................................................................12
Research&Developmen
ntandIntangiibleAssets......................................................................................................17
ProductionOperationsandLogistics........................................................................................................................17
IntternalAudit(IInternational//Global)...............................................................................................................................19
InternationaalAccountingg...........................................................................................................................................19
Production,OperationsaandLogistics.......................................................................................................................21
InternationaalMarketing............................................................................................................................................21
InternationaalFinance................................................................................................................................................22
ExtternalAudit...................................................................................................................................................................22
ExternalForrces..........................................................................................................................................................22
CustomerTrends.......................................................................................................................................................23
CompetitiveeAnalysis.................................................................................................................................................25
InsstitutionalAna
alysisofChina.........................................................................................................................................27
MacroEnvironment..................................................................................................................................................27
dEconomicSyystem..................................................................................................................................29
Politicaland
Infrastructu
ureandEducaationalSystem
ms...................................................................................................................29
RegulationssandPoliciesAffectingFDIIandInternattionalTrade,ImportsandExports..........................................30
NominalRateofInterestt...........................................................................................................................................31
InternationaalMonetarySSystem................................................................................................................................31
PurchasingPowerParity...........................................................................................................................................31
Payments.................................................................................................................................................32
BalanceofP
ForeignExchangeRisk...............................................................................................................................................32


InternationaalCompetitivveness..................................................................................................................................34
Infrastructu
ure............................................................................................................................................................37
StrrategicChoicee...............................................................................................................................................................39
Whatcriticaalquestionsn
needtobeaskedbeforeen
nteringHongKong/China??......................................................39
MaarketEntry.....................................................................................................................................................................45
APPENDIX..........................................................................................................................................................................51

ExeecutiveSum
mmary
Byy 2015, Chin
na will likelyy be the wo
orlds 2nd largest consu
umer markett and will wield
w
significcant global
pu
urchasing power.
p
Chin
nese consumption is expected to
t exceed $8.8 trillion by 2020
0.1 China's
co
onsumption accounted for5.4%of totalconsumptionmeaasuredagain
nsttheworldsleadingeeconomies
in
n2006,jointlyrankingfiffthwithItaly.TheUniteedStatesran
nkedfirstat42%,follow
wedbyJapan
nat11.1%,
3
Germany at 7.3%
7
and Britain at 6.6
6%, respectively. Todayys Chinese consumers have relativvely larger
ningtheyarrepredisposedtolook forname
diiscretionary spendingand"aspirationallifestyles"mean
brrand produccts. Income growth for 2029 yearolds and 30
039 yearolds is likely to
t keep pace with the
2
grrowthoftheenationalecconomy(approximatelyy10%peryeear). Thech
hallengefor companies seekingto
en
nter the em
merging Chinese markeet will be navigating operating risks
r
and obstacles wh
hile taking
ad
dvantageoftheopportu
unitiescreatedbythisraapidgrowth..
Apple Inc. is committed to bringingg the best personal co
omputing, portable digital music and mobile
co
ommunicatio
on experien
nce to consumers, stud
dents, educaators, busin
nesses, and government agencies
th
hrough its in
nnovative haardware, sofftware, peripherals, serrvices, and Internet offeerings. The Companys
C
bu
usiness strategy leverages its uniq
que ability to
t design and
a
develop
p its own operating sysstem (OS),
haardware, ap
pplication so
oftware, and
d services to
o provide itss customers new produccts and solu
utions with
4
su
uperioreaseeofuse,seaamlessintegration,and innovativeindustrialdeesign. Appleeidentifiesfiivedistinct
seegmentsforitsproductss:

HardwaareProducts

MussicProducts
an
ndServices

Perip
pheral
Prod
ducts

So
oftwareProduccts
a
andComputer
r
Technologies

etSoftware
Interne
and
dServices

DuetothedivversityofAp
pplesproductmixandthedistinctccompetitorswithineachproductseggment,our
m
market
analyysis and expansion strattegy will foccus solely on the iPhon
ne and relatted services. We have
taargetedChin
naforourexxpansionand
dwithinthisreportwillidentifyamultipartstraategyformaarketentry
ussingtheGatewaytoCh
hina(HongKong)asourrfirststepto
owardmainlandChina.


o 600 millio
on subscribeers. ChinaM
Mobile (the
Esttimates put the mobile phone marrketin Chinaa in excess of
wo
orldslargesttmobilephoneservice providerwithover436
6millionsub
bscribers)offfersAppletthelargest
potentialsubscriberbaseintheChineesemarket.TThoughoffeeringfarfew
wersubscribeers,companiessuchas
ChinaUnicom (125million
nsubscriberrs)mayprovvideApplew
withviableaalternatechoicesforen
nteringthis
6
maarket. Estim
mates indicaate that 20%
% of cell phones sold in China in 2007
2
cost more
m
than 4,000
4
RMB
(USS$533). Chin
na Mobile estimates
e
th
hat there are 400,000 unofficial

iPhones currrently in usse on their

5
networkandrroughly28m
millionpotentialiPhoneeusersinCh
hina. Emerggingmarketss,suchasC
China,offer
siggnificant opp
portunities for growth,, but they also pose challenges
c
i
including
errratic power supplies,
burdensome local regulattions, high taxes, and low per cap
pita incomee. These pottential pitfaalls require
speecificstrateggiestoensureprofitability.

S 1
Step

OR

S 2
Step

StrrategicDirecction
Vission
To
omakeacontributionto
otheworldbymakingtoolsforthemindthatadvancehum
mankind.7
Ap
pplesvisionstatemente
elevatesitsp
productstoaaveryhighp
planeofimp
portancethro
oughitsrefeerencingof
theeadvancem
mentofhum
mankind.Thisreferencespeaksto thevalueA
Applerecogn
nizesforthe important
rolledigitaltecchnologiesp
playineveryydaylife.Eaachdayweb
becomemorreandmoreedependenttondigital
devices for evveryday tassks, i.e. com
mputing, co
ommunicatio
on, entertainment, sho
opping, keep
ping ones
sch
hedule.Applesetsitsdirrectionfrom
mtheconverrgenceoftheeseformfacctors.

Miission
Ap
ppleignitedtthepersonalcomputerrrevolutionin
nthe1970s withtheAp
ppleIIandreeinventedth
hepersonal
computerinth
he1980swiiththeMacintosh.Appleiscommitttedtobringgingthebesstpersonal computing
exp
perience to students, educators,
e
c
creative
proffessionals and consumeers around the world through
t
its
56
inn
novativeharrdware,softw
wareandIntternetofferiings.
Ap
pplesmissionstatementtrevealssevveralimportaantconstrucctscriticalto
othecompanysstrategyy:

TheeCompanyffeelsthecon
nceptofad
digitallifestyyleisevolvin
ngeverydayyatarapidp
pace,
i.e.theconverggenceofperrsonalcomputers,cellph
hones,thein
nternet,digiitalcamerass,etc.
TheestatementreferstoAp
pplesignitio
onoftheperrsonalcomputerrevolutionandcleaarly
identifiesApple
easbeingan
ninnovatorandleaderintheindusttry.
Asaamarketleaaderandinnovator,App
pledevotesssignificantreesourcestoR
R&D.Beyon
nd
perrsonalcomputers,AppleehassettheinnovationstandardindigitalmusicwiththeiP
Podand
iTunes,andmo
ostrecently,throughitsintroduction
noftheiPho
one.
antageforA
Appleisitsco
ontrolofall ofaspectsp
productdeveelopment,
Adistinctfirmsspecificadva
manufacturing,,anddistribution.ThisccontrolhasaallowedAppletostayattheforefron
ntof
deliveringdigitalsolutions..

VaalueCreation
n

App
plecreatesvvaluebyleveeragingitsusserinterfaceedesignexp
pertisebyconstantlyreeexamining
pro
oductsforthedigitallifestyleinanin
nnovativean
nduserfrien
ndlyway.Forexample,ttheiPod
hassnotonlybe
eenahugesuccessforA
Apple,buthaasfundamen
ntallychangeedthewayinwhich
musicisaccessed,distributted,andstorred.

Asaaninnovator,thecompaanycomman
ndsapricep
premiumforritstechnolo
ogy.Forexaample,
com
mputerlinessuchastheiMacandM
MacBookareepremiumpricedcompaaredtoWind
dows
bassedproductss,andnotco
onsideredto
obeasmainsstreamasatypicalcompetitorsuchasDell,
whichisavailab
bleatamoreevaluebaseedprice.
App
plehasdeemphasizedtthepersonallcomputeraasitsmajorproductasitthasshifted
d
corrporatefocustowardoth
herhightech
hnologyproducts.Goinggasfarasto
oremovetheeword
co
omputerfro
omitsname..
App
pleconsidersitselftobeetheonlyglo
obaltechnologycompan
nythatownssthedesign,
manufacture,aandsoftwareesystemsprrocessfromstarttofinissh.Thisadvaantagegivesitthe
ologyproducctsfortheco
onsumermarket.
abilitytoleveraageresourceestodesignhightechno
Con
nstantinnovvationisacriticalcompo
onentfordeliveringexcittingproducttstothemarketina
tim
melyfashion.Thisstrateggyrequiresssignificantin
nvestmentin
nR&D.
GivvenApplesp
processconttrolrequirem
mentsandseecrecyregarrdingitstech
hnologyinno
ovations,
theecompanyissperceivedaasdifficult,sslightlyparan
noid,andno
onconventio
onalinmanyyofits
bussinessdealin
ngs.However,Applesreeputationforqualityand
dinnovation
noftenoutw
weighs
theesetraits.

The mobile market

m
value
e chain illustrates the many conttexts in wh
hich Apple delivers value to the
17
cusstomer. In
n the conten
nt value chain, risks teend to be concentrated
c
d on conten
nt managem
ment while
18
maarginsremainwithnetw
workoperato
orsandrighttsowners.

Co
orporateStra
ategy
Ap
pplescorporrateethosplacesdesign
nasahighlyvaluedcomponentofA
Applescomp
pletebusinessstrategy
fro
ommanufaccturingexem
mplaryhardw
wareandsoftwaretoexxcellentand
dknowledgeeablecustom
merservice
tounique,inteeresting,and
dmemorableeadvertisem
ments.
The company motto is Think Diffeerent. App
ple competees in the co
onsumer electronics in
ndustry by
diffferentiation
n.Applediffe
erentiatesittselffromotthercomputterhardwarreandsoftw
waremanufaacturersby
pro
oducingthecomputer,iitsoperatinggsystem,an
ndusersoftw
ware.Bycon
ntrollingallaaspectsofth
heprocess,
Ap
ppleisablettoproduceaamachineth
hatworksw
withitssoftw
ware,andsofftwarethat takesadvan
ntageofits
hardwareoutofthebox.
Ap
ppleiswellkknownforke
eepingfutureproductsu
underwrapssuntiltheyaarereadytorevealthem
m,somuch
sothatanicheeindustryhaasdeveloped
ddevotedto
odiscoveringgandreporttingonnewAppleprodu
ucts.
unique,inno
ovative,andintuitivedessignthatpermeatesallaaspectsofA
Apple,from
Thecompanyffocusesonu
oitsretailsto
ores.
itsproductsto

Creeatesleekco
oolhardwareethatintegrratesseamleesslywithitssoftware
Devvelopuserfrriendlysoftw
warethatwo
orksoutoftheboxwithitshardw
ware
Bethetechnolo
ogyleaderfo
orthedigitaallifestyle
Preesentacool,hipimage
Ow
wntheprocessfromconcceptthrough
hcompletion


IntternalAudit
t
Corporate Levvel Financiial Analysis, Core Comp
petencies, Organization
O
al Analysis, Marketing,, R&D and
InttangibleAsseets,Productiion,Operatiions,andLog
gistics
Fin
nancialAnalysis

Pro
ofitabilityAn
nalysis
Grossprofitraangesfrom2
2935%ofsaalesfromyeartoyear,in
ncreasingan
naverageoff35%overth
helasttwo
yeaars.Operatingprofithaasgrownfromlessthan1%in2003toover18%
%in2007.Baasicearningsspershare
inccreasedfrom
m$.19in200
03to$4.04in2007,anincreaseexcceeding2000
0%.Bookvaaluepershaareis$6.21
in2007.Theccompanycarrriesnodebtt.Operatinggcashflowiss86%ofnettincome.4,8
Liq
quidity
Current ratio consistently exceeds 2:1. Workking Capital is $12.7M and $8.1M
M in 2007 and 2006
ease.Accoun
ntsreceivab
bleturnoverisrelativelyconsistento
overthepasstfiveyear
resspectivelya57%incre
period,decliningsomewhaatfrom6.53
3in2003to5.95in2007
7(ratioisinlinewithcompetitors).Dayssales
inreceivablerosefrom55
5in2003to60in2007,slightlyhigh
herthanindu
ustryaveragge.Inventorryturnover
opped from over 78 in 2003 to sligghtly under 45 in 2007
7. This howeever, remain
ns well abovve industry
dro
aveerage. Dayys in inventtory went from 5 to 8
8 days in th
he same peeriod. This is significan
ntly below
4,8
competitorsan
ndindustryaaverageand
dmayindicatedifficultymeetingdem
mand.
LevverageAnalyysis
Returnonasseetsis13.8%,,increasingffrom1%in2
2003.AppleesROAislessthantheircompetitorsandthe
dustryaveraages.Howevver,itsgrowtthinthismeeasurehasiimprovedsiggnificantly. Companyuseslargely
ind
equity financin
ng with an assets to eq
quity ratio of
o 1.74 in 2007,
2
somew
what exceed
ding industrry average.
uityis24.1%
%in2007,low
werthanind
dustryaveraage,howeveer,muchimp
provedoverr2003ROE
Returnonequ
4,8
of1.6%.
SttockPriceHisstory
Ap
pplesclosinggstockprice
ehassteadilyytrendedup
pwardintheelastfiveyears.Thesto
ockclosedat$33.53in
No
ovember200
04andat$92.95onNovvember4,20
008,anincreeaseof177%
%overthefiveyearperiod.57
APP
PENDICES:Thefinancialstattements,includ
dingcommonssizeandratioa
analysis

250

Ap
ppleStocckPricess
200

198.0
08

150

12
25.02

100

92.95
50
32
2.20
0
1Aug04

17Feb05

5
5Sep05

24Mar06 10O
Oct06 28Aprr07 14Nov0
07

1Jun08

18Dec08

6Jul09

Conclusion
Fro
om a financcial perspecctive, Apple presents as a strong company. Over the past
p
five years, it has
operatedeffecctively,creattingvalue,andgeneratingsteadilyincreasinggrrossprofit.TheCompan
nyishighly
bt.Appleinvvestorsexpeeriencea24%returnontheirinvesttmentwhich
h,although
liquidwithnocurrentdeb
notasimpresssiveasothercompetitorsinthecelllphonemarket,isamaarkedimpro
ovementoveerthetime
periodandweellabovethe
e1%Applew
wasreturnin
ngin2003.W
Withastead
dilyincreasin
ngstockpricceoverthe
earlyagrow
wthcompanyythatisprovvidingvaluetoitsshareh
holders.
pastfiveyearss,Appleiscle
Co
oreCompete
encies
Ap
pples primary core com
mpetency is in vertical integration
i
of the desiggn and deveelopment off complete
sollutionsforp
personalcom
mputers,con
nsumerelecttronics,andmobilecom
mmunicationdevices,inccludingthe
hardware,opeeratingsyste
em,softwareeapplication
nsandrelateedservices.8Applehassstrongcreatiivestaffing
estment in research an
nd developm
ment as a key componeent of its sttrategy for
and views significant inve
providinginn
novativepro
oductsinahighlycompeetitivemarkeet.
continuouslyp
OrrganizationalAnalysis
Ap
pple has app
proximately 32,000 fulltime emplo
oyees and 3,100
3
tempo
orary emplo
oyees and co
ontractors.
Co
orporateown
ned facilities are the headquarterss in Cupertino California and a maanufacturingg facility in
Co
ork,Ireland.A
Allretaillocaationsareleeased.4
Attheendofffiscalyear20
008,Appleh
hadopenedatotalof24
47retailstores,includin
ng205storesintheUS
o 42 storess internation
nally. The Company
C
haas typically located its stores at hightraffic
h
and a total of
4
loccationsinqu
ualityshoppingmallsand
durbanshoppingdistriccts.


nalassemblyyofApplesproductsisperformediinthecompanysmanuffacturingfaccilityinIreland,andby
Fin
extternalvendo
orsinCaliforrnia,SouthK
Korea,Chinaa,andtheCzzechRepublic.Thesupp
plyandmanu
ufactureof
criticalcomponentsisperfformedbysolesourcedthirdpartyvendorsinttheUS,Chin
na,Japan,So
outhKorea,
4
Maalaysia,Philippines,Taiw
wan,Thailand,andSingaapore.
Ap
pple maintains a flat corporate stru
ucture unencumbered by
b excessivee layering. Stteve Jobs reemains the
companysprimaryvisionaaryandspokkesperson.
Bo
oardofDirecctors4
ell
And
dreaJung
BillCampbe
MillardDrexler
Arth
hurD.Levinsson
AlGore
EriccE.Schmidt
SteveJobs
JerrryYork

E
ExecutiveOff
fficers4
T
Thefollowin
gpersonnelareidentifieedasexecuttiveofficersofAppleasofNovembeer1,2008.

