Digital sport china challenges 5.11

DIGITAL SPORT THE CHINA CHALLENGE

THE CHINA OPPORTUNITYWHY CHINA MATTERS 2

1.3 BILLION PEOPLE 3

1.3 BILLION PEOPLE150 CITIES WITH 1 MILLION ORMORE PEOPLE 3

1.3 BILLION PEOPLE150 CITIES WITH 1 MILLION OR850 MILLION MOBILEMORE PEOPLESUBSCRIBERS 3

1.3 BILLION PEOPLE150 CITIES WITH 1 MILLION OR850 MILLION MOBILEMORE PEOPLESUBSCRIBERS MOBILE INTERNET43% ACCESSMONTHLY 3

1.3 BILLION PEOPLE150 CITIES WITH 1 MILLION OR850 MILLION MOBILEMORE PEOPLESUBSCRIBERS MOBILE INTERNET43% ACCESSMONTHLY44% GROWTH IN MIDDLE CLASSPOPULATION 3

1.3 BILLION PEOPLE150 CITIES WITH 1 MILLION OR850 MILLION MOBILEMORE PEOPLESUBSCRIBERS MOBILE INTERNET43% ACCESSMONTHLY44% GROWTH IN MIDDLE CLASSPOPULATION INCOME GROWTH15% YEARLYTHROUGH 2015 3

THE CHINA CHALLENGEWHAT IT TAKES TO WIN IN CHINA 4

THE CHINA CHALLENGE WHAT IT TAKES TO WIN IN CHINAEXPERIENCE COMPETITIONDESIGN PRODUCTS, SERVICES, AND BRAND THAT ARE ‘OF PROTECT OUR BRAND FROM COPYCATSCHINA’CREATE A WINNING STRATEGY AMID LOW SPORTPARTICIPATION RATESGROW, ENGAGE, AND SERVICE THE NIKE+ COMMUNITY IN MANUFACTURINGCHINA MANAGE AN EFFICIENT, AGILE, FLEXIBLE SUPPLY CHAIN AS WEOPERATE A SMART AND SCALABLE CONTENT LOCALIZATION SCALESTRATEGY ENABLE AN EQUITABLE, EMPOWERED, AND PROFITABLEOPTIMIZE SITE PERFORMANCE SUPPLY CHAIN DESIGN, MANAGE, AND TEST FOR PRODUCT QUALITYMOBILE DISTRIBUTIONCREATE A SMARTPHONE STRATEGY WHILE THE INDUSTRY SELL WHERE CONSUMERS WANT TO BUYFIGHTS A 3G BATTLEPARTNER WITH THE RIGHT OPERATING SYSTEMS ANDHANDSET MANUFACTURERSPLACE OUR BETS ON ANDROID? ORGANIZATION STAFF TO SUPPORT AND GROW THE CHINA BUSINESSSTRATEGIZE TO SCALE BEFORE SMARTPHONE AND 3GPENETRATION EXPLODEPROVIDE A PREMIUM EXPERIENCE ON AN INEXPENSIVESMARTPHONECREATE MUST-HAVE APPS ON THE BEST APP STORES 5

EXPERIENCE DESIGN PRODUCTS, SERVICES, AND BRAND THAT ARE ‘OF CHINA’ China has roughly 150 cities with at least 1 million people clustered into 22 hubs, each with distinct urban cultures, sport participation, demographics, and digital behaviors. Modifying products, services, and marketing plans to serve the most promising Chinese submarkets and grassroots Chinese athletes will provide opportunities to expand in China and serve the Chinese athlete*.MCKINSEY QUARTERLY: IS YOUR EMERGING MARKETS STRATEGY LOCAL ENOUGH? APRIL 2011 6

