AMAP (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

*                  Not for trading, but only in connection with the listing on the NASDAQ Global Select Market of American depositary shares (“ADSs”).  Currently, each ADS represents four ordinary shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 265,004,977 ordinary shares, par value $0.0001 per share, as of December 31, 2013.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes    o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17    o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

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INTRODUCTION

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:

·                   “ADSs” refers to our American depositary shares, each of which represents four ordinary shares;

·                   “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Taiwan, Hong Kong and Macau;

·                   “RMB” or “Renminbi” refers to the legal currency of China;

·                   “shares” or “ordinary shares” refers to our ordinary shares, par value $0.0001 per share;

·                   “$,” “dollars,” “US$” or “U.S. dollars” refers to the legal currency of the United States.

Unless the context indicates otherwise, “we,” “us,” “our company,” “our” and “AutoNavi” refer to AutoNavi Holdings Limited, a Cayman Islands company, its predecessor entities and its subsidiaries and consolidated variable interest entities.

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties.  All statements other than statements of historical facts are forward-looking statements.  These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions.  We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.  These forward-looking statements include:

·                   trends and competition in the navigation and location-based service industry.

You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual future results may be materially different from and worse than what we expect.  We qualify all of our forward-looking statements by these cautionary statements.  Other sections of this annual report include additional factors which could adversely impact our business and financial performance.  Moreover, we operate in an evolving environment.  New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events.  We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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(1)          Including share-based compensation expenses as follows:

(2)          In December 2009, we distributed the equity interests in Shanghai AutoNavi Software Co., Ltd., or AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software Co., Ltd., or AutoNavi Software, to all of our shareholders or their designated persons on a pro rata basis.  AutoNavi Shanghai had been engaged in the telematics business and the results of that business have been presented as discontinued operations for all periods presented in this annual report.

(3)          Each ADS represents four ordinary shares.

The following table presents a summary of our consolidated balance sheet data as of December 31, 2009, 2010, 2011, 2012 and 2013.

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Exchange Rate Information

Substantially all of our operations are conducted in China and substantially all of our revenues are denominated in RMB. This annual report contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader.  Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.0537 to $1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2013.  We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all.  The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.  On April 18, 2014, the noon buying rate was RMB6.2240 to $1.00.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.  These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.  For January 1, 2009 and all later dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.

Source: Federal Reserve Statistical Release

(1)          Annual averages are calculated from month-end rates.  Monthly averages are calculated using the average of the daily rates during the relevant period.

B.                                     Capitalization and Indebtedness

Not applicable.

C.                                     Reasons for the Offer and Use of Proceeds

Not applicable.

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D.                                     Risk Factors

Risks Related to Our Business and Industry

Our operations may suffer from the effects of business uncertainties resulting from announcement of the proposed merger with an affiliate of Alibaba Group, contractual restrictions on our activities during the period in which we are subject to the Merger Agreement, and costs associated with the proposed transaction.

On April 11, 2014, we entered into an agreement and plan of merger, or the Merger Agreement, pursuant to which we are to be acquired by Ali ET Investment Holding Limited, or Ali ET, an indirect wholly-owned subsidiary of Alibaba Group, and announced the transaction on the same date.  Uncertainty about the effect of the proposed merger on our employees, customers, and other parties may have an adverse effect on our business. Such uncertainty may impair our ability to attract, retain, and motivate key personnel, including our executive leadership, and could cause customers, suppliers, financial counterparties, and others to seek to change existing business relationships with us. The Merger Agreement restricts us, without the consent of the other merger parties, from, among other things, making certain acquisitions and investments, from accessing the debt and capital markets, and from taking other specified actions until the proposed merger occurs or the merger agreement terminates. The restrictions may prevent us from pursuing otherwise attractive business opportunities and taking other actions with respect to our business that we may consider advantageous. We have incurred, and will continue to incur, significant costs, expenses, and fees for professional services and other transaction costs in connection with the proposed merger, which may not be recoverable even if the merger is not completed.

The market price for our ADSs has been volatile due to our announcement of the proposed merger and may continue to be volatile as a result of further development of the proposed merger. If the proposed merger does not close or the merger agreement is terminated for some reason, the market price for our ADSs may drop.

Failure to adequately maintain and update our digital map database and minimize errors in our navigation and location-based solutions could harm our reputation and subject us to liability claims, which could result in loss of customers, decreased revenues and unexpected expenses.

Our digital map database requires constant maintenance and updating, which is a complex process and subject to error.  We also rely on third parties to provide certain data for our digital map database such as some of the point-of-interest data and real time traffic information.  There is no assurance that our controls and procedures for maintaining and updating our digital map database will be adequate to keep pace with the rapidly changing road systems in China.  We have in the past received feedback from customers and end-users identifying errors in our digital map data.  If there are errors in our solutions due to actual or perceived database deficiencies, our reputation could be harmed and our customers may cease to buy our solutions.