T
TimothyD.C
Cook
ChieefOperatinggOfficer
D
DanielCoope
erman
SeniorVicePressident,GeneeralCounselandSecretaary
T
TonyFadell
SeniorVicePressident,iPodDivision
S
ScottForstal
l
Sen
niorVicePresident,iPho
oneSoftwareeEngineeringandPlatfo
ormExperien
nce
S
StevenP.Job
bs
DireectorandCh
hiefExecutiveOfficer
R
RonaldB.Joh
hnson
SeniorVicePressident,Retaiil
R
RobertMans
sfield
SeniorVicePressident,HardwareEngineeering
P
PeterOppen
nheimer
ChiefFinancialOfficer
SeniorVicePressidentandC
P
PhilipW.Sch
hiller
ng
SeniorVicePressident,WorldwideProductMarketin
B
BertrandSer
rlet
wareEngineeering
SeniorVicePressident,Softw
S
SinaTamadd
don
SeniorVicePressident,Appliications

ArecentposstingonApp
A
ple'scareer pagessuggeestedthatthecompanyyhaspledgeeditselftorreleasingthee
iPhoneinCh
hina.Apostin
ngforaniPh
honeQualityyAssuranceEngineerinBeijingservvesasastron
ngindication
n
a to Apple'ss intentions. Per the po
as
ost, Apple isslooking "to
o focus on in
nternational releases off our iPhonee
a
andiPodtou
uchproductssforBeijing,,"thepostp
perhapsbein
ngpartofalargerefforttobuildaneffectiveQA
A
23
t
teamspecific
ctotheChin
nesemarkett.

M
Marketing
KeyMarketSSegmentatio
K
on
A
Applesegme
entsandrep
portsitsmarrketsbygeo
ographicalreegionandreetail.TheAm
mericasremaainApples
8
p
primarymar
ket.57%ofallcompanyysaleswereregisteredintheUS.
2008R
REVENUEPERCENTAGESSBYSEGMEN
NT
Retail,19.4%

J
Japan,4.7%

Americcas,44.9%

AsiaP
Pacific,7.7%

Europe,23.3%

iPhoneCusto
omerProfile (US)9

72%m
male
Averaageage:31
31%b
betweenthe
eagesof1524
32%b
betweenthe
eagesof2434
31%b
betweenthe
eagesof3549
6%ovverage50
58%ccompletedccollege(natio
onalaveragee43%)
43%o
ofbuyerslivvinginNewYYorkandCallifornia
Averaagehouseho
oldincome$
$75,600(26%
%higherthaannationalaaverage)

MostiPhoneeuserscanb
M
becategorizeedasyouthffultechnoph
hiles;halfareeunderage30,andath
hirdcarries
m
more
than one
o mobile phone. Thiss customer base
b
is ideal for launching a produ
uct, but not significant
e
enoughtocr
reatesustainedgrowth..Applesbigggestquestio
onaboutthefutureof theiPhone iswhether
t
theycanrea
chbeyondtheseearlyaadopterstoggeneratemaainstreamdeemandforth
heiPhone.100

Product
P
T
TheiPhonei
sthemostp
publicizedneewmobiled
deviceinreccentmemoryy.Becauseo
ofitsnewness,thereis
littlesatisfacction/usabilityinformatiionavailableebeyondthatgatheredfromearly adopters.A
Applehasa
h
history
of su
uccessfully moving
m
earlyy adopters into adjacen
nt markets with
w productts like the iPod (more
n
narrowly
foccused on a single usagge mobile ap
ppliance ratther than a mobile com
mputer). The iPhones
m
multiplefeat
turesmakeitappealingtotechnoph
hiles,butpo
otentiallyconfusingtom
mainstreamccustomers.
T
Thehistoryo
ofthemobileindustryisrifewithp
productsthaatinitiallyso
oldwellthen
nfizzled.Altthoughthe
11
iPhonesfutu
urelookspro
omising,itslongtermsu
uccessisnottguaranteed
d.
T
Tosatisfythe
eneedsofm
mainstreamu
usersApplemustassesss:
1. HowistheiPhonebeingused
d?
2. WhatteffectistheiPhonehavvingoncusttomersando
onthetechn
nologyindusstry?
E
Earlyfeedba
ckhasprovidedthefollo
owinginsigh
hts:11

iP
Phoneusersareverysattisfied.TheiPhoneuserrsreportverryhighlevelssofsatisfacttionwith
th
heproduct.TTheyareusiingitsfeaturresextensiveely.
Emailisthe#1function.Themosth
heavilyuseddatafunctio
onontheiPh
honeisread
ding(but
notwriting)e
email.
TheiPhonein
ncreasesmo
obilebrowsiing.Moreth
han75%ofiP
Phoneuserssayithasleedthemto
domoremob
bilebrowsingg.
o Brrowsinghasdrawbacks..About40%
%ofiPhoneu
userssaytheeiPhonehastrouble
displayingsom
mewebsitestheywantttovisit.
TheiPhoneissexpandingthesmartphonemarke
et.About50
0%ofiPhoneesreplaced
co
onventionalmobilepho
ones,40%replacedsmarrtphones,an
nd10%replaacednothingg.Among
co
onventionalphones,Mo
otorolaRazrwasthepho
onemostoftenreplaced
d.Among
sm
martphoness,WindowsM
MobileandR
RIMBlackbeerryweremo
ostoftenrep
placed.
A
AthirdofiPh
honeusersccarryasecon
ndphone.Thereareaneecdotalrepo
ortsofiPhon
neusers
caarryingaseccondmobileephone,eith
herforbasicvoicecallingg,orforotherfunctionsslike
co
omposingemail.
A
Aquarterof
iPhoneuserrssayitsdissplacingano
otebookcom
mputer.28%
%ofiPhoneu
users
su
urveyedsaid
dstronglyth
hattheyofteencarrytheirriPhoneinstteadofanotebookcom
mputer.
U
Usersareyou
ung.Abouth
halfofiPhon
neusersareunderage3
30andaboutt15%arestudents.
A
Applesellsto
oitsinstalled
dbase.Atleeast75%ofUSiPhoneusersarepreeviousApple
cu
ustomers
theyusedeeitheriPodsorMacintosshcomputerrs.
TheiPhonein
ncreasesphonebills.Th
heiPhonehaasincreaseditsusersmonthlymobilephone
billsbyanave
erageof24%
%,or$228extraperyeaar.
TheiPhonele
eadspeople
etochangeccarriers.Alm
mosthalfofiiPhoneusersschangedcaarriers
w
whentheygo
ottheiPhonee.
A
AT&Tsgamb
blepaysoff.TheiPhonehaslikelyin
ncreasedAT&
&Tsgrossseervicereven
nueby
about$2billionperyear..

Price
P
A partial oveerview of Apples
A
A
pricin
ng model within
w
select countries is provided below. Although hard
n
numbersare
eunavailable
e,speculatio
onisthatAp
pplesellsiPhonestocaarriersforan
nywherefro
om$350to
$
$700
each, depending
d
upon
u
the model.
m
Analysts estimattes place the iPhones manufacturi
m
ing cost at
12
a
approximate
ely $100 pe
er phone. With the in
ntroduction of the iPh
hone 3G, Ap
pple abando
oned their
r
revenuesha
ringpricing modelwhicchhadgeneratedfollow
woncashstrreamsfrom carriers. Caarriersnow
s
subsidize
thee cost of the phone, making up for it in montthly charges,,and no lon
nger funnel a share of
t
their
month
hly revenue to Apple. This significantly impaacted Applees revenue sharing deeals which
g
generatedde
eferredinco
omeovertheelifeofatyp
pical24mon
nthcontract.13
Co
ountry

Carrier

iPhoneRetailP
Price

DataP
PlanCost

Contract

USSA

AT&T

$199/$299

$30/$4
45

2years

Caanada
Au
ustralia

Rogers
Telstra
Optus

startingat$30CAD
Ratevaariesdependin
ngonpre
paid/p
postpaidplan
Variesaccordingtop
preorpost
paidoptionandconttractterm

3years
2years

Au
ustralia

Au
ustralia
Au
ustria

N/A
10am
month

N/A
2years

Au
ustria
Be
elgium
De
enmark

Vodafone
ONE
(Orange)
TMobile
Mobistar
Telia

$199/$299
$2798GB/$39
9916GBwith$
$30plan,freew
with
$80(8GB)or$
$100(16GB)m
monthplan
Prepaid:$729
98GB/$84916
6GB/PostPaid
d:No
upfrontfee,m
monthlyhandseetrepayment
addedto"yescap"or"yescap3G"plan
N/A
1498GB/22
2916GB
startingat1
TBA
DKK13998GB
B/DKK199916
6GB

Fin
nland

Sonera

N/A
TBA
DKK59
99firstsixmon
nths,DKK
399aftterthat
32 89.99amonth

2years
TBA
6months
minimum
2years

Fraance

Orange

Ge
ermany

TMobile

Ho
ongKong

Hutchison
Telecom

Ire
eland
Itaaly

O2
Vodafone

Itaaly

Telecom
Italia
Softbank
Telcel
TMobile

Jap
pan
Me
exico
Ne
etherlands

Ne
ewZealand Vodafone

11598GB
B/85 2451
16GB,payasyyou
go4298GBaand51916G
GB
1498GB19
9916GBnewccustomers,19
998 32am
month
GB249existiingcustomers
1169,95ffor8GBand19,95 249,95
5for Variesbetween29,
and89,
16GB,depend
dingonrateplaan
HK$2938orfreewithHK$49
98dataplan
HK$18
88for500MBd
dataand
voiceo
orHK$498forunlimited
data
491698G
GB/129 22
2916GB
45 100

4998GB/5
56916GBprepaid,subsidizeed
TBA
TBA
4998GB/5
56916GBprepaid,subsidizeed
TBA
TBA
23,040/34,,560
7280unlimiteddataa
TBA
TBA
1,0079,95
5for8GB/19,,95159,95fo
or
29,95
5 64,95
16GBdependiingonrateplan
N/A
N/A

1or2years

2years
2years
2years

18months
TBA
TBA
2years
TBA
2years
N/A

Place
P
T
Traditionally
y, carriers co
ontrolled th
he decisionss about whiich phones would be offered
o
to users. The
s
successofth
heiPhonein
ngettingsub
bscribersto switchoperratorsintheeUSshifted powerawayyfromthe
o
operators
an
nd toward handset com
mpanies thaat can demonstrate the ability to generate demand.
d
A
c
company
with that pow
wer has sign
nificant leveerage over the
t operato
ors, becausee it can playy them off
a
againsteach
other.
Additionally,, Apples me
A
ethod of prroduct desiggn is incrediibly difficultt for other companies
c
t imitate,
to
b
because
of their lack of
o expertisee in integraating develo
opment of the
t
operating system (OS), user
11
interface,on
nlineservicess,andhardw
waredesign. ThisremaainsasignificcantmarketadvantagefforApple.

Promotion
P
A
Apple
does not build products
p
peeople want, they build products people
p
desirre. Their prromotional
s
strategyissi
mpleandalessonfrommarketing1
101:sellben
nefits,notfe
eatures.
TTheiPhoneischangingcconsumers'p
perceptiono
ofthemobileephonefrom
madevicetthatfacilitateestalktoa
p
pocket
PC fo
or accessingg digital con
ntent. It's an
n achievement of markketing as well as techn
nology. For
e
example,
Ap
pple's educaational ad campaign
c
frrom TBWA//Chiat/Day has
h demonsstrated to millions
m
of
c
consumers
a
accustomed
to using a phone for ju
ust talk, how
w a mobile handset can
n search to buy a car,
c
connectwith
hFacebookffriends,man
nageaskivacation,togeettingtrailm
mapsandfindingrestaurrants.14
Apple also offered
A
o
a 30
0minute insstructional video
v
on itss website detailing each iPhone feeature and
f
function.Pr
romotedas aneducatio
onaltool,thevideowassinrealityaa30minute advertisement.Apple
s
succeeded
in
n giving peo
ople an exp
perience, this type of immersion in Apple's brand has trremendous
v
value.
Applee has succe
essfully employed a strategy thaat builds interaction and engagem
ment with
c
customersw
whoareeithe
erpreparinggtobuyorarethinkingaaboutit.How
woftendoyyougetmorethanone
m
minuteofcu
ustomers'un
ndividedatteention,letallone30?
WiththeiPh
W
hone,Apple reversedco
oursefromitslongstan
ndingpolicy ofrestrictin
ngthedevelopmentof
o
outsideappl
icationsfor itsproductss.Apple'sneewonlineA
AppStoreis opentoanyyonewithanideaand
t
theabilityto
owritecode
e.DeveloperrssplitthessaleswithAp
pple,30/70 inthedeveloper'sfavor.Appsfor
m
mobilephon
neshavebee
enaroundon
navarietyo
ofplatformsforanumbeerofyears.A
Applemadethemeasy
t
touse,great
ttolookat,andpackageeditallasanecessaryliifestylefortthecoolandhip.Allwhilecreating
a
anongoingr
revenuestre
eam.

G
GrossMargin
nByBusinesssSegment4
G
Grossmargin
npercentaggewasrelativelyflatin 2008ascom
mparedto2
2007.Gross marginpercentageof
3
34.0%in200
07increased
dsignificantlyyfrom29.0%
%in2006.TTheprimarydriversofth
hisincreasew
weremore
f
favorableco
ostsoncertaaincommoditycomponeents,includingNANDflashmemoryyandDRAM
Mmemory,
h
higher
overaall revenue that provided for mo
ore leverage on fixed production costs, and
d a higher
p
percentageo
ofrevenuefromtheCom
mpanysdireectsaleschaannels.

NetSales
CosttofSales
GrossMargin
GrossMarginPe
ercentage

2008
$32,47
79
$21,33
34
$11,14
45
34.30%

2007
$24,00
06
$15,85
52
$8,15
54
34.00%
%

2006
$19,315
$13,717
$5,598
29.00%
%

SSalesByBusiinessSegmeent15
A
Apple
evaluaates the perrformance of
o its operatting segments based on
n net sales and
a operatin
ng income.
N sales fo
Net
or geograph
hic segments are generrally based on the loccation of cu
ustomers, while
w
Retail
s
segment
nett sales are based on sales from the Companys retail stores. Operaating incomee for each
s
segment
inccludes net sales
s
to third parties, related cosst of sales, and operatting expensees directly
a
attributable
tothesegm
ment.

ReportingSe
R
egment
A
Americas

20
008
2007
7
N
NetSales
$14
4573 $1159
96
O
OperatingIn
ncome $4
4051 $294
49

2006
$9415
5
$1899
9

2005
$6658
$970

E
Europe

NetSales
N
O
OperatingIn
ncome

$7
7622
$2
2313

$546
60
$134
48

$4096
6
$627
7

$3073
$465

Jaapan

NetSales
N
O
OperatingIn
ncome

$1
1509
$
$440

$108
82
$23
32

$1211
1
$208
8

$924
$147

R
Retail

NetSales
N
O
OperatingIn
ncome

$6
6315
$1
1337

$411
15
$87
75

$3246
6
$600
0

$2278
$396

O
OtherSegme
ents

NetSales
N
O
OperatingIn
ncome

$2
2460
$
$615

$175
53
$38
88

$1347
7
$235
5

$998
$118

R
Research&D
Developmen
ntandIntan
ngibleAssetss
Appleoperattesinamarrketthatreliiesheavilyo
A
onrapidtech
hnologicaladvances.Th
herefore,theeCompany
isheavilydependentonitsabilityto
oprovideaconsistentstreamofinno
ovativeprod
ductsandservices.The
C
Company
may expand the range of
o its produ
uct offeringss and intelleectual propeerty through
h licensing
a
and/or
acqu
uisition of thirdparty business
b
and
d technologgy. Research
h and devellopment expenditures
t
totaled$1.1
2million,and$712millionin2008,2007,and2006,respecttively.8
billion,$782
ApplehasincreaseddolllarexpendituresinAdveertisingandResearchan
A
ndDevelopm
mentoverth
hepastfive
y
years,
howeever, they have
h
been able
a
to redu
uce the inteensity of bo
oth advertising and ressearch and
d
developmen
twithrespe
ecttosales, indicatingthattheirefffortsintheseareashavepaidoffin
nincreased
s
sales.