EXPERIENCE CREATE A WINNING STRATEGY AMID LOW SPORT PARTICIPATION RATES Sport participation rates in China, while low and not expected to increase dramatically by 2015, are somewhat %comparable to US sport participation rates. OF POPULATION Tailoring our service offering, brand positioning, and distribution strategy in China will enable us to scale and positively PARTICIPATING IN inﬂuence activity rates. SPORTS 12% CYCLING 10% 1% AEROBICS 6% 6% RUNNING 9% 4% BASKETBALL 4% 2% FOOTBALL CHINA 2% US 0% 3% 6% 9% 12% 15%US SPORT PARTICIPATION RATES: CORE PARTICIPANTS FROM SGMA 2010 REPORTCHINA SPORT PARTICIPATION RATES: PARTICIPATE “OFTEN” FROM CM09A CHINA MARKETING AND MEDIA SURVEY 2009 7

EXPERIENCE GROW, ENGAGE, AND SERVICE THE NIKE+ COMMUNITY IN CHINA As the number of Nike+ members in China grows from 65,000 today to upwards of 1 million by 2015, community management and customer support will become vital to sustaining athlete* relationships and developing loyalty. Growing and engaging the Nike+ community in China will require knowledge of local market dynamics and inﬂuencers, effective dialogue and product/service support, brand content and asset management, and integration with local social networks and media.EDELMAN DIGITAL CHINA APRIL 2011 8

EXPERIENCE OPERATE A SMART AND SCALABLE CONTENT LOCALIZATION STRATEGY Localizing content and UI across all experience platforms - device, mobile, and PC - is especially challenging inChina due to the complicated Chinese character set, regional dialects, translation complexities, and the resources required for maintenance, QA, and testing. 9

EXPERIENCE OPTIMIZE SITE PERFORMANCE Chinese consumers experience poor website performance when interacting with the Nike+ site. Nike+ currently operates from a data center in Sacramento, from which internet connections from China can take up to 200-300 ms per request. The complexity of the Nike+ experience requires that data must make multiple round trips. Multiple requests of a heavy Flash- based site results in extremely long site delays - up to 30-45s for a single page load - and a poor overall user experience. Strengthening the infrastructure and application platform and creating a multi-data center model are key to resolving the network latency issues.CONVERSATIONS WITH DIGITAL SPORT IT ARCHITECTS ASHOK BALAKRISHNAN AND SETTI SRIDAR 10

MOBILE 11

MOBILE CREATE A SMARTPHONE STRATEGY WHILE THE INDUSTRY FIGHTS A 3G BATTLE China’s three major mobile carriers - China Mobile, China Unicom, and China Telecom - operate three distinct 3G networks. China Mobile is the largest mobile carrier, with 70% share, but operates an expensive, proprietary network that is incompatible with global standards. China Unicom, the #2 carrier, supports the global WCDMA standard (on which the iPhone China currently runs), which is expected to drive China’s smartphone penetration due to its lower costs and compatibility for a greater variety of and high-quality smartphones. MARCH 2011: 850 M MOBILE SUBSCRIBERS 590 M 154 M 93 M 70% 20% 10% 3G STANDARD TD-SCDMA (proprietary) WCDMA (global) CDMA 1X/EVDO PROPRIETARY OS ANDROID-BASED OPEN MOBILE SYSTEM (OMS) LINUX-BASED WOPHONE OS NONE AS OF APRIL 2011 AVG. SMARTPHONE $497 $361 $445/$660 PRICEANALYZING CHINA’S SMARTPHONE MARKET (ANALYST REPORT), BEIJING GAO HUA SECURITIES COMPANY LIMITED OCTOBER 2010; CHINA MOBILE, CHINA UNICOM, AND CHINA TELECOM COMPANY REPORTS 12