Moreover, we could be subject to liability claims and the associated adverse publicity.  Claims could be made by our customers if errors in our solutions result in the failure of their products or services, or by end-users of those products or services or others alleging loss or harm as a result of actual or perceived errors in our digital map data.  Some of our license agreements include disclaimers, limitations of liability and similar provisions, which, however, may not be effective barriers to potential claims.  Any associated adverse publicity may reduce our customers’ willingness to incorporate our map data and related applications into their products, which would adversely affect our revenues.

Liability claims present a risk of protracted litigation, substantial monetary damages, attorneys’ fees, costs and expenses, and diversion of management’s attention from the operation of our business.  In some circumstances, we are contractually obligated to indemnify our customers for liabilities, costs and expenses arising out of liability claims.  We may incur additional costs and expenses providing indemnification or contesting our customers’ indemnification claims.  In addition, we may also have to recall our digital map data or offer to provide replacement, either involuntarily by mandate of our customers or a regulatory agency, or voluntarily in order to preserve our reputation and maintain good customer relations.  Recalls or replacements can be costly and divert management’s attention from the operation of our business.

The markets for products and services of our customers incorporating our map data and solutions are evolving and their future growth is uncertain.  If these markets fail to grow or even decline, or if we fail to adapt to the rapid changes in these markets, our results of operations and prospects may be adversely affected.

The markets for products and services of our customers incorporating our digital map data and solutions are evolving and are characterized by continuing advances in technology, evolving industry standards, frequent new product and service introductions and changes in the marketing and delivery of digital-map dependent products and services.  Our success depends in part upon our customers’ abilities to successfully market and sell their products and services that incorporate our map data and solutions. If our customers cannot maintain market share for their existing products and services incorporating our map data and solutions or do not continue to successfully develop and market new products and services incorporating our map data and solutions, or if the products and services that our customers develop and market do not meet their consumers’ expectations or are not accepted by the market at all, our results of operations and growth prospects may be adversely affected because we may lose existing customers and have difficulty finding new customers, markets and applications for our map data and solutions.  Moreover, if we fail to identify new opportunities in the navigation and location-based services markets, introduce new map data and solution features in a timely manner, keep abreast of our customers’ innovations or adapt our solutions to changing industry standards or customer requirements, we could lose our existing customers and be unable to attract new businesses, which could have a material and adverse effect on our business, financial condition and results of operations.

We had a net loss in 2013 and may incur further losses in the future.

We had a net loss of $25.4 million attributable to our shareholders in 2013, compared to net incomes of $36.5 million and $36.5 million attributable to our shareholders in 2011 and 2012, respectively. As we offer our mobile navigation application to both smartphone and tablet computer manufacturers and users for free since August 2013 to increase our market share, and continue to incur significant cost of revenues and operating expenses to grow our business, we expect that we may incur further losses in the near future. In addition, our ability to achieve profitability is affected by various factors that are beyond our control. For example, as we introduce new navigation and location-based solutions or enter into new markets, we may face unfamiliar market and technological and operational risks and challenges. Therefore, we cannot assure you that we will not incur net losses in the future.

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We historically have derived a majority of our revenues from our automotive navigation business, which may be affected by fluctuations in the automotive market and the average selling prices of our solutions.

We derived 67.6%, 57.7% and 51.3% of our net revenues for the years ended December 31, 2011, 2012 and 2013, respectively, from licensing map data for use in in-dash navigation systems installed on automobiles and customized aftermarket navigation solutions.  Any significant downturn in the overall demand for automobiles could adversely affect the demand for both in-dash navigation systems and aftermarket navigation solutions, which in turn would materially decrease our revenues.  Although China’s automotive market has grown in recent years, it is uncertain whether the number of automobiles to be manufactured will grow at a similar rate in the future.  It is also uncertain that the percentage of new automobiles equipped with in-dash navigation systems or the demand for aftermarket navigation solutions will increase in the future.  In addition, the average selling prices for our solutions may decline for a variety of reasons, including competitive pricing pressures, discounts we offer, phase-out of supports from navigation system or device manufacturers, and introduction of new business models.  The average selling prices for our map data licensed for use in in-dash navigation systems and our customized aftermarket navigation solutions have in the past decreased, and may continue to decrease in the future.  Our financial results will suffer if we are unable to offset any future reductions in the average selling prices by increasing our sales volumes, reducing our per unit costs, or developing new or enhanced solutions on a timely basis with higher sales prices.  To the extent that our future revenues substantially depend on sales of in-dash navigation systems installed on automobiles and aftermarket navigation solutions, our business would be vulnerable to any downturns in China’s automotive market and the average selling prices of our solutions.

We have limited experience in the mobile and internet location-based services markets, and may not be able to successfully address the challenges we face in these markets.