AdvertisingExpensses
AdvertisingIntensity
Advertisingperem
mployee
R&DExxpenses
R&DIn
ntensity
R&Dpe
eremployee
e

2003
$193M
3.1%
$14,223
3
$471M
7.6%
$34,709
9

20
004
$2
206M
2.5
5%
$1
15,339
$4
489M
5.9
9%
$3
36,411

2005
$287M
2.1%
$17,063
$534M
3.8%
$31,748

200
06
$33
38M
1.7%
%
$16
6,741
$71
12M
3.7%
%
$35
5,265

2007
$467M
1.9%
$19,705
$782M
3.3%
$32,996

P
ProductionO
OperationsaandLogistics
FFinalassemb
blyofApplesproductsttakesplaceintheComp
panysmanuffacturingfaccilityinIreland,andby
e
externalven
dorsinCaliffornia,South
hKorea,Chiina,andthe CzechRepu
ublic.Thesu
upplyandmaanufacture
o
ofcriticalco
mponentsissperformed
dbysolesou
urced,thirdpartyvendo
orsintheUS,China,Jap
pan,South
K
Korea,Malay
ysia,Philippiines,Taiwan
n,Thailand,aandSingapo
ore.Solesou
urced,thirdpartyvendo
orsinChina
p
performfina
alassembly ofsubstantiallyallofth
heCompanyysportable products,in
ncludingMaccBookPro,
8
M
MacBook,M
MacBookAir,iPods,iPhon
ne,andmosstoftheCom
mpanysiMaacs.
Chinese asseembly operrations takee place prim
C
marily at Ho
on Hai Preccision Indusstry Co. in Shenzhen.
S
Shenzhen
is a walled faactory city of
o 270,000 Hon
H Hai (Fo
oxconn) emp
ployees. Bessides Apple iPods and
iPhones, Hon Hai worke
ers/residentts produce Dell
D and Heewlett Packaard PCs, Mo
otorola and Nokia cell
p
phones,Sony
yPlayStation
n2andPSPandtheNin
ntendoWii.

TThe goal of the Apples retail busin

ness is to exxpand its insstalled base through saales to custo
omers who
c
currentlydo
ompanysprroducts.Byo
operatingitssownstoresandlocatin
ngthemin
notalreadyyowntheCo
d
desirable,
hiightraffic lo
ocations, Apple is better positioned
d to control the custom
mer buying experience
e
a attractn
and
new custom
mers. Appless stores are designed to
o simplify and enhance the presentation and
m
marketingof
ftheCompaanysproducctsandrelatedsolutionss.Tothaten
nd,retailstoreconfiguraationshave
e
evolved
in various size
es in orderr to accommodate maarketspecifiic demandss. The storees employ
e
experienced
andknowle
edgeableperrsonnelwho
oprovidepro
oductadvicee,service,an
ndtraining.Thestores
o
offer
a widee selection of thirdparrty hardware, software, and various other acccessory pro
oducts and
8
p
peripheralss
selectedtoccomplementttheCompanysownproducts.
In July 2008, Apple beggan shippingg the iPhonee 3G in certain countriees and madee iPhone 2.0
0 software
a
availableto
alliPhoneccustomers.TTheCompan
nyhassigned
dmultiyearragreementtswithvario
ouscellular
n
network
carriersauthorrizing them to
t distributee and provid
de cellular network
n
servvices for iPh
hone 3G in
o
over70coun
ntries.These
eagreementtsaregenerallynotexcllusivewithaaspecificcarrrier,excepttintheUS,
U
U.K.,France,
,Germany,SSpain,Ireland,andcertaainothercou
untries.8

M
Marketsand
dDistribution
n
A
Applescusto
omersarep
primarilyinttheconsumeer,SMB,edu
ucation,enterprise,government,an
ndcreative
m
markets.
The Company distributes its productts through wholesalerss, resellers, national an
nd regional
r
retailers,
and
d cataloguers. No indivvidual custom
mer accountted for morre than 10%
% of net salees in 2008,
2
2007,or200
06. TheCom
mpanyalsossellsmanyo
ofitsproducctsandreseellscertainthirdpartyp
productsin
m
mostofitsm
majormarkettsdirectlyto
ocustomersthroughitsownsalesfo
orceandretailandonlin
nestores.8
FForeignandDomesticOp
perationsan
ndGeograph
hicData
T
The
US rep
presents Ap
pples largesst geograph
hic marketp
place. In 20
008, approxximately 57
7% of the
C
Companys
n sales caame from saales to custtomers insid
net
de the US. Final
F
assembly of the Companys
C
p
products
is performed in
i the Comp
panys manu
ufacturing faacility in Ireeland, and by
b external vendors
v
in
C
California,Ko
orea,China,andtheCzeechRepublicc.Currently,,thesupply andmanufaactureofmaanycritical
c
components
sisperforme
edbysolesourcedthird
dpartyvend
dorsintheU
US,China,Jaapan,Korea,,Malaysia,
P
Philippines,
Taiwan, Thaailand, and Singapore. Solesourced thirdpartty vendors in China perrform final
a
assemblyof
substantialllyallofApp
plesportablleproducts,includingM
MacBookPro
o, MacBook,,MacBook
A iPods, iP
Air,
Phone, and most of thee Companyss iMacs. Maargins on sales of the Companys
C
p
products
in
f
foreigncoun
ntries,andon
nsalesofprroductsthatincludecom
mponentsob
btainedfrom
mforeignsup
ppliers,can
b adverselyy affected by foreign currency exchange
be
e
raate fluctuations and by
b internatio
onal trade
8
r
regulations,
includingtariffsandanttidumpingpeenalties.

A
Applesabilit
tytocompe
etesuccessfu
ullydependssheavilyonitsabilityto
oensurethecontinuingandtimely
introductionofnewinnovativeprod
ductsandteechnologies tothemarkketplace.TheCompany believesit
isuniqueintthatitdesiggnsanddeveelopsnearly theentiressolutionfor itspersonal computers,consumer
e
electronics,
and mobile
e communiccation devicces, includin
ng the hard
dware, operrating system
m, several
s
softwareapp
plications,andrelatedsservices.As aresult,Applemakessignificantinvestmentsinresearch
a
anddevelop
mentandho
oldsasignificantnumbeerofpatentssandcopyrights.TheCo
ompanyhasregistered
8
a
and/orhasa
appliedtoregisternumeerouspatentts,trademarksandserviccemarks.
Bycontrast, manyofAp
B
pplescompeetitorsseek tocompeteeprimarilyth
hroughaggrressivepricin
ngandlow
c
cost
structures. If Apple is unablee to continue to deveelop and sell innovative new prod
ducts with
arginsorifo
a
attractivem
othercompaaniesinfringgeonApplesintellectuaalproperty, theCompanysability
t
tomaintain
acompetitivveadvantaggecouldbe negativelyaaffectedand
dhaveamaateriallyadverseaffect
8
o
onitsfinanci
ialcondition
nandoperattingresults.
I
InternalAud
dit(Internatiional/Globa
al)
InternationaalAccounting

S
SalesandPro
ofitability
H
Hardware
products con
ntinue to drrive sales. However,
H
the iPhone is Apples fasstest growin
ng product
s
segment
and
d will likely overtake Other
O
Music Related Pro
oducts and Services
S
as Apples
A
num
mber three
8
r
revenuegen
eratorin2009.
S
SALESVOLUM
MEBYPRODU
UCTSEGMENTT(000)
$16,00
00.00

$14
4,276.00

2008

$14,00
00.00

2007

$12,00
00.00

2006
$9,1
153.00

$10,00
00.00
$8,00
00.00
$6,00
00.00

$3,340.00

$4,00
00.00

$
$1,844.00

$2,00
00.00

$1,659.00

$2,207.00

$
Harrdware
Pro
oducts

iPod

OtherMusic
elatedProducts
Re
a
andServices

iPhone

Peripheralsand
d
OtherHardwarre

Software,
Service,and
otherNetSales

N single cu
No
ustomer or single
s
counttry outside of the US accounted fo
or more thaan 10% of net sales in
2
2008,2007,
or2006.Th
heUSrepressentsAppleslargestgeeographicmaarketplace. Approximately57%of
t
theCompany
ysnetsalessin2008cam
mefromsaleestocustom
mersinsideth
heUS.8
2008REVENUEPERCENTAGESBYGEEOGRAPHICSSEGMENT
Retail,19.4%

Japan,4.7%

Americass,44.9%

AssiaPacific,7.7%

Europe
e,23.3%

GeographicSSegmentRep
G
porting8
InaccordanccewithSFASSNo.131,D
DisclosuresaboutSegmeentsofanEn
nterpriseand
dRelatedInfformation,
t Compan
the
ny reports se
egment info
ormation baased on the management approaach. The maanagement
a
approach
deesignates the internal reporting
r
ussed by manaagement for making deecisions and
d assessing
p
performance
easthesourrceoftheCo
ompanysreportableseggments.

F
ForeignCurr
rencyTransla
ation8
T Compan
The
ny translatess the assets and liabilitiies of its intternational nonUS
n
dollar functionaal currency
s
subsidiaries
into US dollars using exchange raates in effect at the end of each period. Revvenue and
e
expenses
forr these subssidiaries aree translated using rates that approxximate thosse in effect during the
p
period.Gain
sandlossessfromtheseetranslation
nsarecredittedorchargedtoforeiggncurrencyttranslation
included in accumulated
a
d other com
mprehensive income in shareholderrs equity. The
T Companys foreign
m
manufacturi
ng subsidiarries and cerrtain other internationaal subsidiariees that use the US dollar as their
f
functionalcu
urrencyrem
measuremon
netaryassetsandliabilittiesatexchangeratesiineffectatttheendof
e
eachperiod,
,andinventtories,propeerty,andno
onmonetary assetsand liabilitiesat historicalraates.Gains
a
andlossesfr
romthesetrranslationsw
wereinsignifficantandhaavebeeninccludedintheeCompanyssresultsof
o
operations.

Internationa
alTaxation8
T Compan
The
nys consolid
dated financcial statements provide for any relaated tax liab
bility on amounts that
m
mayberepa
atriated,asid
defromund
distributedeearningsofccertainofth
heCompanyysforeignsubsidiaries
t
thatareinte
ndedtobeiindefinitelyrreinvestedin
noperationssoutsidetheeUS.

Internationa
alTransferPrricing8

T Companyy does not inc

The
clude intercom
mpany transfe
ers between segments
s
for managementt reporting purposes.

P
Production,
OperationsandLogisticcs8
Mostofthe Companys componenttsandprodu
M
uctsareman
nufacturedinwholeor inpartbyafewthird
p
partymanuf
acturers.MaanyoftheseemanufacturersarelocaatedoutsideeoftheUS,aandaregeographically
c
concentrated
d in single locations. The
T Compan
ny has also outsourced
d much of its transporttation and
logistics management. While thesee arrangements may lo
ower operating costs, they also reduce
r
the
C
Companysd
directcontro
oloverprodu
uctionandd
distribution.
FFinal assemb
bly of the Companys
C
products is currently performed
p
i the Companys man
in
nufacturing
f
facilityinIre
eland,andbyyexternalvendorsinCaalifornia,Korea,ChinaaandtheCzecchRepublic.Currently,
t supply and
the
a
manufaacture of many
m
critical components is perforrmed by solesourced thirdparty
t
v
vendors
in the
t US, Chin
na, Japan, Korea,
K
Malaysia, Philipp
pines, Taiwaan, Thailand and Singap
pore. Sole
s
sourced
thirrdparty ven
ndors in Ch
hina perform
m final asseembly of su
ubstantially all of the Companys
C
p
portable
pro
oducts, inclu
uding MacBook Pro, MacBook,
M
MaacBook Air, iPods, iPho
ones and most of the
C
CompanysiM
Macs.
TThe Compan
ny contracts with certain third partties to offer their digitalcontent th
hrough the Companys
C
iTTunes Storee. The Comp
pany pays su
ubstantial feees to obtain the rights to audio an
nd video content. The
C
Companys
licensing arrrangements with these third partiees are shorttterm and do not guarrantee the
c
continuation
norrenewalofthesearrrangementsonreasonab
bleterms,iffatall.

InternationaalMarketingg8
TToremainco
ompetitive, theCompanybelieves thatincreassedinvestmentinreseaarchanddevvelopment
a marketing and adve
and
ertising is neecessary to maintain orr expand itss position in the marketts whereit
c
competes.
T Company also belieeves increaseed investmeent in markeeting and ad
The
dvertising programs is
c
criticaltoinc
creasingproductandbraandawareneess.
Costs incurrred by the Company for
C
f engineering, sales, marketing, and warraanty are expensed as
incurred.
SSelling,Geneeral,andAdm
ministrativeExpense(SSG&A)
E
Expenditures
sforSG&A increased$798million or27%to$
$3.8billioniin2008com
mparedto20
007.These
increases arre due prim
marily to higher stockbased compensation expenses,
e
h
higher
variable selling
e
expenses
resulting from
m the signifiicant yearo
overyear inccrease in to
otal net salees and the Companys
C
c
continuedex
xpansionof itsRetailseegmentinbothdomesticandinternationalmaarkets.Inaddition,the
C
Companyinc
curredhighe
erspendingo
onmarketin
ngandadverrtisingduringg2008comp
paredto200
07.

E
Expenditures
sforSG&Aiincreased$5
530milliono
or22%durin
ng2007com
mparedto2006.Theinccreasewas
d
dueprimarily
ytohigherd
directandin
ndirectchann
nelvariablesellingexpeensesresultingfromthesignificant
y
yearover
yeear increase
e in total neet sales in 2007, the Companys
C
c
continued
e
expansion
off its Retail
s
segmentinb
bothdomestticandinterrnationalmaarkets,andh
higherspend
dingonmarkketingandaadvertising,
p
partiallyoffs
etbyonelessweekofeexpensesintthefirstquaarterof2007
7.8,4

InternationaalFinance8
TThe Compan
ny leases various equipment and facilities, including rettail space, under noncancelable
o
operating
leease arrange
ements. Thee Company does not currently
c
utilize any other offbalaance sheet
f
financingarr
rangements..

EExternalAud
dit

E
ExternalFor
ces
Chinas econ
C
nomy is exp
pected to exxpand by ap
pproximatelly 10% in 2009. Relateed to the iP
Phone, we
e
examinedth
eexpenditu
uresoncomm
municationssinHongKon
ng,China,an
ndthrougho
outAsia.

Chinaaisexpandin
ngcommuniicationsnotonlybytrad
ditionalmeth
hods,(i.e.po
ostalservice,hardline
telep
phones,andfax),butalso
oinhigherttechnologym
methods,(i.ee.mobileph
honeandinteernet).
Withhighertechnologycomegenerallyllowercostsaandfasteroverallmeansofcommunication.
disposablein
ncome,iscreeatingrapidgrowthinthe
This,coupledwitththerapidincreaseind
municationssector.
comm
Overa10yearpe
eriodspendiingoncomm
municationsgrewfromR
RMB100BilliontoRMB8
890Billion.
Thisggrowthisexpectedtoco
ontinueatvaaryingratesconstrained
donlybytheeproductlifeecycleofa
given
ntechnologyyandwhereitisinthecycle.
In2006,morethan17million
nChineseussedtheirmo
obilephonetoconnectttotheintern
net.About
86%o
ofthemobilleInternetu
userswerein
nurbanareaas,whileslightlymoreth
han17%areinrural
areass.