MOBILE PARTNER WITH THE RIGHT OPERATING SYSTEMS AND HANDSET MANUFACTURERS Nokia and its closed Symbian OS dominate China’s smartphone landscape today, but Android’s free, open source model is eroding Nokia’s share with Android-based devices from Chinese and foreign OEMs. In addition, although Apple still has limited share, the CHINA SMARTPHONE MARKET SHARE and sales of the iPhone 4 have been strong. MARKET SHARE Apple and China iPhone dominates Chinese consumers’ mindshare, SMARTPHONE A partnership between BY OS BY OEM (2010) or China Telecom in conjunction with price reduction efforts would boost Apple’s smartphone share. Mobile Other 100% 6% 4% 4% 3% 6% 90% 13% 13% 20% 2% 6% 19% 3% 80% 5% 70% 30% 17% 6% 60% 19% 50% 57% 11% 8% 50% 13% 40% 25% 9% 30% 10% 49% 20% 6% 39% 3% 28% 10% 15% 0% CHINA 2010 US 2011 Global 2011 Global 2015OEM SHARE: EAST-WEST CONNECT.COM JANUARY 2011 OtherOS SHARE: EAST-WEST CONNECT.COM JANUARY 2011, TECH CRUNCH, COMSCORE, GARTNER, IDC 13

MOBILE PLACE OUR BETS ON ANDROID? Android’s share of China’s smartphone market almost tripled in 2010, jumping from 7% to 21% by the end of the year. Twice as many Android-based smartphones than iPhones sold in China in 2010 as several handset manufacturers, including Lenovo, HTC, Samsung, Motorola, Sony Ericsson, Huawei, and ZTE introduced Android-based phones at prices ranging from $150-700. In addition, China’s Mobile, 2010 CHINA the country’s #1 mobile carrier, launched an Android-based operating system. While Android-based development is expected to grow CHINA SMARTPHONE OPERATING China’s smartphone market and drive down the price, Android may fragment the market and make it challenging for brands and developers SMARTPHONEmanage mobile content. to deliver and SALES SYSTEM MARKET SHARE 70% 60% 50% 25% 40% 50% 25% 30% OTHER OS 20% 8-10 MILLION SMARTPHONES SOLD 10% 50% ANDROID BASED 200% Y/O/Y GROWTH FOR 0% ANDROID Q1 2010 Q2 2010 Q3 2010 Q4 2010CHINA OS SHARE: EAST-WEST CONNECT.COM JANUARY 20112010 CHINA SMARTPHONE SALES: “iPHONE SALES IN CHINA DISAPPOINTING,” 14FORTUNE.COM DECEMBER 2, 2011

MOBILE STRATEGIZE TO SCALE AS SMARTPHONE AND 3G PENETRATION EXPLODE Only 60 million of China’s 850 mobile subscribers currently use 3G networks, and even fewer - about 45 million - own smartphones. Of course, smartphone and 3G/4G penetration is expected to grow, but exactly how, when, and among which UNIQUE consumers is SMARTPHONE PENETRATION SUBSCRIBERS pure hypothesis. Although China’s government-owned mobile carriers each support 3 distinct 3G standards, they SMARTPHONE (MILLIONS) are M investing heavily inM Wi-Fi infrastructure468 M may improve network quality across mobile subscribers, independent of USERS, GLOBAL 172 are 297 which 631 M 60% FORECAST 60% 900 how the 3G battle shakes out. SMARTPHONE SHARE BY NETWORK TYPE 50% CD MA2 000 44% 675 4% 19% 40% TD-SCDMA 36% 50% 30% 450 GSM (2G) 25% 25% 27% WCDMA 20% 19% 14% 225 3G (WCDMA/TD- 10% 10% SCDMA,CDMA2000) 2G (GSM/CDMA) 0% 0 2009 2010 2011 2012 Smartphone sales: China Mobile subscribers: ChinaANALYZING CHINA’S SMARTPHONE MARKET (ANALYST REPORT), BEIJING GAO HUA SECURITIES COMPANY LIMITED OCTOBER 2010; GLOBAL MOBILE Smartphone penetration: North AmericaSTATISTICS 2011, MARCH 2011; MOBITHINKING; “CHINA IS APPLE’S FASTEST GROWING MARKET FOR iPHONE,” COMPUTER WORLD, APRIL 21, 2011; Smartphone penetration: China 15“CHINA SMARTPHONE MAKERS TO PUSH PRICE BARRIER,” MARKETWATCH, FEBRUARY 17, 2011.