TThe Chinesee governmen

nt has been
n inclined to
o play a mo
ore promineent role in internationaal standard
s
setting
for wireless
w
netw
works. It haas proposed
d one of thee 3G standards adopted
d by the Intternational
T
Telecommun
nications Un
nion (ITU), called Time DivisionSyn
D
chronous Co
ode Division
n Multiple Access
A
(TD
S
SCDMA).
In January 20
006, the Chiinese Ministtry of Information Indu
ustry annou
unced that TDSCDMA
T
w
wouldbethe
ecountry's3
3Gstandard
d,withtrialsofthetechn
nologybegin
nninginmid
d2006.How
wever,asof
m
mid2007,on
nlyMotorolaa(MOT)and
dSamsunghadcommittedtomakingTDSCDMA
Ahandsets.InMay

2007, the Ch
2
hinese government confirmed that European WCDMA
W
and
d American CDMA2000 standards
w
wouldalsob
beapprovedforusein3G
Gnetworksandthata3
3Gnetworkw
wouldbedeeployedinm
mid2008.58
Whilenotim
W
mmediateco
ompetitorsinthemobilletelephoneespace,theefixedline((ChinaTeleccom,China
N
Netcom,
and
d China Tie
etong) and satellite
s
(Ch
hina Satellitee) telephone service providers
p
in China are
c
competingw
withChinaM
MobileandChinaUnicom
m[CHU.N]in
nabidtobuildoutandrrunaThirdG
Generation
3
3Gwireless
network,whichwould operateat ahigherspeeedthanexxistingcellularnetworkss,andthus
a
allow
more data applicaations. The Chinese
C
govvernment haas not yet made
m
the deecision on when
w
it will
issue 3G liceenses or ho
ow many liccensed it wiill offer, how
wever Chinaa Netcom, China Teleccom, China
M
MobileandC
ChinaUnicomhaveallssaidtheyareeinvestingin
n3GandBeeijinghascom
mmittedto thelaunch
o
of3Gin200
ninvestmenttinChinaUnicomLtd.
8.SouthKoreasSKTeleecomhasalreadymadeea$1billion
t
tooffer3G
s
servicesinC
China.The USDepartm
U
entofCommerceestim
matesthatC
Chinas3G carrierswill
s
spend$72b
illionintheccomingsixyyearstobuild
dup3Gnetw
workswithn
nationwideccoverage.58
InChina,mo
obilephonessaresoldthroughfreesstandingcelllularstores,departmentt,andhomeeappliance
c
chainstores
.Asofmid2006,there wereaboutt47,000ded
dicatedretaailphonesto
ores,whichaarerapidly
e
expanding
from the citties to the more rural regions. China is also
o starting to
o mimic thee US sales
m
methodology
y of bundlin
ng handset sales
s
with su
ubscription service. By 2006, the US
U Commerccial Service
e
estimated
th
hat fifteen percent
p
of all
a GSM han
ndsets weree sold in co
onjunction with
w
a servicce sale. At
p
present,the
nearmonopolyprovideerofCDMA handsetsissChinaUnicom(CHU),ttheonlyCDM
MAmobile
5
58
n
networkope
eratorinChin
na.In2006,ChinaUnico
omsold95%
%ofallCDMA
Ahandsets.

C
CustomerTr
rends
Customer trrends in various technologies will likely follo
C
ow the sam
me growth patterns
p
as European
c
countries.

TradiitionalCommunicationssCompetittionfromottherformso
ofcommuniicationhaveeincreased
the quality
q
and lowered th
he cost of traditional forms of communicat
c
ion. For example,
e
a
tradittionalteleph
honehasseeenvastimprrovementinqualitythro
oughinvestm
mentinfiberopticand
digitaaltechnology.
AdvaancedComm
munications Internetteelephone,V
VOIP,andSM
MS(textmesssaging),areeexpected
tofollowalongaasteepgrow
wthcurve,m
muchthesam
mewaythattthoseform
mshaveevolvedinthe
USan
ndEurope.
2007yieldedan1
11.1%increaaseinmobilephoneexp
penditures.

C
Competitive
eAnalysis
Worldwidessalesofmob
W
bilephonesw
willreach1.2
28billionun
nitsin2008upfrom1.1
15billionun
nitsin2007
19

an11%incr
rease.
Whilethemobilephone
W
emarketisp
poisedfordo
oubledigitggrowthin20
008and2009(withsalesexpected
t grow 10.3
to
3%), the ind
dustry faces challenges in some reggions, which
h are projectted to declin
ne. Mobile
p
phone
sales growth will increasinggly rely on emerging
e
markets as mature
m
regio
ons such as
a Western
19
E
Europe,Japa
anandNorth
hAmericarreachsaturaation.

In
nAsia/Pacific,mobileph
honesalesarreforecastttoreach472
2.5millionun
nitsin2008,a17.9%
in
ncreasefrom
m2007.
M
Mobilephone
esalesinWeesternEurop
peareprojeectedtoreacch188millio
onunits,a1.5%
declinefromlastyear.
In
nNorthAme
erica,salesareexpected
dtototal185
5.7millionunitsin2008,a5.3%incrreasefrom
2007.
M
Mobilephone
esalesinJap
panareestim
matedtoreaach47.7millionunits,a9.1%decreaasefrom
2007.

With a moree mature market, mobile operatorss are seeingg their service revenue come undeer pressure
W
a
and,drivenb
bylowerflatratetariffss,demandfo
ordataservvicesisstartingtopicku
up,increasin
ngdemand
investment.Costcontrolandputtingpressureeonsupplierrpricingareethebusinesssnormof
f
fornetwork
o
operators.Th
hus,mobiledevicevend
dorsareexpeeriencinginccreasedpresssureondevvicepricing.
F
Fivekeytren
ndsthatwillaffectthem
mobiledeviceemarketin2
2009:19
1. Estab
blishedVend
dorsConsoliidateandNe
ewPlayersJJointheFrayy:Newdeviccevendors,suchas
AppleeandGarmin,wanttod
differentiatethemselvess,whilebign
namevendors,suchasM
Motorola,
facep
pressureasmarketsharresdeclineaanddesignin
nnovationbeecomesincreeasinglychaallenging.
2. DevicceVendorsB
BuildOutEccosystems:P
Pressurefromoperatorsstolowerth
hepriceofdeeviceswill
drivesomeestab
blishedplayeerstoseeko
outnewsourrcesofreven
nuefromcontentandseervices
soldttoenduserss.ThistrendisepitomizeedbyNokiawithOvi,So
onyEricssonwithPlayNo
owand
AppleewithitsiTu
unesstore.TThisnewmarketwillbrin
ngchangesiinrelationsh
hipsbetween
nvendors,
operaatorsandco
ontentprovid
ders.
3. DevicceMakersR
RemoveCom
mplexityforUsers:Increeasingdeviceefunctionalityandaneeedfor
differrentiationw
willdrivedem
mandtosimp
plifytheuserinterface(UI)andservviceexperien
nce.Asa
conseequence,mo
obiledevicevendorswillneedtobu
uilduptheirUIcompetencieswhileretaining
familiarityandco
onsideringhowuserscanmovehoriizontallyacrosstheirdevvicesappliccations,
ratheerthanjustvverticallywitthinthem.

4. MobiileDevicesB
BecomeLife
estyleStatem
ments:Stylewillplaymo
oreofaroleacrosstherrangeof
devicces,drivennotonlybyfaashiontrend
dsbutalsobyconsumersdesiresto
oreinforceliffestyle
choicces.Vendorssneedtohavveestablisheedplatformssonwhichssmallchangeestocasingssand
colorrscanbemadewithoutaaffectingcossts.Theywilllalsoneedttoconsiderpartneringw
withnon
mobilecompanie
esandbrand
dssuchascconsumerelectronics,faashionorspo
ortscompan
niesto
increasethelifesstyleappealandconsum
merreachoftheirproduccts.
5. HighEndDevicePlatformsB
BecomeFie
eldRefreshaable:Ascellulartechnologiesbecom
mepartof
increasinglyexpe
ensiveconsu
umerdevicess,vendorsm
mustmanageeongoingsu
upport,upgraadesand
userswillholldontohighenddevicesslonger,theese
enhancementofdrives.Becaausemanyu
platfo
ormswillneedmorelifeecyclemanaagementinttheformofu
upgradesandenhancem
ments.
Someevendorsarreimplemen
ntingthesefieldrefresh
hesthatcan
nbemadeto
osupportneewdigital
rightssmanageme
ent(DRM)reequirementss,downloadbugfixes,ordownloadnewapplicaations,
wallp
papersorskinstokeepd
devicesupto
odate.

I
Institutional
lAnalysisof
f China
M
MacroEnvir
ronment
Multiple facttors may haasten or retard the devvelopment of
M
o a modern
n Chinese co
onsumer secctor. These
includetheffollowing:

ofrestriction
nsonforeign
ninvestmenttinChinasd
distributionsector
Theendo
Increased
dinterestonthepartofforeignretaailersinChinasretailsecctor
Apossible
erevaluation
noftheChin
nesecurrenccy
EffortsbyytheChineseegovernmenttoshiftth
hesourcesofeconomicgrowthawayfrom
investmentandexportsandtowaardconsumeerspending
Acceleratedreformo
ofChinasbankingsystem
mresultinginabiggerandmoreefficient
marketfo
orconsumerrcredit
Tighteningofthecon
nsumercrediitmarketfolllowingahigghdefaultraateonautom
motive
loans
Apossible
ecollapseoffresidentialpropertyprrices
Forcedco
onsolidationofChineserretailingcom
mpanies

Most of theese events would havve the effecct of acceleerating the growth off consumer spending,
M
a
accelerating
nizationofreetaildistribu
ution,increasingtheimp
portanceofcconsumerfin
nance,and
themodern
increasingth
heimportancceofChinassconsumermarkettoglobalretailaandconsumeerproductccompanies.
S
Some,howe
ver,wouldh
haveadetrim
mentaleffecctonmodernizationofthesector.
In the past decade, the
e Chinese ecconomy hass grown at an extremely rapid pacce resulting in a huge
increase in the
t numberr of middle class consumers. Hence the current interest in Chinas burgeoning
b
c
consumer
m
market.
Going forward, the
t longterrm economiic future forr China appears bright. There are
p
positive
reassons to belie
eve that Chinas rapid growth
g
can be sustaineed for several decades. The result
c
couldbeaco
ountrywithalargenumberofafflueentandmidd
dleincomecconsumers.
Why?China iscatching uptothew
W
worldsrichccountriesbyyinvestinginnewcapacity,adoptin
ngmodern
16
t
technologies
s,andconsequentlyrapiidlyincreasin
ngtheprodu
uctivityofitssworkers.

PortersDi
iamondMod
del

Capital

Fixedassetinvvestmentbetween
nJanuaryandJuly
rose31%overrthesameperiodlastyear(est.
$330B)
Approximatelyy$80Bwasfinancedindicatingacceess
tosourcesofccapital
Inflowsfromfforeigninvestmenttwere
approximatelyy$75Bin2007

Governm
ment

FacttorConditions

Infrastructure
nvest$1Toverthenext3years
Expectedtoin

Significanttransportation/energgy/communication
ns

alreadyinplacce
o airports<200
mberofports
o largenum
o accessibleinlandwaterways
o highways240Mkmpaveed,needinvestmeent
o rail <62
2,500 km track

Relate
edIndustries

Co
orporateStrat
tegy,Structu
ure,andRivalry

Capitalmarketsemployashortrrunoutlookmakin
ng
mpetitivewherein
nvestmentisshortt
themmorecom
term.
wnforelectronicsm
manufacturing
Regionisknow
providingfirmsswithawealthofexperienced
managerialand
dlabortodrawfro
om.
Competitionsp
pursinnovation.
Asiascontractelectronicsmanufacturing(CEM)
owfrom$121.5billlionin2006to$281.8
marketwillgro
billionin2011.Theregionwillcaapture55.1percen
ntof
uringservices(EMSS)
theglobalelecttronicsmanufactu
marketin2011
1,upfrom45percentin2006,andC
China
isforecasttoacccountforabout7
76percentofthe
AsianEMS/ODM
M(originaldesignmanufacturing)
marketsby201
11

Costofgoodssoldforelectronicspro
C
oducts
m
manufacturedinCh
hinawasabout$1
174billionin2004.
T
Thismarketwillgro
owto$385billionin2009.
T
Theconsumerelec
ctronicsmarketgreewataCAGRof
1
11.7%from2002to
o2006

Dem
mandConditio
ons

Eco
onomytransformeedfromcentrally
plaannedtomarketo
oriented.
Refformstosupportiintellectual
pro
opertyandcopyrigghts.
Invvestmentininfrasttructure.
Chinahasbecometh
hebiggest
exp
porterofelectronicproductsinthe
wo
orld.Governmentpolicy
intterventionhascon
ntributed
siggnificantlytotheraapidexpansionof
theeelectronicsindusstry.

Secondlargestconsumermarketb
by2015
by
Consumptionexpectedtobeapprroximately$8.8Tb
2020
U$5.7T,US$10.1T,
o $4.17Tprojectedin2008(EU
JPN$2.8TT)
Middleclassexp
pectedtobe520M
Mby2025
Individualsareadoptingmoreofaastriveror
wealth,power,
achievermenttalityfocusingonw
materialssecuritty,andstatus.
Consumerconfid
denceremainshiggh
o plannedexxpendituresoneleectronicsarehigheerin
ChinathanintheUS
wthinconsumerspendingin2008(>>1%
o 10.8%grow
US,EU,and
dJPN)

P
Politicaland
dEconomicSSystem59
PeoplesRep
P
publicofChin
na
OneP
PartyRuleChineseCom
mmunistParrty
Execu
utiveStateCouncilMembersandtthePremier
o Nomorethan2conseecutive5yearterms
Head
dofStatePresidentand
dVicePresid
dent
o Nomorethan2conseecutive5yearterms
Natio
onalLegislature2,989d
delegates,5yearterms
Regio
onalAssemb
bliesandAdm
ministrations22provin
nces,4municipalities,(G
Govt.contro
ol),and5
auton
nomousregiions
Natio
onalGovernm
mentThep
politburooftheCCPsetsspolicyandcontrolsalladministrative,legal
andeexecutiveap
ppointments;theninem
memberpolittburostandingcommitteeisthefoccusof
poweer
TTheHongKo
ongSpecialA
AdministrativveRegion(SSAR)oftheP
People'sRepu
ublicofChina59
TheBasicLaww
whichguaraanteesHongKongahigghdegreeofautonomyuntil2047
ChieffExecutivew
whoseappointmentisin
nfluencedbyyChina
Execu
utiveCounciiladvisoryroletoChieffExecutive
Head
dofStatePresidentofP
PeoplesRep
publicofChiina
LegislatureUniccameralLegiislativeCoun
ncil,(Legco),,consistingo
ofdirectlyellectedandthose
electedbyfunctionalconstituencies
o 30memb
berseach
LocalGovernmen
ntComprisedofDistricctCouncils
Parties
4MainPoliticalP
o TheproggovernmentDemocraticAllianceforrtheBetterm
mentandPro
ogressofHo
ongKong
(DAB)12seats
o TheProB
BusinessLibeeralParty(LP
P)10seats
o DemocratticParty(DP
P)9seats
o CivicParty4seatsfo
our;theprodemocracycampoveraallholds25o
ofLegco's60
0seats

InfrastructurreandEducationalSystems
SSince 1979, the educattion system in China has shifted to
t a system that is geaared toward
ds modern
e
economicde
evelopment..Chinahas anationwid
desystemo
ofpublicedu
ucation,whiichincludes 6yearsof
p
primary
schooling and 3 years of lower and
d uppermid
ddle school,, followed by
b a standaard 4 year
u
universitycu
urriculum.NiineyearsofeducationisstechnicallyycompulsoryyforallChin
nesestudentts.

In 2003 China supporte

ed 1,552 in
nstitutions of
o higher leearning (collleges and universities)
u
and their
7
725,000prof
fessorsand 11millionsstudents.Co
ompetitiven
nationwideeexamination
nsdetermineewhogets
60
intocollege.Roughly2%
%ofthecolleegeagepopulationisad
dmitted.
In1998,the Chinesegovvernmentprroposedan ambitiousp
planintended
dtoexpand
duniversityeenrollment
t ensure a greater output of profeessional and
to
d specialized
dgraduates. An adjuncttto the plan
naimed to
d
developane
elitesystem
mofworldcllassuniversiities.Restructuring,thro
oughconsollidations,meergersand
s
shiftsamong
gtheauthoritieswhichssuperviseinsstitutions,w
wasaimedattaddressingtheproblem
msofsmall
s
size
and low
w efficiency.. Higher voccational edu
ucation was also restru
uctured, and
d there was a general
t
tendency
th
here to emp
phasize elitee institution
ns. This rapid expansio
on of mass higher education has
r
resulted
in not only a strain in teeaching reso
ources but also in higher unemployment rattes among
g
graduates.
TThebiggestiissuewithth
hecollegeed
ducatedsegmentoftheChinesepopulationisthattherearrefarmore
a
applicantsfo
orjobsrequiiringacolleggedegreeth
hanthereareejobs.Even
nwiththat,theChineseeducation
s
systemprod
ucesstuden
ntswithgood
dquantitativveskillscom
mingoutofcollege,butd
doesnotdoagoodjob
o
ofteachingp
practicalreaallifeexperience.Therresultisthattcompaniessstillhavetroublefindingenough

goodcolle
geeducated
dcandidatess.