MOBILE PROVIDE A PREMIUM EXPERIENCE ON AN INEXPENSIVE SMARTPHONE At an average price of $300-$450, smartphones are still a luxury item, especially among the under-30 segment, which comprise 90% of China’s 3G users. Over 50% of China’s 3G users earn less than $370/month, with almost 25% of these consumers reporting no stable income. Device manufacturers are working closely with component makers on $100-$150 smartphones, most of which will leverage the free Android operating system and WCDMA network to keep costs low. $100 $150 $200 $250 $300 $350 $400 $450 $500 $550 $600 $650 $700 $750 $800 $850 $900 2013 CURRENT CURRENT iPHONE iPHONE TARGET TOP AVERAGE 4 16GB 4 32GB PRICE SELLING SMARTPHONE ($750) ($895) ($100-1 SMARTPH PRICE 50) ONES ($300-$450) ($200-215 )ANALYZING CHINA’S SMARTPHONE MARKET (ANALYST REPORT) - BEIJING GAO HUA SECURITIES COMPANY LIMITED OCTOBER 2010; “CHINA SMARTPHONE MAKERS TO PUSH PRICE BARRIER,” MARKETWATCH.COM, FEBRUARY 17, 2011 16

MOBILE CREATE MUST-HAVE APPS ON THE BEST APP STORES China’s app marketplace is as fragmented as its smartphone landscape, with app stores from each mobile carrier and several handset manufacturers. Android’s open-source model coupled with Google’s delay in launching its Android Market in China is further fragmenting the app space, as several independent Android app stores have emerged. While they expand the reach and variety of Android apps, app developers and brands are ﬁnding increasingly difficult to distribute content and protect against pirated and repackaged app. Regardless, China’s high rate of mobile internet and feature users suggests that the app economy will boom, MONTHLY MOBILE MEDIA USAGE but additional research is needed to design the best distribution and pricing model. # OF APPs FROM MOBILE CARRIERS (NOV. 2010) 64% CHINA MOBILE CHINA UNICOM CHINA TELECOM Text messaging 86% 6,044 6% 6% 2,612 10% 37% 17% 17% 30% Picture messaging 41% 20% 22% 27% 77% Mobile internet 35% 19% 21% 43% 41,072 25% Themes Themes Themes Email Reading Reading Reading 8% Games Games Games Other Tools China Mobile China Unicom Entertainment 21% Pre-installed games China Telecom 40% 18% OTHER APP STORES App downloads 20% 14%Location-based services 4% 0% 10%20%30%40%50%60%70%80%90% US CHINAMONTHLY MOBILE MEDIA USAGE: “HOW CONSUMERS IN ASIA PACIFIC USE THEIR MOBILE PHONES,” FORRESTER, DECEMBER 13, 2010. “ASIA PACIFIC MOBILE TECHNOGRAPHICS: 2010,” FORRESTER, JANUARY 18, 2010; NEILSEN CHINA MOBILEREPORT INSIGHTS, AUGUST 2010; “APP MARKET FIRES UP IN CHINA,” BORTIGNON.COM, NOVEMBER 22, 2010; “NOKIA OVI STORE TOP APPLICATION STORE IN CHINA,” THENEXTWEB,COM, JANUARY 20, 2011; “CHINA’S ALTERNATIVE 17ANDROID MARKETS - LOTS OF APP CHOICES, PIRACY, AND SECURITY RISKS,” VENTUREBEAT.COM, FEBRUARY 16, 2011; “ANDROID APP MARKETS - AN OVERVIEW,” SHANZAI.COM, MAY 2011

GOVERNMENT POLICY 18

GOVERNMENT POLICY SERVE ATHLETES* WITHIN THE CHINESE FIREWALL China’s policy of blocking access to foreign social networking and blogging services may pose challenges for Nike+ as its features become increasingly social. Foreign internet operators in China must also implement systems to censor objectionable content within seconds if it being posted. Increasing Chinese protectionism may place further restrictions on foreign web, mobile, and telco companies operating in China. Good government relations and strategic partnerships with Chinese ﬁrms may be a means to provide access to the market.“CHINA’S SOCIAL NETWORK - ZUCKERBERG AND SINA CHAT OVER THE GREAT FIREWALL,” FORBES.COM, FEBRUARY 16, 2011; “FACEBOOK: THE CHINA CHALLENGE,”MEMEBURN.COM, JANUARY 18, 2011 19

COMPETITION 20

COMPETITION PROTECT OUR BRAND FROM COPYCATS Though China has long been known for counterfeiting Western branded consumer goods, China’s control over foreign internet sites has led to a new era of digital copycats. While the government continues to block Facebook, Youtube, Twitter, Skype, and other digital platforms, several home-grown versions - including 360buy.com, Baidu, TaoBao.com, QQ, RenRen, and youkou - have enjoyed enormous success. Partnering with local companies and creating barriers to imitation are important components of a China digital strategy. VS.“CHINA’S SOCIAL NETWORK - ZUCKERBERG AND SINA CHAT OVER THE GREAT FIREWALL,” FORBES.COM, FEBRUARY 16, 2011; “FACEBOOK: THE CHINA CHALLENGE,”MEMEBURN.COM, JANUARY 18, 2011 21

PRODUCT DEVELOPMENT & OPS 22

PRODUCT DEVELOPMENT & OPS DESIGN, MANAGE, AND TEST FOR PRODUCT QUALITY Producing to high-quality standards requires a culture of quality throughout the product development process, not just with a Chinese manufacturer. Products must be designed for high-quality manufacturing and developed against a disciplined schedule and process. Factory and partner selection and management and rigorous, systematic QA, testing, and validation are also critical. Embedding a culture of quality throughout design and development and the processes to track, measure, and improve quality should be part of a broader program management strategy.CONVERSATIONS WITH DIGITAL SPORT SUPPLY CHAIN DIRECTOR MIKE OVERSON 23

MANUFACTURING MANAGE AN EFFICIENT, AGILE, FLEXIBLE SUPPLY CHAIN Companies around the world have for decades relied on China’s low-cost labor. But recent wage hikes, quality issues, and operational challenges have led some firms to rethink their manufacturing strategies. Manufacturing wages in China doubled between 2002 and 2008, and overbooked factories often use subcontractors and lax quality control to meet demand. As Digital Sport transitions from a largely partner-managed manufacturing model to a Nike-managed model, balancing costs, flexibility, quality, and on-time delivery is crucial. Many small- to medium-sized tech companies are exploring new tactics - including US-based manufacturing and reengineering for automated manufacturing - to improve product quality, costs, flexibility, and speed to market.“MADE IN AMERICA: SMALL BUSINESS BUCK THE OFFSHORING TREND,” WIRED, FEBRUARY 28, 2011 24

MANUFACTURING ENABLE AN EQUITABLE, EMPOWERED, AND PROFITABLE SUPPLY CHAIN Several consumer electronics companies - most notably Apple - have beenscrutinized for alleged wage, hour, and other worker rights violations at theirChinese factories. The 17 worker suicides at Foxconn, China’s largest private employer responsible for 40% of the world’s consumer electronics, drew particular concern. While Nike has made enormous strides in improving worker conditions in the apparel and footwear supply chain, electronics factories pose different challenges that Nike has neither the experience nor buyer power to easily resolve. While Nike is proactively working on best-in- class practices with tier 2 and tier 3 electronics factories, overtime and labor compliance become challenging to monitor and manage at subcontractor facilities and upstream vendors in the electronics supply chain. Ensuring the factory partners are proﬁtable and sustainable is key to developing long-term relationships with factories that respect overtime and wage policies and partner with Nike on innovation and development. CONVERSATIONS WITH SUSTAINABLE BUSINESS & INNOVATION ISSUES DIRECTOR SONYA DURKIN-JONES AND DIGITAL SPORT SUPPLY CHAIN 25 DIRECTOR MIKE OVERSON