R
Regulations
andPoliciessAffectingFFDIandInternationalTrrade,ImporttsandExporrts
Intheintereestofprotecctingstateo
ownedenterrprises,Chin
nahasinstitutedasysteemofrestricctivetrade
p
practices
aim
med at con
ntrolling the flow of go
oods and seervices into the countrry. As Chinaas growth
increases itss significance in the wo
orld econom
my, China will be forced
d to take more
m
globallyy accepted
r
responsibility
yforthesep
practices.
TTheUShas playedakeyyroleinhelpingChina integratein
ntotheworlldeconomiccsystemunderatwo
t
tieredappro
oachby:

FullyintegratingChinaintotheglobal,ru
ulesbasedeconomicand
dtradingsysstem.
daccesstottheChinesemarketforU
USexporterssandinvestors.
Gainiingincreased

C
Chinastwo
keystofulfilllingitsWTO
Ocommitmeentsare:

Increasingeffectiveprotectio
onofIntellecctualProperrtyrights.
Moveementtoafflexible,marketbasedexxchangeratee.

TTheStrategiccEconomic Dialogue,(SSED),event occursevery2yearsto

odiscusssusstainablegro
owthwhile
m
managingtra
adeimbalan
nces,openinggofnewmaarkets,andw
workingoneenergyandeenvironmenttalissues.

N
NominalRat
teofInteresst
Along with the
A
t surge in economic growth,
g
inflaation has also risen in China. The upper end target has
ttheratein
b
been3%,bu
nJuly2008w
was5.6%.FFood,housin
ng,andmediicinehaveb
beenthethreeeprimary
6
61
d
drivers,inte
ermsofprice
eescalation.
It is debatab
ble as to whether tightter monetarry policy will serve as a deterrentt to investm
ment. Real
interestratesaresaidto
obenegativee,evenwithrecenttightteningofmo
onetarypolicy.

InternationaalMonetarySystem
TThe IMF poiints out thaat Chinese monetary
m
po
olicy could improve
i
notticeably if the
t central bank
b
were
g
granted
morre discretion
nary power to set interest rates. In
I the last two
t
years, increases
i
in the trade
s
surplus
and significant inflows of foreign cap
pital have leed to a largge accumulation of intternational
r
reserves,wh
hichhasfurth
hercomplicaatedmonetaarypolicyhaandling.Inth
hisrespect,ttheIMFhaswelcomed
t
thechanges
introduced intotheChineseexchangeratesysstemasasiggnificantsteptowardsm
makingthis
s
systemmore
eflexible.Allthoughitis difficultto definean"eequilibrium"exchangerrateforChin
na,theIMF
f
firmlymainta
ainsthatam
moreflexibleeexchangerrate,andno
otjustarevaaluation,mu
ustbeadoptedifChina
istoincreasetheindependenceof itsmonetarrypolicyand
dshieldits economyaggainstextern
nalshocks.
T
TheIMFma
nChina'sintteresttoinccreasethefflexibilityof itsexchangerateand
inlystressessthatitisin
t
thatalthoug
htheinternationalcom
mmunityasawholeisresponsiblefo
orcorrectinggtheimbalan
ncesinthe
g
globalecono
omy,amore
eflexibleexchangesysteminChinaawouldcontributetoth
hatcorrectio
onprocess
b
bothdirectly
y(bylowerin
ngitsextern
nalsurplus) andindirecttly(byencouragingotheerAsianeco
onomiesto
61
d
dothesame
).

P
PurchasingP
PowerParityy
TThe US Centtral Intellige
ence Agencyy (CIA) reports that in 2002
2
the pu
urchasing po
ower parity of China's
e
exports
was $312.8 billlion while im
mports totaaled $268.6 billion resu
ulting in a trade surplus of $44.2
59
b
billion.

TThe Internattional Mone

etary Fund (IMF) reportss that in 2001 China haad exports of
o goods tottaling $266
b
billionandim
mportstotalling$232billlion.Theseervicescredittotaled$33.3billionaanddebit$3
39.3billion.
T
Thefollowin
gtablesummarizesChina'sbalanceeofpaymen
ntsasreportedbytheIM
MFfor2001 inmillions
61
o
ofUSdollars
s.

B
BalanceofP
Payments43
TThecurrent statisticspo
ointtoward Chinaasrissingpowerw
withagrowingeconom
my.TheCurrrentaccount
b
balanceof1
17,401Msugggestsastro
ongforeign investment inChineseaassets.Th
he$54Mcap
pitalaccount
d
deficitsugge
estChinaisn
notborrowin
ngcapitalfrromforeign investorsbu
utsupplyingcapitalfrom
mincountryy.
O
Overalltheb
balanceofpaymentsleaavesanegattivereserveof$47,447M
Mwhichtran
nslatestoastrongerusee
o
ofimportsth
hanexports.
CurrrentAccoun
nt
17,401
1
Balanceongoo
ods
34,017
7
5,933
3
Balanceonservvices
Balanceoninco
ome
19,175
5
Currrenttransfe
ers
8,492
2
Cap
pitalAccoun
nt
54
4
FinaancialAccou
unt
34,832
2
Dire
ectinvestme
entabroad
6,884
4
Dire
ectinvestme
entinChinaa
44,241
1
Porrtfolioinvesttmentassetts 20,654
4
Porrtfolioinvesttmentliabilities 1,249
9
Oth
herinvestme
entassets
20,813
3
Oth
herinvestme
entliabilitie
es
3,933
3
NettErrorsandOmissions
4,732
2
ResservesandR
RelatedItem
ms 47,447
7

F
ForeignExch
hangeRisk
TThereisapo
ositiverelatio
onshipbetw
weenbanksiizeandforeiignexchangeexposure,whichmayreflectthe
larger foreiggnexchange operations and tradingg positions of
o larger Ch
hinese bankss, and their significant
nge exposurre arising from
f
impaccts of the renminbi (RMB) exch
hangerate
indirect foreeignexchan
m
movements
on their cu
ustomers. Evidence
E
sugggests that the average foreignexxchange exp
posures of
s
stateowned
d and jointsstock commercial bankss in China arre higher th
han those off banks in Hong
H
Kong,
n
notwithstand
dingthatthe
eirparticipationininterrnationalban
nkingbusineessesisstillllimitedcomparedwith
t
theirHongK
Kongcounterrparts.Negaativeforeignexchangeeexposureisp
prevalentforrlargerChin
nesebanks,
s
suggestingth
hatanappre
eciationoftheRMBtendstoreduceetheirequittyvalues,an
ndistherefo
orelikelyto
h
hamper
the banking se
ector's perfo
ormance. Together witth the fact that decreases in equ
uity values
g
generally
im
mply higher default
d
risk, how Chinesse banks wo
ould be affeected under different sccenarios of
2
22
R
RMBapprec
iationshould
dbecloselymonitored.

Apple uses derivative instruments,, such as fo

A
oreign exchange forward and option position
ns, to hedgee
e
exposures
to
o fluctuations in foreiggn currency exchange rates. It regu
ularly review
ws its foreiggn exchangee
f
forwardand
doptionpossitions,bothonastandalonebasissandinconjunctionwitthitsunderlyingforeign
n
c
currencyand
dinterestraterelatedeexposures.H
However,givventheeffecctivehorizon
nsoftheCompanysriskk
m
managemen
tactivitiesaandtheanticcipatorynatureoftheexxposures,th
herecanben
noassuranceethehedges
w offset more
will
m
than a portion of
o the finan
ncial impactt resulting from
f
movem
ments in either foreign
n
e
exchange
orr interest rates. In addittion, the tim
ming of the accounting for recognition of gain
ns and losses
arktomarkketinstrumeentsforany givenperiod
r
relatedtom
dmaynotco
oincidewith
hthetiming ofgainsand
d
lossesrelateedtotheunderlyingeco
onomicexpo
osuresand, therefore,m
mayadverseelyaffecttheeCompanys
8
f
financialcon
nditionando
operatingressults.

InternationaalCompetitivveness

BUSINESSENVIRONMENT

HONGKON
NG
Platforrmfordoingbu
usinesswith
mainlandChina
ortwithno
Consideredafreepo
dutiesortariffs
wledgeof
Goodlinksandknow
Chinesemarkets
Strongrespectofruleesandlaw
CloserEconomicParttnership
Arranggement(CEPA),,givesHong
Kongp
productspreferrential
treatm
mentinChina
Veryffastpacedbusiness
environ
nment
Consideredtobeananti
corruptionculture

CHINA
Unpredictaablebusiness
environment
Plannedecconomy,oftenleadsto
overinvesttmentinthewrongthing
14traderegionsestablishedto
facilitatetrrade

RESOURCES

HONGKON
NG

CHINA

ConsideredthegateewaytoChina,
possessesthenecesssaryresources
essmainlandC
China
toacce
Geograaphiclocationisconsidered
itsmosstimportantnaaturalresourcee
Financial,marketing,andtechnical
expertisefitswellwitthChinas
manufaacturingresources
Oftencconsideredabeachhead
forMN
NCsthataredo
oingbusiness
withCh
hina

Vasthumanandnaturalrresources
available

HONGKO
ONG

Intelle
ectualpropertyyprotection
mustb
begovernedbyylocallaws,ass
oppossedtointerven
ntionfromUS
Government
Maturremarketmeansthereare
somewellestablisheedcompetitorss

COMPETITION

CHINA
Historyofintellectualproperty
theft
Largeinstaancesofpiracyyand
counterfeiiting,averagingg20%of
products
Weakandunevenenforccementof
IntellectuaalPropertyrulees

STAFFING

HONGKO
ONG

CHINA

Heavvymanagemen
ntexperiencein
n
internationalbusiness
puterliterateaand
Comp
entre
epreneurialwo
orkforce
Harm
moniouslaborrrelations
9yeaarsofcompulso
oryeducation
proviidedforfreeb
bythe
government
essiscloselylin
nkedwith
Succe
mainlandChina
erinhoursworked,(2400),b
but
Leade
only27thinproducttivity

Highdemandforcollegegraaduatejobs
OpportunittyforMNCsforllowcostlabor
Estimated25millioncollegeegraduates
chasing10millionjobs
Sourcingtaalentisnowtheleeading
concernforAmericancomp
paniesinChina
aheadofin
ntellectualproperrtyrights
protection
Theeducattionsystemisgoo
odat
producingquantitativetalent,butnot
necessarilyyreallifeapplicab
bility
ExtracostiisincurredbyMN
NCstoteach
theapplicaantsthenecessaryreallife
skillsrequirredtoperformjo
obs
Averagejobdurationis2yeearsinChina,
comparedwith56intheUS
Employeep
poachingiscomm
monplace

ACCESSTODISTRIBUTIONCHANNELS

CHINA

HONGK
KONG
Eage
ertoworkwith
hserious
expo
orters
Agen
ntsordistributtorsanexcellent
waytosellintoHo
ongKongfor
nt
minimalinvestmen
ntpartofsocieety.
PCsareaprevalen
74.2%ofalldomesstichouseholds
withPCsathome
ernmentfullyssupportstheuse
Gove
ofITTandpromotesscontinual
imprrovement
Inforrmationiseasiiertogatherin
n
HonggKongthanCh
hina

In2006
6,nearfullliberalizationwas
achievvedforUSfirmsstohavefull
tradingganddistributionrights.
Societyyisprimarilycaashbased,
whichputssomelimittationsone
commercemodels

UNDERSTANDINGLOCALCUSTOMERS

HONGKONG

CHINA

Highpercapitainco
ome
More
etechnologicallysophisticateed
Highlyeducated
eworldlyview
More

Disposab
bleincomelocaatedinurban
centersvvs.ruralareas
3rdlargesstmarketforlu
uxurygoods
behindJaapanandtheU
US
Generalizzationaboutcu
ustomersis
difficultssinceChinais
geograph
hicallylargeandeach
provincehasuniquech
haracteristics
ChineseaarewelcominggofUS
products,butstillprefeerlocal
supportffortheproductts
Manycom
mpanieshavemadethe
mistakeo
ofrushingintoChina
expansionwithoutfullyyresearching
pitfalls.
marketp

Infrastructurre
Chinasrapid
C
dlygrowing economyhaasledtosiggnificantinveestmentininfrastructurreprojects.According
t
toanarticle
inTheEco
onomist,Ch
hinaspentm
moreoninfraastructureandothercap
pitalprojecttsfromthe
p
periodspann
ning200120
005thanintthepreviouss50yearsintotal.
TThe rate at which infrasstructure prrojects are being
b
develo
oped is changing the dynamics of travel and
d
doingbusine
essinChinavveryrapidly..
K
KeyStatistics
s

Chinaaexpectstoseedoubledigitgrowth
hininfrastru
ucturespend
dingthrough
htheendofthe
decad
de.
Theeexpected$20
00Bthatiseexpectedinrrailwaydeveelopmentam
mountsto4or5timesm
morethan
intheeprevious5years.

C
CHINAkeyr
recenthighlights:

Beijingsnew
wairportterm
minalplanneedandbuiltinjust4yeaars,by50,00
00+people.The
teerminalspan
ns1.8milesandis17%largerthanH
Heathrowsccombinedsizeofallterm
minals.
th
th
Theairporthasgonefrom
m26 busiestto9 busiestintermssofworldtrravelsince2002,
w
whichspeaks
stotherapid
dlygrowingclimateinChina.
Thelongestseacrossingbridgeopen
nedinJune,sspanning36
6kmfromacrrossHangzhouBay.
B
BulletTrainprojectsareunderwayy.AnexampleofthisisttheplannedlinkbetweeenBeijing
andShanghaii,whichredu
ucesrailtimefrom10hoursto5ho
ours,andoffersacompeetitive
optiontoairttravel.
nterstatehigghwaydevelopmentgain
nedacceleraationin1993
3with53,60
00kmofhigh
hway
In
developedbyyendof2007.Thisacco
omplishmenttparallelsw
whattook40yearsintheeUS.
nd
d
Chinassystemisnow2 toonlytheeUS.
A
Aperipheral
benefittoan
nupgradedhighwaysysstemhasbeeendramaticgrowthfortthe
automobilein
ndustry,and
dreliefonth
heoverburdeenedrailsysstem,fromaafreightpersspective.

Hong Kong is
H
i considered to have a
a world classs infrastructture. There are many infrastructur
i
re projects
t
thataffectal
lldifferentfo
ormsincludiing:

Redevelopme
entoftheKaaiTakAirporrt
H
HongKongM
MacauZhuhaaiBridge
G
GuangzhouS
ShenzhenHo
ongKongExp
pressRailLin
nk
D
Disneyland

H
HONGKONG
Gkeyrecenthighlights::

Theelectricitysystemiscconsideredttobestateoftheart.
Telecommunicationssysttemisfullyd
digitized.
honeoperato
ors,alongwith11netwo
orks.
Siixmobileph
O
Over200ISP
s,withbroaadbandaccessavailableto98%ofho
ouseholds.
Consideredto
obetheworrldsbusiestcontainerp
port,anditissthehubofportactivityyfor
m
mainlandChi
na.
$30Bprojecte
edtobespeentoverthenextfiveyearsoninfrasstructurepro
ojects.

K
KeyInfrastru
uctureStatistics

Transp
portation
M
Mode

A
AIR

R
RAIL

ROA
ADWAY

S
SEA

CHINA
C
Airtraffiic7Mpassen
ngersin198
85,185Min2
2007
97addittionalairportsplannedb
by2020,
compareedwith146totalin2006
Airportssthatcanhandle30annualpassenggers
now3,eexpectedtogrowto13
China'srrailwayscarry25%oftheworld'srailway
trafficonjust6%ofitstracklen
ngth
Currentlly78,000km
moftrack,exxpectedto
expandtto120,000kkmby2015
Chinasrrailsystemccanonlyhan
ndle40%of
currentdemand
Thelarggestseacrossingbridgerrecently
completted
Containeerthroughputexpectedtogrow85%
%
between
n2010and2
2020

HONGKONG
G
Redevelopm
ment
oftheKaiTak
Airport

Guangzhou
ShenzhenH
Hong
KongExpress
RailLink

HongKong
MacauZhuhai
Bridge

S
StrategicCho
oice
W
Whatcritica
lquestionsneedtobeaaskedbeforreenteringH
HongKong/C
China?
WhatisthessizeofChina
W
asmobile/sm
martphonem
market?
M
Market
size (in units)
In 2007, Nokia
N
held a
a 35% share of the to
otal mobile phone markket in Chinaa
r
registerings
alesof71Munits.Extraapolated,thiisshowsoveerallmarket yieldsofap
pproximatelyy210Munitss
(2007)and2
242Munits((2008).Marketgrowth hasbeen15
5%peryear..Allowingfo
orthesame growthratee
in2009,themarketforaallphonessh
houldbeapp
proximately278Munits.
SSmartphonescompriseaapproximateely11%oftheworldwid
demobilephonemarkeet.Usingthisspercentagee
w
wecanquan
ntifythesmaartphonemaarketinChin
naatapproximately31M
Munits.BaseedonApplesworldwidee
s
shareofthe
smartphone
emarket(6.5
5%),ourpro
ojectedfirstyeariPhoneesalesgoalin
nChinais2M
Munits.

World
dwideSmaartphoneM
MarketShare
ers,
Othe
22.7
70%
Nokiia,
52.90
0%
RIM,11.40%
R

50%
Apple,6.5
Mottorola,
6.50%

So
ource: Canalys Comp
pany Ltd., 2008

W
WirelessSu
bscribersB
ByRegion
Middle
EEast/Africa,
203M
NorthAmericaa,
250M

LaatinAmerica,
283M

AsiaP
Pacific,
963
3M

Europe,688M

Source: Telecommunications Industry Asssociation, CTIA

W
Whoisourc
ompetition??
T
Theglobalsm
martphonem
marketiscu
urrentlydom
minatedbyN
Nokiawitha nearly53% share,followedbyRIM
M,
A
Apple,Moto
orola,anda widerange ofsmallerp
players.InC
China,Nokia isthemobilephonem
marketleader
24
w
withapproxi
imately35%
%marketshare,followed
dbySamsung(16%)andMotorola(7
7.5%).
C
Competitors:
:
Nokia Total
T
incou
untry sales of
o $9.9B in 2007
2
made China Nokiaa's single largest markeet, taking
13%ofglobalsales.NokiahasbeenaleaderintheChin
nesemobilephonemarketsince20
004.With
a sold a total
t
of 70.7
7 million
its bestsselling N95, Nokia saw more than 38% growtth in sales and
mobilephonesinChinain2007ggainingado
ominant35%
%shareofCh
hinesecustomers.
Nokia siggned a deal with China Postel to sell $2 billion
n worth of handsets an
nd mobile devices in
China in 2008. China Postel currently has about a 30
0% share of the wholessale segmen
nt of the
market.Nokkiahasbeendistributinggitscellpho
onesacross ChinathroughChina
Chinese cellphonem
Postelsin
nce1998.
RIM(Blackberry)ChinaMobileerecentlyinttroducedBlaackberrytottheChinesemarket.Theerollout
tookplacceacrossthe
ecountry,b
butGuangdo
ong,ShanghaaiandBeijin
ngwerethe focusformarketing.
China Mobile is resp
ponsible forr running an
nd promotin
ng the Blackkberry brand
d in China, including
i
odels, planning and priccing. TCL wiill manufactture the pho
ones and su
upply them to China
sales mo
Mobile.
Guangzhouuserswilllbeabletochoosebetweentwop
packages50
0MBofdataausageforR
RMB398,
or400MB,including2MBofinteernationalro
oamingusages,forRMB598.
G
Globalhighli
ights:

Totalworldw
widecellphonesalesin2
2007,1.15Bu
units
Totalworldw
widesmartph
honeshipmeentshitnewpeakof39.9
9MunitsinQ
Q32008
Totalworldw
widesmartph
honeshipmeentswereap
pproximatelyy125Munitssin2008
U
USmarketm
orethandoubles,butdeclineinJap
pancontributestoan18
8%yearonyyearfallin
A
AsiaPacific
EMEAgrowth
hat21%helpedby43%riseinCentralandEasteernEurope,butWesternEurope
alsostrong
N
Nokiaretains
smarketlead
d,butsharereducedasAppleandR
RIMmakelargegains
M
Microsoftsha
areofsmartphonemarkketincreasesdespitebeeingovertakeenbyApple

W
Whatarethe
esubscribergrowth,pen
netration,an
ndrevenuerratesinHong
gKong/Chin
na?
T
TheHongKo
ongandChin
nesemarketssvarygreatllyintermso
ofsizeforsubscriberand
dpenetrationrates.

Chinahasove
er600millio
onsubscribersandapen
netrationratteof34.3%
H
HongKongha
asalmost9m
millionsubscribers,and apenetratio
onrateof12
25.4%,whichmeans
th
hatmanysubscribersinHongKonghavemultip
plephones
o Fo
orcompariso
on,thepeneetrationrateintheUSisabove80%
Between200
06and2010,subscriberggrowthreveenueisexpecctedtogrow
wfrom$1Billionin
A
Asiato$1.6B
Billion
D
Dataservices
sareprojectedtobetheeprimaryrevvenuedriverrsintheneaarterm

Howsophistiicatedareco
H
onsumerexp
pectationsin
nHongKong
g/China?
Ingeneral,theHongKo
ongconsumeerismoretechnologicaallysophisticcated,ishighlyeducated,andhasaa
h
higher
per capita
c
incom
me. The higher penetraation rate off Hong Kongg consumerss shows that many own
n
m
morethano
nedevice,aandassuch,aremoreap
pttospenddisposableincomeonahighendph
honesuchas
t
theiPhone.

ThePCownershiprateisnothighinChina,andttherefore,althoughmorreexpensivee,amore
so
ophisticated
dphoneservvesnotonlyasaphone,butasamu
ultifunctionaaldevice

Howmuchd
H
disposableincomedoesttheHongKong/Chineseconsumerha
ave?
In 2007, dissposable inccome per capita
c
of China's urban and rural residents rose 12.2%
% and 9.5%
%,
r
respectively.
.Percapitad
disposableincomeofurrbanresiden
ntswas13,78
86Yuanwhiilethatofru
uralresidents
w
was4,140Y
uan($605.6
60US).Grow
wthratesforurbanand
druraldispo
osableincom
mepercapitarose1.8%
%
a
and2.1%fro
omayeareaarlier.Theceentralgoverrnmenthas singledout boostingruralincomes asapriorityy
inthe11thfiveyearplan
n,whichrun
nsto2010.200($1US=6.8
88Yuan)
WhataretheebarrierstoentryintoH
W
HongKong/C
China?
P
PoliticalW
WhileHongK
KongspoliticcalstructureeiscloselylinkedwithtthatofChina,itisconsideredtobee
m
more
stablee and predictable than China. Hong Kong prrovides App
ple with a foundation
f
to use as aa
s
springboard
intotheChinesemarkeet.Chinasu
unpredictab
bilitypresenttschallengesforanymu
ultinationall,
b
butasChina
becomesm
moreintegratedintotheeworldmarkket,itwillneeedtocontinuetoadap
ptitswaysto
o
a
assimilate
in
nto the wayys of the WTTO. China limits foreiggn investmeent in teleco
om networkks by makingg
f
foreignentit
iespartnerw
withChineseecompaniess,andlimitin
ngtheirconttrolto49%.
Internet Resstrictions The
T governm
ment of Chin
na has longstanding po
olicies restriccting the infformation to
o
w
whichcitizen
nsareexpossed,andthaatwhichtheeymaythem
mselvespub
bliclysay.Th
heInternetp
posesanew
w
c
challenge
to
o such censsorship, both because of the sheeer breadth of content typically avvailable, and
d
b
becausesou
rcesofcontentaresoo
oftenremoteefromChineesejurisdictiion,andthu
usmuchmorredifficultto
o
p
penalizefor
breachingre
estrictionsonpermissiblematerials.Thereissomeevidenceethatthego
overnment

hasattempteedtopreven
h
ntthespreadofunwanttedmaterialbypreventtingthespreeadoftheIn
nternetitselff,
b
butaconcom
mitantdesire
etocaptureetheeconom
micbenefitsofnetworkeedcomputin
nghasledto
oavarietyo
of
s
strategiesto
osplitthediifference.Fo
orexample, thegovernm
mentmight encourage Internetacccessthrough
h
c
cybercafesra
atherthaninprivatesp
pacessothatcustomerss'surfingcan
nbephysicaallymonitoreedbyothers
inthecafe.A
Asatechnicalmatter,anecdotalrep
portshaved
describedasshiftingseto
ofbarriersto
osurfingthee
w from Chinese
web
C
poin
nts of accesss sites that are rep
ported unavvailable or domain
d
nam
mes that aree
u
unknownto
thesystemorthatleadtounexpeccteddestinattions,individ
dualpagesthatarebloccked,andthee
u
useofsearch
hkeywordstthatresultsintemporarrylimitstofu
urthersearches.21
As with mosst filtering regimes,
A
r
wh
hether impleemented at the client, ISP, or goveernment levvel, no list is
m
made
available of the sites blockeed or of thee methodologies used to block th
hem. Furtheer, while thee
g
government
connected InternetSoccietyofChin
na(notachapteroftheeinternation
nalInternet Society)has
a
askedIntern
netservicep
providersandcontentcreatorstosignapledgeeincludingsselffiltering,fewofficiaal
s
statements
document the existence of governmentmaintained weeb filtering, much less the criteriaa
e
employedan
ndthreshold
dsnecessaryytoelicitab
block.Wetheereforesougghttoinvesttigatethegrrowingseto
of
m
methodsby
whichIntern
netfilteringisaccomplisshed,andto
ocollectanddistributeaalistofblockkedsitesand
d
p
pagesalist
tthatislarggeinabsolutetermsevenifsmallrelativetotheesizeoftheInternetand
dtothetotaal
a
amount
of blocked
b
conttent, and a list that is diverse even if not perrfectly repreesentative of all blocked
d
c
content.Suc
chalistallow
wsusandottherstobeggintoassesssthenature andscope offilteringw
withinChinaa,
21
w
withparticul
larattention
ntononsexu
uallyexplicittwebsitesrrenderedinaaccessibleth
here.
HowwilltheiPhonebed
H
delivered(ca
arriersorwholesalers)?
InChina,mo
obilephonessaresourcedandsoldtthrougheith
herthecarrier(theprovviderofthe service)or
w
wholesalers
(providingp
productstorretailersforresale).Globally,Appleworksmain
nlywithcarriersbut,in
t
theUS,hasb
beguntoofferdistributionoftheiPh
honethrougghitsretailstoresandlargeretailch
hains.

MajorW
WirelessProvvidersinChina
COMP
PANY

China
Mobile
China
United
d
Teleco
om
Corp.

REVENUEE
(Billions))

$37

$11.8

YOY
REEVENUE
GR
ROWTH

21.5%

EBITDA
A

$20

YOY
EBITDA
G
GROWTH

19.7%

SUBSC
CRIBERS
DEC.3
31,2006
(Milllions)

30
01.2

8.3%

$4

11.4%

14
42.4

Source-Stand
dard & Poors Globa
al Industry Surveys Telecommunications:
T
: Wireless Asia

TTwo compan
nies dominaate the marrket: China Mobile Com
mmunication
ns Corp. (Ch
hina Mobile), with two
o
t
thirdsofthe
market,and
dChinaUnittedTelecom
mmunicationsCorp.(Chin
naUnicom),,withthereemainingonee
t
third.
China Mobile occcupies the high
h
end of the markett, while Chin
na Unicom is viewed as more of aa
d
discount
serrvice. China Mobile hass started foccusing on lo
ower end cu
ustomers in smaller cities and ruraal
lyasawayo
a
areasrecent
ofmaintainingitssubscrribergrowth
hrates.
China Mobile and Chinaa Unicom co
C
ompete fierrcely on pricce, but becaause they dominate
d
the market so
o
c
completely,
they are offten accused
d of collusivve behavior. The compaanies tend to
t move toggether when
n
introducingn
newservicess.Thegoverrnmenthasaamajoritysttakeinbothcarriers.
FFromanAveerageRevenueperUser(ARPU)persspective,bo
othcarriersccollectfarlessperusertthancarriers
in other areeas of the world.
w
Theree is also disparity betw
ween the tw
wo carriers. China Mobiles ARPU is
r
roughly
90 Yuan
Y
per use
er, which eq
quates to ro
oughly $11.2
27, and Chin
na Unicomss ARPU is 49
9.2 Yuan per
u
user.

China,especiallyinsomeeareas,hasb
bypassedlan
ndlineservicceandmoveeddirectlyin
ntodigital
hichareofteenlessexpen
nsivetoinstaallandmaintain.Thisin
ncreasestheARPUof
networks,wh
th
hoseusersw
whoarenotspendingon
nlandlineservice.
D
Data
servicess are consid
dered the key
k to continued reven
nue growth by mobile carriers. For
exxample, Chiina Mobile earned $6.6
6 billion for data servicces in 2006, outperform
ming Verizon
n
W
Wirelesswhic
chhad$4.5billionindattarevenuesin2006,and
dAT&TWireelesshad$4
4.3billion.

Howcanweachievemarketpenetra
H
ationandma
aintainprofiitpotential?
T volume opportunityy that Chinaa can provid
The
de offers po
otentially siggnificant revvenue oppo
ortunities for
A
Apple.Atiss
suewillbetthecompanysabilityto
oidentifyan
noptimalm
marketentry//pricingstraategy.Akeyy
m
metric
in deetermining adaptation
a
o the iPhon
of
ne by Chineese carriers is the Averrage Revenu
ue per Userr,
(ARPU),whicchisthemonthlyrevenu
uethatacarrriergenerattespersubscriber.
TTheARPUhaasasignificaanteffecton
nthecarrierscoststruccture,andasssuch,limitssthetypeso
ofsubsidized
d
h
handsets
the carrier can offer itss subscribeers. A con
nsideration for entry in
nto this maarket is thee
nd
introduction of a value priced 2 generation handset. Major hand
dset manufaacturers currrently doingg
b
businessinC
Chinaofferm
modelspriceedatorlessthan$100. Thispricep
pointcanbe thedifferen
ncebetween
n
m
massandnic
chemarketaacceptance.Applesoptions:
1. M
Maintainthecurrentmarrginstructurrebyofferin
ngtheiPhoneeatnormalglobalpricin
ng
WilllikelylimitssalesandrellegatetheiP
Phonetonichemarketstatus
n
2. AdapttheiPh
A
honetothem
marketbyofferingavaluepriced2nd
generation
nhandset
Willlikelygain massmarke
etappealbutatacosto
ofdiminishingthefeatu
uresofthe
phonemakingittlessuniquee
Wehavechosentopu
ursueoption
n1andretaintheuniquenessofthe
eiPhone.

H
Howcanwe
differentiatee?
A
Ascompetito
orspushto catchupwithsimilarph
honedesignsanduserinterfacefun
nctionality,A
Applewillbee
r
requiredtof
findfurtherw
waystodiffeerentiateitssproductsan
ndretainitspremiumprricingstature.
TTheiPhonerreliesonthe
econvergencceofdigitaltechnologieesthatbund
dleinternetaaccess,amu
usicplayer,aa
p
phone,
a vid
deo player and
a a host of
o other digital lifestyle features.. Apples Ap
pp Store allo
ows users to
o
d
download(fo
orfreeorfo
orafee)tho
ousandsofiPhoneappliicationsbuiltbyAppleo
orfreelanceedeveloperss.
T
This
is a un
nique, diffe
erentiating feature
f
for iPhone users that prrovides them
m with thee benefit o
of

customizing
gtheirphon
ne.
T
Thisisakey
differentiato
orforApple.

PORTER
RSFIVEFO
ORCESMO
ODELFORC
CHINA

RIVALRY
YAMONGFIRM
MS
Themajo
ormanufacture
ers
allprovidesimilar
offeringsintheChinesse
market.TheincludeNokia,
LG,RIM,Motorola,
Huaw
wei,andZTE.

THREEATOFNEWEN
NTRANTS

THREATOFSUBSSTITUTION

New
wentrantsarealwaysa
riskkinemergingm
markets.
Howevver,mostcom
mapniesare
faced
dwithsimilarb
barriersto
entrryandareenteringan
areaw
whichalreadyproduces
47
7%oftheworld
d'scell
phones.

Anyproductservingthetechnologyindu
ustryis
threatened
dbysubstitute
eproductsasn
new
technologiesaredisscoveredand
commerciaalized.Manym
manufacturersare
tryingtocaapitalizeoniPh
hone'sconceptby
offeringprroductsthatim
mitatetheiPho
one.

BA
ARGAININGPO
OWEROFCUSTTOMERS

BARGAININ
NGPOWEROFFSUPPLIERS

Apple'sen
ndcustomerw
willbethecarrierofchoiceth
hat
itpartne
erswith.TheC
Chinesecarrie
ershavestrongg
leverage,,astheyaresu
upportedbyth
hegovernment,
whosetsttherulesforFD
DI.