DISTRIBUTION 26

DISTRIBUTION SELL WHERE CONSUMERS WANT TO BUY Nike’s China business relies heavily on partners, with the top 7 partners accounting for over 70% of revenues is from seven retail partners, none of which have distinct positioning or category proﬁles. This channel strategy may pose a challenge as Chinese consumers are increasingly shopping at specialty stores and expect to ﬁnd pinnacle products at pinnacle doors, leading Chinese consumer electronics retailers, or local specialty outlets. In addition, unlike US consumers, Chinese consumers are used to in-store support by staff working on behalf of the manufacturer - not the retailer , and many opt to shop at small, local retailers. Best Buy’s closure of its 11 stores in China demonstrates the challenge that foreign retailers may face in China. Responding to the local market and consumer purchasing preferences with after-sales service, convenience, and competitive pricing are key success criteria for electronics retailers in China.“BETTER BUY,” CHINA ECONOMIC REVIEW, 2011; CONVERSATIONS WITH CORPORATE STRATEGY & DEVELOPMENT ANALYSTS SARAH WALTON AND SCOTT BRAMBLE 27

ORGANIZATION 28

ORGANIZATIONSTAFF TO SUPPORT AND GROW THE CHINA BUSINESS TO BE WRITTEN ITTEN WR TO BE 29

PROJECT PLAN 30

PROJECT PLAN SCHEDULEAPRIL-MAY JUNE JULY-AUG SEPT OCT-DEC JAN 2012+PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5 PHASE 6SCOPE VISION: RESEARCH RECOMMEND PLAN & EXECUTE WHAT DOES & ATION INTEGRATEPROJECT LEADS GOOD LOOK ANALYSIS CORE TEAM AND CORE TEAM CORE TEAM WITH KEY LIKE? SUB-TEAMS WORK STAKEHOLDERS SS CORE TEAM RE ON WORKSTREAMS IN PROG WO RK 31

PROJECT PLAN TEAM BRAND/ DIGITAL SPORT GEOGRAPHY DTC FUNCTIONS CATEGORIESEXECUTI TREVOR TOM CLARKE CRAIG JEANNE DAVID AYRE?VE EDWARDS CHEEK JACKSON ROLAND WOLFRAM?SPONSO DAVIDE GRASSO?RSMANAGEME JAYME DSLT OGRESSGEO GMS ??? ??NT MARTIN IN PR RK CRAIG WOSTAKEHOL ZANONDERSCORE TEAM CATEGORY PLATFORM GEO BRAND CHINA MAG MYERS? DIGITAL LEAD LEADS RETAIL LEADS PRODUCT GEO PLANNER? CATEGORY LEAD MERCHANTS BRAND EXPERIENCE DIRECTORS LEAD PROJECT LEADS: MEGHA DOSHI, DIGITAL SPORT; TBD, CSD 32

PROJECT PLAN WORKSTREAM OWNERSHIPGLOBAL BRAND & DIGITAL SPORT PRODUCT &CHINA GLOBAL OPSHOW TO DESIGN PRODUCTS, SERVICES, AND BRAND THAT WHAT IS OUR SUPPLY CHAIN / MANUFACTURING STRATEGY?ARE ‘OF CHINA’? WHAT PROCESSES ARE REQUIRED FOR FLAWLESS EXECUTION ANDWHAT’S OUR STRATEGY FOR LOW SPORT PARTICIPATION PRODUCT QUALITY?RATES OG RE SS PLATFORMCHINA MARKETINGIN K PR OR HOW DO WE MAKE SURE OUR SERVICES WORK IN CHINA? WHOW DO WE GROW, ENGAGE, AND SERVICE THE NIKE+COMMUNITY IN CHINA? DTC WHAT IS OUR DISTRIBUTION / CHANNEL STRATEGY?DIGITAL SPORTEXPERIENCE & DIGITAL SPORT PLANNINGCATEGORY DIGITAL & HRLEADS HOW SHOULD WE STAFF/ORG TO SUPPORT & GROW THE CHINA BUSINESS?HOW TO LOCALIZE THE RIGHT CONTENT AT THE RIGHTTIME IN THE RIGHT WAY? 33WHAT TYPES OF SMARTPHONES SHOULD WE DESIGN OUR

Digital sport china challenges 5.11

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Digital sport china challenges 5.11 — Presentation Transcript