Applealreadyprodu
ucesproductin
nChina,andisstaking
ntageofthelo
owercoststrucctureofoutsourced
advan
m
manuracturing
g.

M
MarketEntry
y
W
Whatareou
urobjectives?
OfficiallyintrroducetheiiPhonetoth
O
heChinesem
marketwithiinthenext5
5yearsbyp
partneringw
withaleadingg
s
serviceprovi
iderwhilem
maintainingccurrentmarggins.Wewillachievethiisbygeneratingmainlan
ndconsumer
d
demandthro
oughthesaleofunlockkediPhones usingestab
blisheddistriibutionchan
nnelsinHon
ngKong,and
d
later, Beijingg (Apples retail
r
store)). We will generate
g
th
his demand by creatingg and making availablee
s
softwarefea
aturesspeciffictotheChiinesemarkeetthroughth
heApplicatio
onStore.Deployingthisstrategywilll
c
capturea6.5
5%shareofChinassmartphonemaarket,equatingtofirstyeearmovemeentof2Mun
nits.

Specific
o OfficiaallyintroduccetheiPhonetotheChinesemarkettbypartneringwithaleeading
servicceprovider
o Saleo
ofunlockediPhonesthro
oughestablissheddistribu
utionchannelsinHongK
Kongand
Beijing
plicationssp
pecifictotheeChinesemaarketthrougghthe
o Developmentofssoftwareapp
AppliccationStore
M
Measurable
o Captu
ure6.5%smaartphonemaarketshare
o Firstyyearmovementof2Munits
A
Achievable
o 6.5%ssmartphoneemarketshaareisApplesscurrentwo
orldwidesmaartphonemaarket
share
hannelsarealreadyinplace
o Blackkmarketdistributionch
R
Realistic
nestimated400,000unitsinserviceeinChina
o Currentblackmaarkethasan
ndinalignmeentwithApp
plespositionglobally
o Ourobjectivesareerealistican
Timebound
n5years
o Within

W
Whatisours
strategy?
Our strategyy will rely on
O
o organic growth
g
and leverage. Launching
L
iP
Phone Chinaa begins in Hong Kongg,
s
spreadstoG
Guangdongp
province,andfinallytotthecitiesoffShanghaiandBeijing.H
Howwewillachieveour
f
firstyearsale
esprojection
nof2Munittsisoutlined
dbelow.

StraategicIssue
es

1. Saaturationofmaturemarrketshowtogrowmaarketshareiinemergingmarkets
2. Prricinglackofproductllinebreadth
h,consumerdiscretionaryincomeconcerns,
co
ommoditizattionthrough
hnewentrants
3. Distributionchannelsbuilddistribu
utionexposu
urewhilemaaintainingm
margins,

ne
egotiatingle
everage

HongKong
TheGatewayytoChina
Organ
handBuzz
nicGrowth

Applehasane
A
existingdistribu
utionagreemeentwith

HongKongsle
eadingcarrier,3HK
ChinaMobileownsa24%shareof3HK
K

Utilizeexistin
ngdistributionchannels
providing3H
HKwithunlockeediPhones(8G
GB
and16GB)fo
orresaleintheeAsia/Pacific
market
Price$600US(8GB),$700US(16GB)

Generateconsu
umerdemandtthroughthe

deevelopmentoffuniqueappliccationsspecificctothe

Ch
hinesemarket
(cool,needto
ohaves)andbuzz
m
marketing

blesoftwarefeeatures
Developandmakeavailab
theChinesema
arketthroughthe
specifictot

AppleAppliicationStore

rcities
Beginadverrtisingheavilyinselectmajo
Takeadvantageofearlyaadopters
mpellingreason
nforChinese
Buildacom

consumerstohaveaniPh
hone

Ch
hinaOurrObjective
e
De
emandand
dLeverage
e

Cap
pitalizeonbuzzzwithearlyado
optersuseof
App
plicationstogeenerateinteresstanddemand
d
Beginthesaleeofunlockedp
phonesin
theBeijingreetailstore
uangdong
AggressivelyaadvertiseinGu
province,Shaanghai,andBeijing

Maintainpremium
mpricingwhileeassessing
mandandidentifyingpotentialadaptationss
dem
(i.e..,alessexpenssiveversionwithfewer
feattures)
Assesssupplyychannelstocconfirmability
tomeetdemandprojection
ns

PlanA Reeopen negotiations with China Mobile for exclusive

distributionrights

o Bypart
hinaMobile,Ap
pplegainsacceesstoa
neringwithCh
mobilesubscribersand
significaantnumberoftheworldsm

createsgreaterecono
omiesofscalefforitsmanufaccturing
operations
o LeveraggeARPUfigureesfordataservvicesrevenueggeneration
o Provideequantifiableu
unitdemandfigures
o PlanBIfnegotiation
nsfalter,opendiscussionswithChina

LaaunchiPhon
neChin
na!

W
Whatisourr
revenueprojjection?
R
Revenuepro
ojectionsare
ebasedsalesofon2M unlockediPh
honessoldinthefirstyyearat$600US.Based
o Apples overall
on
o
operrating margins, COGS iss assumed to be 64.85
5% of sales with gross margin of
3
35.15%.
Thee gross proje
ections for sales
s
are 15
5% each yeaar generatin
ng net incom
me from new sales as
s
shownbelow
w.

INCOMEESTATEMENTT(millions)
Sales
CostofG
GoodsSold
GrossPrrofit
SG&A
OperatingIncomeBeeforeDeprec..
Depreciation&Am
mortization
OperatingProfit(EBIT)
InterestExpense
NonO
OperatingInco
ome/Expense
e
SpeciaalItems
PretaxIncome
Taxes
MinorityInterest
NetInco
ome
Extraord
dinaryItems
DiscontiinuedOperattions

Baaseyear
1,844
1,196
648
288
361
22
339
0
46
0
385
116
0
269
0
0

Year1

1,200
778
422
187
235
14.16
220
0
30
0
250
76
0
175
0
0

Year2

1,380
895
485
215
270
16.284
254
0
35
0
288
87
0
201
0
0

Year3

1,587
1,029
558
248
310
18.7266
292
0
40
0
331
100
0
231
0
0

Year4

Year5
5

2,099
9
1,825
1,184
1,361
1
642
738
8
285
327
7
357
410
0
21.53559 24.7659285
5
335
386
6
0
0
46
52
2
0
0
381
438
8
115
132
2
0
0
266
306
6
0
0

0
0

A
APPENDIX
STATEM
MENTOFFINA
ANCIALPOSITTION

Sep03

Se
ep04

Sep05

Sep06

Sep07

4,566.00
950
56
0
315
5,887.00
1,174.00
505
669
5
109
0
145
6,815.00

5,46
64.00
1,05
50.00
101
0
440
55.00
7,05
1,29
98.00
591
707
1.4
97
0
1
189.6
8,05
50.00

8,261.00
1,312.00
165
0
562
1
10,300.00
1,481.00
664
817
0
96
0
338
1
11,551.00

10,110.00
2,845.00
270
208
1,076.00
14,509.00
2,075.00
794
1,281.00
0
177
1,042.00
196
17,205.00

15,386
6.00
4,029.00
3
346
4
417
1,778
8.00
21,956.00
2,841.00
1,009.00
1,832.00
0
3
337
6
625
5
597
25,347.00

1,154.00
0
531
304
368
2,357.00
0
0
235
2,592.00

1,45
51.00
0
685
0
544
80.00
2,68
0
0
294
74.00
2,97

1,779.00
0
1,204.00
0
501
3,484.00
0
308
293
4,085.00

3,390.00
0
2,011.00
0
1,070.00
6,471.00
0
381
369
7,221.00

4,970
0.00
0
4.00
2,374
0
1,955.00
9,299.00
0
6
619
8
897
10,815.00

SHAREH
HOLDERS'EQUITY
PreferreedStock
CommonStock
CapitalSSurplus
RetainedEarnings(N
NetOther)
Less:TreeasuryStock
TOTALSSHAREHOLDEERS'EQUITY

0
1,926.00
62
2,359.00
0
4,223.00

0
14.00
2,51
93
55.00
2,65
0
76.00
5,07

0
3,521.00
60
4,005.00
0
7,466.00

0
4,355.00
0
5,629.00
0
9,984.00

0
8.00
5,368
0
4.00
9,164
0
14,532.00

TOTALLLIABILITIES&
&EQUITY

6,815.00

8,05
50.00

1
11,551.00

17,205.00

25,347.00

ASSETS
Cash&Equivalents
Net)
ReceivablesTotal(N
InventoriesTotal
PrepaidExpenses
CurrentAssetsOtheer
CurrentAssetsTotaal
uip(Gross)
Plant,Property&Equ
ulatedDeprecciation
Accumu
Plant,Property&Equ
uip(Net)
mentsandAdvvancesOthe
er
Investm
Intangib
bles
DeferredCharges
AssetsOther
ASSETS
TOTALA

LIABILITTIES
AccounttsPayable
NotesPayable
dExpenses
Accrued
Debt(Lo
ongTerm)Du
ueInOneYeaar
OtherCurrentLiabilitties
urrentLiabilities
TotalCu
LongTermDebt
DeferredTaxes(BalanceSheet)
LiabilitieesOther
TOTALLLIABILITIES

INCOMEESTATEMENTT

Sep
p03

Sep04

Sep05
5

Se
ep06

SSep07

6,207
7.00
4,387
7.20
1,819
9.80
1,683
3.00
13
36.8
11
11.8
25
8
101
26
92
24
0

8,279.00
8
5
5,870.50
2
2,408.50
1
1,910.00
499
149.5
349
3
60
23
383
107
0

13,931.00
0
9,738.00
0
4,193.00
0
2,393.00
0
1,800.00
0
150
0
1,650.00
0
0
0
165
5
0
0
1,815.00
0
480
0
0
0

19,31
15.00
13,52
25.00
5,79
90.00
3,14
45.00
2,64
45.00
192
2,45
53.00
0
365
0
2,81
18.00
829
0

24,006.00
15,568.00
8,4
438.00
3,745.00
4,693.00
284
4,4
409.00
0
599
0
5,008.00
1,512.00
0

IncomeBeforeExtrao
ordinaryItem
ms&
DiscontiinuedOperattions(EI&DO))
Extraord
dinaryItems
DiscontiinuedOperattions
NetInco
ome(Loss)

68
1
0
69

276
0
0
276

1,335.00
0
0
0
0
0
1,335.00
0

1,98
89.00
0
0
1,98
89.00

3,4
496.00
0
0
3,4
496.00

IncomeBeforeEI&DO
O
PreferreedDividends
AvailableforCommo
onBeforeEI&
&DO
CommonStkEquivalentsSavingss
AdjustedAvailableforCommon

68
0
68
0
69

276
0
276
0
276

1,335.00
0
0
0
1,335.00
0
0
0
1,335.00
0

1,98
89.00
0
1,98
89.00
0
1,98
89.00

3,4
496.00
0
3,4
496.00
0
3,4
496.00

0.19
0
0
0.19
0
0.19
0
0.19

0.74
0.74
0.71
0.71

1.65
5
1.65
5
1.56
6
1.56
6

2.36
2.36
2.27
2.27

4.04
4.04
3.93
3.93

360
0.63
363
3.47
366
6.73

371.59
387.31
391.44

808.44
4
856.78
8
835.02
2

84
44.06
87
77.53
85
55.26

864.6
889.29
872.33

Sales(Net)
CostofG
GoodsSold
GrossPrrofit
Selling,General,&Ad
dminExpense
es
OperatingIncomeBeeforeDepreciiation
Depreciation,Deplettion,&Amorttiz
OperatingIncomeAffterDepreciattion
InteresttExpense
NonOperatingIncom
me/Expense
SpecialItems
PretaxIncome
IncomeTaxesTotal
MinorityyInterest

NGSPERSHAR
RE:
EARNIN
PrimaryyExcludingEEI&DO
PrimaryyIncludingEI&DO
FullyDilutedExclud
dingEI&DOEI&DO
FullyDilutedIncludingEI&DO
COMMO
ONSHARES:
forPrim
maryEPSCalcu
ulation
forFullyyDilutedEPSCalculation
Outstan
ndingatFiscallYearEnd

STATEM
MENTOFCASH
HFLOWS

INDIREC
CTOPERATINGACTIVITIESS
IncomeBeforeExtrao
ordinaryItem
ms
DeferredTaxes
SaleofP
PPEandInvesstmentsLoss(Gain)
FundsfrromOperatio
onsOther
ReceivablesDecrease(Increase)
InventoryDecreasee(Increase)
Accountts/PandAccrruedLiabsIn
nc(Dec)
OtherA
AssetsandLiabilitiesNetC
Change
OperatingActivitiesNetCashFlow

INVESTIINGACTIVITIES
Investm
mentsIncreasse
SaleofInvestments
ShortteermInvestmentsChange
CapitalEExpenditures
InvestingActivitiesOther
Investin
ngActivitiesNetCashFlo
ow

CINGACTIVITIIES
FINANC
SaleofC
CommonandPreferredStock
PurchasseofCommon
nandPreferredStock
LongTermDebtReduction
Financin
ngActivitiesNetCashFlo
ow
Cashan
ndCashEquivvalentsChan
nge

ON:
OTHERIINFORMATIO
InteresttPaidNet
IncomeTaxesPaid

Sep0
03

S
Sep04

Sep05

Sep06

Seep07

68
6
1
11
2
29
13
35
20
01
1
11
24
43
9
95
28
89

276
20
2
188
8
45
297
204
934

1,335.00
52
9
674
121
64
328
322
2,535.00

1,989..00
53
11
3
388
3
357
1
105
1,611..00
1,370..00
2,220..00

3,49
96.00
78
12
559
385
76
1,49
94.00
292
5,47
70.00

0
4
45
91
14
16
64
3
33
82
28

0
5
1,3
328.00
176
11
1,4
488.00

0
0
2,275.00
260
21
2,556.00

25
1,086..00

29
6
657

18
3
357

17
2,94
41.00
5,23
36.00
735
202
3,24
49.00

53
5
2
26
0
2
27

427
0
300
127

543
0
0
543

318
3
3
355
0
3
324

365
3
0
739

1,144.0
00

427

522

2,901..00

2,96
60.00

20
2
4
45

10
7

0
17

0
1
194

0
863

R
RatioAnaly
ysis
PROFITTABIILTYRATIOS
GrosssProfitMargin
NetO
OperatingMargin

LIQUID
DITYRATIOS
Curre
entRatio
QuicckRatio

TURNO
OVERRATIOS
Inventoryturnover
Dayssofinventory
Acco
ountReceivablesturnover
Dayssofreceivables
Saless/NetPropertyyPlant&Eq
Asse
etsturnover

DEBTR
RATIOS
DebtttoAssets
DebtttoEquity
InterrestCoverage(EBIT/intexp)

PERSH
HAREDATA
EPS((Diluted)
EPS((Basic)
Cash
hDividendsPerShare
Divid
dendPayoutR
Ratio

OTHER
RRATIOSandMEASURES
Adve
ertisingExpensses
Adve
ertisingIntensity
Adve
ertisingperem
mployee
R&D
DExpenses
R&D
DIntensity
R&D
Dperemployee
e
CapiitalExpenditurres
CapittalExp/Sales
CapittalExp/perem
mployee
Com
mmonShares(M
MM)
ComSharestoCalccEPS

Sep03

Sep04

Sep05

Sep06

Sep07

29..3%
0..4%

29..1%
4..2%

30..1%
11..8%

30.0%
12.7%

35.1%
18.4%

2.4
498
2.4
474

2.6
632
2.5
595

2.9
956
2.9
909

2.2
242
2.2
200

2.3
361
2.3
324

78.3
343
5days
6.5
534
55days
9.2
278
0.9
911

58.1
124
6days
7.8
885
46days
11.7
710
1.0
028

59.0
018
6days
10.6
618
34days
17.0
051
1.2
206

50.0
093
7days
6.7
789
53days
15.0
078
1.1
123

44.9
994
8days
5.9
958
60daays
13.1
104
0.9
947

38..0%
61..4%
3.1

36..9%
58..6%
11
16.5

35..4%
54..7%
n/a

42.0%
72.3%
n/a

42.7%
74.4%
n/a

$0
0.19
$0
0.19
$0
0.00
0..0%

$0
0.71
$0
0.74
$0
0.00
0..0%

$1.56
$1.65
$0
0.00
0..0%

$2.27
$2.36
$0.00
0.0%

$3.93
$4.04
$0.00
0.0%

$19
93.0
3..1%
$14,2
223
$471M
7..6%
$34,7
709
$1
164
2..6%
$12,0
085
36
66.7
36
60.6

$20
06.0
2..5%
$15,3
339
$489M
5..9%
$36,4
411
$1
176
2..1%
$13,1
105
39
91.4
37
71.6

$28
87.0
2..1%
$17,0
063
$534
4M
3..8%
$31,7
748
$2
260
1..9%
$15,4
458
835.0
80
08.4

$338.0
1.7%
$16,7
741
$712
2M
3.7%
$35,2
265
$6
657
3.4%
$32,5
541
855.3
844.1

$467.0
1.9%
$19,7
705
$782
2M
3.3%
$32,9
996
$7
735
3.1%
$31,0
013
872.3
864.6

STATEMENTOFRETAINEDEARN
NINGS
RetainedRearningsBeginningB
Balance
NetIncome
CashDividends
RetainedEarninggsAfterDividend
ds
ChangeForeign
nCurrencyTranslation
Adj.toLongTermMarketableSeecurities
OtherCMPAdj,((StockSplits/Retirement)
NonCMP(COMP
PUSTAT)Adjustm
mentsPLUGCALC
CU
RetainedEarninggsEndingBalan
nce
RetroactiveAdju
ustments(Acct'gChgs)
RetainedEarnin
ngsAfterAdjusttments

Sep03

Sep04

Sep05

Sep06

Sep07

2,276.00
69
0
2,345.00
4
1
16
25
2,358.00
1
2,359.00

2,359.00
276
0
2,635.00
0
4
4
24
2,655.00
0
2,655.00

2,655.00
1,335.00
0
3,990.00
0
4
4
11
4,005.00
0
4,005.00

4,005.00
1,989.00
0
5,994.00
0
0
3
368
5,629.00
0
5,629.00

5,629.00
3,496.00
0
9,125.00
0
7
0
39
9,164.00
0
9,164.00

CommonSizeIncomeStaatement
INCOMESTATEM
MENT

Sales
CostofGoodsSo
old
GrossProfit

6,207
4,387
1,820

100.00%
70.68%
29.32%

8,279
9
5,871
1
2,409
9

100.00%
70.91%
29.09%

13,931
9,738
4,193

100.00
0%
69.90
0%
30.10
0%

19,315
13,525
5,790

10
00.00%
7
70.02%
2
29.98%

24,006
6
15,568
8
8,438
8

100.00%
64.85%
35.15%

SG&A
OperatingIncom
meBeforeDeprec.

1,683
137

27.11%
2.20%

1,910
0
499
9

23.07%
6.03%

2,393
1,800

17.18
8%
12.92
2%

3,145
2,645

1
16.28%
1
13.69%

3,745
5
4,693
3

15.60%
19.55%

Depreciation&Amortization
OperatingProfitt(EBIT)

112
25

1.80%
0.40%

150
0
350
0

1.81%
4.22%

150
1,650

1.08
8%
11.84
4%

192
2,453

0.99%
1
12.70%

284
4
4,409
9

1.18%
18.37%

InterestExpense
NonOperatinggIncome/Expense
SpecialItems
PretaxIncome
Taxes
MinorityIntere
est
NetIncome

8
101
26
92
24
0
68

0.13%
1.63%
0.42%
1.48%
0.39%
0.00%
1.10%

3
60
0
23
3
383
3
107
7
0
276
6

0.04%
0.72%
0.28%
4.63%
1.29%
0.00%
3.33%

0
165
0
1,815
480
0
1,335

0.00
0%
1.18
8%
0.00
0%
13.03
3%
3.45
5%
0.00
0%
9.58
8%

0
365
0
2,818
829
0
1,989

0.00%
1.89%
0.00%
1
14.59%
4.29%
0.00%
1
10.30%

0
599
9
0
5,008
8
1,512
2
0
3,496
6

0.00%
2.50%
0.00%
20.86%
6.30%
0.00%
14.56%

1
0

0.02%
0.00%

0
0

0.00%
0.00%

0
0

0.00
0%
0.00
0%

0
0

0.00%
0.00%

0
0

0.00%
0.00%

ExtraordinaryIte
ems
DiscontinuedOp
perations

Sep03

Sep04

Sep05

Sep06
6

S
Sep07

CommonSize
eBalanceShe
eetAssets

BALANCESHEET
TASSETS
Cash&Equivalents
NetReceivables
Inventories
PrepaidExpense
es
CurrentAssetsOther
TotalCurrentA
Assets

Sep0
03
S
Sep04
Sep05
67.88% 8,261
4,566
67.00% 5,464
8
71.52%
%
950
13.94% 1,050
13.04% 1,312
11.36%
%
56
0.82%
101
1.25%
165
1.43%
%
0
0.00%
0
0.00%
0
0.00%
%
315
4.62%
440
5.47%
562
4.87%
%
5,887
86.38% 7,055
87.64% 10
0,300
89.17%
%

GrossPP&E
AccumulatedD
Depreciation
NetPP&E

1,174
505
669

17.23% 1,298
7.41%
591
9.82%
707

InvestmentsatEEquity
Investmentsand
dAdvancesOtheer
Intangibles
DeferredCharge
es
AssetsOther
TOTALASSETS

0
5
109
0
145
6,815

0.00%
0
0.07%
1
1.60%
97
0.00%
0
2.13%
190
1
100.00%
8,050

16.12%
7.34%
8.78%

Sep06
10,110
58
8.76%
2,845
16
6.54%
270
1
1.57%
208
1
1.21%
1,076
6
6.25%
14,509
84
4.33%

Se
ep07
60.70%
15,386
4,029
15.90%
1.37%
346
1.65%
417
7.01%
1,778
86.62%
21,956

1,481
664
817

12.82%
%
5.75%
%
7.07%
%

2,075
794
1,281

12
2.06%
4
4.61%
7
7.45%

2,841
1,009
1,832

11.21%
3.98%
7.23%

0.00%
0
0.02%
0
1.20%
96
0.00%
0
2.36%
338
100.00% 11,551

0.00%
%
0.00%
%
0.83%
%
0.00%
%
2.93%
%
100.00%
%

0
0
177
1,042
196
17,205

0
0.00%
0
0.00%
1
1.03%
6
6.06%
1
1.14%
100
0.00%

0
0
337
625
597
25,347

0.00%
0.00%
1.33%
2.47%
2.36%
100.00%

Co
ommonSizeBalanceShee
etLiabilities

BALANCESHEET
TLIABILITIES
AccountsPayablle
NotesPayable
AccruedExpense
es
TaxesPayable
Debt(LongTerm
m)DueInOneYear
OtherCurrentLiiabilities
TotalCurrentLiiabilities

1,154
0
531
0
304
368
2,357

SSep03
16.93%
0.00%
7.79%
0.00%
4.46%
5.40%
34.59%

LongTermDeb
bt
DeferredTaxes((BalanceSheet)
InvestmentTaxCredit
MinorityInteresst
LiabilitiesOthe
er
TOTALLIABILITIES

1,45
51
0
68
85
0
0
54
44
2,68
80

Sep04
18.02%
0.00%
8.51%
0.00%
0.00%
6.76%
33.29%

0
0
0
0
0
2,592

0.00%
0.00%
0.00%
0.00%
0.00%
38.03%

0
0
0
0
0
2,97
74

0.00%
0.00%
0.00%
0.00%
0.00%
36.94%

EQUITY($Millio
ons)
PreferredStock
CommonStock
CapitalSurplus
RetainedEarninggs(NetOther)
Less:TreasurySttock
TOTALEQUITY

0
1,926
62
2,359
0
4,223

0.00%
0.00%
28.26%
0.91%
34.61%
0.00%
61.97%

0
2,51
14
9
93
2,65
55
0
5,07
76

0.00%
0.00%
31.23%
1.16%
32.98%
0.00%
63.06%

TOTALLIABILITIES&EQUITY

6,815

1
100.00%

8,05
50

100.00%

1,779
0
1,204
0
0
501
3,484

Sep05
15.40%
%
0.00%
%
10.42%
%
0.00%
%
0.00%
%
4.34%
%
30.16%
%

3,390
0
2,011
0
0
1,070
6,471

Sep06
19
9.70%
0
0.00%
11
1.69%
0
0.00%
0
0.00%
6
6.22%
37
7.61%

4,970
0
2,374
0
0
1,955
9,299

Sep07
19.61%
0.00%
9.37%
0.00%
0.00%
7.71%
36.69%

0
0
308
0
0
4,085

0.00%
%
0.00%
%
2.67%
%
0.00%
%
0.00%
%
35.36%
%

0
0
381
0
0
7,221

0
0.00%
0
0.00%
2
2.21%
0
0.00%
0
0.00%
41
1.97%

0
0
619
0
0
10,815

0.00%
0.00%
2.44%
0.00%
0.00%
42.67%

0.00%
%
0.00%
%
30.48%
%
0.52%
%
34.67%
%
0.00%
%
64.64%
%

0
4,355
0
5,629
0
9,984

0
0.00%
0
0.00%
25
5.31%
0
0.00%
32
2.72%
0
0.00%
58
8.03%

0
5,368
0
9,164
0
14,532

0.00%
0.00%
21.18%
0.00%
36.15%
0.00%
57.33%

0
3,521
60
4,005
0
7,466

1
11,551
100.00%
%

17,205

10
00.00%

25,347

100.00%

Corpo
orateForecasst
INCOMESTATEMENT
Sales
CostofG
GoodsSold
GrossPro
ofit
SG&A
OperatingIncomeBeforeDeprec.
Depre
eciation&Amortization
OperatingProfit(EBIT)
InteresttExpense
NonOp
peratingIncome//Expense
SpecialItems
PretaxIncome
Taxes
MinorityyInterest
NetIncome
ExtraordiinaryItems
Discontin
nuedOperations

Baseyear
24,006
15,568
8,438
3,745
4,693
283
4,410
0
600
0
5,010
1,513
0
3,498
0
0

Year1

28,087
18,214
9,872
4,382
5,491
331
5,160
0
702
0
5,862
1,770
0
4,092
0
0

Year2

32,837
21,295
11,542
5,123
6,420
387
6,032
0
821
0
6,853
2,069
0
4,784
0
0

Yearr3

Year4

Year5

38,36
65
24,87
79
13,48
85
5,98
85
7,50
00
45
53
7,04
48
0
95
59
0
8,00
07
2,417
0
5,58
89

44,793
29,049
15,745
6,988
8,757
529
8,229
0
1,120
0
9,348
2,822
0
6,526

52,267
33,895
18,372
8,154
10,218
617
9,602
0
1,307
0
10,908
3,293
0
7,615

0
0

0
0

0
0

Corpo
orateForecasst
BALANCESHEET
ASSETS($
$Millions)
Cash&Equivalents
NetRece
eivables
Inventories
PrepaidExxpenses(3%)
CurrentAsssetsOther(3%
%)
TotalCurrentAssets
GrossPP
P&E
AccumulatedDepreciatio
on
NetPP&EE
Investmen
ntsatEquity
Investmen
ntsandAdvancessOther
Intangible
es
DeferredC
Charges
AssetsOther
TOTALASSSETS

Baseyear

Year1

Y
Year2

Year3

Year4

Year5

15,386
4,029
346
417
1,778
21,956
2,841
1,009
1,832
0
0
337
625
597
25,347

17,929
4,714
405
430
1,831
25,309
3,864
1,340
2,523
0
0
337
625
597
29,391

21,761
2
5,511
473
442
1,886
3
30,074
5,255
1,728
3,527
0
0
337
625
597
3
35,160

25,979
6,439
553
456
1,943
35,370
7,146
2,181
4,966
0
0
337
625
597
41,895

30,549
7,518
646
469
2,001
41,183
9,719
2,709
7,010
0
0
337
625
597
49,752

35,395
8,772
753
483
2,061
47,465
13,218
3,326
9,892
0
0
337
625
597
58,916

Corpo
orateForecasst
LIABILITIES($Millions)
AccountssPayable
NotesPayable
AccruedExpenses
TaxesPayyable
Debt(Lon
ngTerm)DueInOneYear
OtherCu
urrentLiabilities
TotalCurrentLiabilities
LongTe
ermDebt
Investme
entTaxCredit
MinorityInterest
LiabilitiessOther
TOTALLIABILITIES

EQUITY(($Millions)
Preferred
dStock
Common
nStock
CapitalSurplus
Retained
dEarnings(NetOtther)
Less:TreasuryStock
TOTALEQ
QUITY
TOTALLIABILITIES&EQU
UITY

Baseyear
4,970
0
2,374
0
0
1,955
9,299
0
619
0
0
10,815

Year1
5,819
0
2,374
0
0
1,955
10,148
0
619
0
0
10,767

Year2
6,803
0
2,374
0
0
1,955
11,132
0
619
0
0
11,751

Yearr3
7,94
49
0
2,37
74
0
0
1,95
55
12,27
78
0
619
0
0
12,89
97

Year4
9,281
0
2,374
0
0
1,955
13,610
0
619
0
0
14,229

Year5
10,829
0
2,374
0
0
1,955
15,158
0
619
0
0
15,777

0
5,368
0
9,164
0
14,532

0
5,368
0
13,256
0
18,624

0
5,368
0
18,040
0
2
23,408

0
5,36
68
0
23,63
30
0
28,99
98

0
5,368
0
30,156
0
35,524

0
5,368
0
37,771
0
43,139

25,347

29,391

3
35,160

41,89
94

49,752

58,916

Corpo
orateForecasst
STATEMENTOFCASHFLOWS
ATINGACTIVITIESS
INDIRECTOPERA
IncomeBeforeEExtraordinaryItem
ms
DeferredTaxes
SaleofPPEandInvestmentsLosss(Gain)
FundsfromOpe
erationsOther
ReceivablesDe
ecrease(Increase))
InventoryDecrrease(Increase)
Accounts/PandAccruedLiabsInc(Dec)
dLiabilitiesNetChange
OtherAssetsand
OperatingAcctivitiesNetCasshFlow

INVESTINGACTIVITIES
InvestmentsIncrease
SaleofInvestme
ents
ShorttermInvesstmentsChangee
CapitalExpendittures
InvestingActivitiesOther
hFlow
InvestingActivitiesNetCash

FINANCINGACTIVITIES
SaleofCommon
nandPreferredStock
PurchaseofCom
mmonandPreferredStock
ExcesstaxbeneffitsStockbased
dcompensation
LongTermDebtReduction
FinancingActiivitiesNetCashFlow
CashandCashEEquivalentsChaange

Baseyear

Year1

3,498 4,092
416
12 12
559 559
(385) (685)
(76) (59)
1,494 849
764 (3,248)
6,282 1,521

Year2
4,784

12
559
(797)
(68)
984
(3,042)
2,432

Year3
5,589

12
559
(928)
(80)
1,145
(3,972)
2,326

Year4
6,526

12
559
(1,079)
(93)
1,332
(5,350)
1,907

Ye
ear5
7
7,615

12
559
(1,,254)
((108)
1
1,549
(7,,025)
1
1,347

17
2,941
(5,236)
735
(202)
(1,745)

1,023 1,391 1,892 2,573 3
3,499

1,023 1,391 1,892 2,573 3
3,499

365
3
371

739
5,276

2,543 3,823 4,218 4,480 4
4,846

ResidualIncomeValuaation
ResidualIn
ncomeValuation
NetIncome
e
BeginningEEquity
RequiredEquityReturn
ExpectedIn
ncome
ResidualIncome
DiscountFaactor

Base
eyear
Year1
1
Year2
Y
Year3
Year4
4

28,087
24,006
7
32,837
3
38,365
44,793
3

9,984
14,532
2
18,624
2
23,408
28,998
8
13
3.80% 13.80%
%
13.80%
13.80% 13.80%
%

5
2,570
2
1,378
2,005
3,230
4,002

26,081
22,628
1
30,267
3
35,134
40,792
2
0.8787
7
0.7722
0
0.6785
0.5963
3

PresentValueofResidualIn
ncome
Cumulative
ePresentValueo
ofResidualIncom
me
TerminalValueofResidualIncome
BeginningB
BookValueofEquity
ValueofEq
quity
CommonSharesOutstandin
ng
ValueofEq
quityperShare

22,919
9
22,919
9

23,371
46,290

23,840
2
7
70,130

24,322
2
94,452
2

Year5

52,267

35,524
13.80%

4,902

47,365
0.5239
24,817
119,269
892,098
9,984
1,021,351
872
1,171.27

Terminal
Year

54,097

43,139
13.80%

5,953

48,144

R
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