We entered the mobile and internet location-based services markets in 2006.  For the years ended December 31, 2011, 2012 and 2013, revenues from our mobile and internet location-based solutions business accounted for 21.6%, 29.8% and 37.0%, respectively, of our total net revenues. As we devote more resources in growing our business in the mobile and internet location-based services markets, we face some new challenges that are different from the ones we face in the automotive navigation market, including: adopting alternative revenue models and pricing structures; serving a larger number of small customers; and interacting with end-users directly. We also face intense competition from large internet companies in providing mobile and internet location-based services, a number of which companies may have more experience and resources than us in this market.

If we are unable to effectively respond to these challenges and expand our business in the mobile and internet location-based services markets, our growth and prospects could be negatively affected.  We have made and will continue to make investments in developing new solutions for customers in the mobile and internet location-based services markets.  If we are unable to generate sufficient revenues in these markets to recoup our investments, our future results of operations and financial condition could be materially and adversely affected.  In addition, our limited experience in these markets may not provide a meaningful basis for you to evaluate our future prospects and results of operations.

If we fail to maintain our relationships with major mobile operators, our mobile location-based solutions business and growth prospects could be adversely affected.

Our cooperation arrangements with China Mobile and China Telecom are an important part of our mobile location-based solutions business.  Our contractual relationship with China Mobile is maintained through China Mobile Liaoning, the China Mobile subsidiary in charge of constructing and operating a location-based service platform for China Mobile’s nationwide network.  Since 2006, we have been providing a nationwide digital map database to support mobile location-based services throughout China Mobile’s nationwide network.  In November 2009, China Mobile engaged us to jointly develop and operate a new mobile navigation service, which was launched in 8 provinces and tier one cities in January 2011, and is currently available across mainland China.  We expect to continue relying on China Mobile for the growth of our mobile location-based solutions business in the near future. Our agreement with China Mobile Liaoning regarding the nationwide digital map database will expire at the end of 2014. Our agreement with China Mobile Liaoning regarding the mobile navigation service expired at the end of 2013. We are communicating with the China Mobile to renew this agreement, while we continue to provide data and services to China Mobile under it.

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We are also cooperating with China Telecom to provide end-users with a business platform software, which will integrate China Telecom’s map data with its point of interest data and ultimately support its location-based mobile navigation business platform, called “E Surfing,” across China Telecom’s nationwide network.  Our cooperation with China Telecom in relation to the “E Surfing” service is through Beijing PDAger Technology Development Co., Ltd., also known as Beijing Xiejin Technology Development Co., Ltd., or PDAger.  The cooperation agreement will expire in June 2014.

There is no guarantee that China Mobile or China Telecom will not decide to terminate the current cooperation relationship or insist on new agreements with substantially different commercial terms that are unfavorable to us.  Our negotiating leverage with China Mobile or China Telecom is limited given its dominant position in China’s mobile communications market.  If China Mobile or China Telecom for any reason decides to terminate the current co-operation relationship, or if it proposes new agreements with commercial terms materially different from the current ones, e.g., by changing the revenue sharing arrangement with us, our mobile location-based solutions business and growth prospects could be adversely affected.

Our ability to generate revenues from our mobile location-based solutions business could suffer if China Mobile or China Telecom’s location-based services do not generate sufficient revenues.

In providing a nationwide digital map database to support mobile location-based services throughout China Mobile’s nationwide network, we share a portion of the fees charged by China Mobile for certain aspects of the business, and receive from China Mobile fees based on the level of usage of our map data by China Mobile’s subscribers for other aspects of the business, subject to a monthly cap.  For the mobile navigation service jointly developed by China Mobile and us, we shared a portion of the fees charged by China Mobile before 2013, received payments in the form of a fixed fee in 2013 and we expect to continue to receive payments in the form of a fixed fee in 2014. For the mobile navigation service jointly developed by China Telecom and us, we share a portion of the fees charged by China Telecom.  Therefore, our ability to generate revenues from our mobile location-based solutions business is affected by the future success of the location-based services offered by China Mobile and China Telecom.  The future success of China Mobile or China Telecom’s location-based services will depend on, among other things, the quality of its mobile network, the resources it commits to promoting and operating its location-based services and its ability to effectively manage its subscribers’ expectations.  We, however, have no control over any of those factors.  If the formal launch of some location-based services by China Mobile or China Telecom is delayed, or China Mobile or China Telecom does not allocate sufficient resources to promoting and operating its location-based services, or if China Mobile or China Telecom’s location-based services are not well received by users, those services may not generate sufficient usage and revenues.  As a result, revenues from our mobile location-based solutions business may be adversely affected.

Our results of operations and cash flows may fluctuate due to the project-based nature of our public sector and enterprise applications business.

We generated 9.7%, 11.1% and 10.4% of our net revenues from our public sector and enterprise applications business for the years ended December 31, 2011, 2012 and 2013, respectively. Historically, revenues from our public sector and enterprise applications business have typically been generated on a project basis.  For instance, we provided aerial digital maps of two entire provinces and parts of three other provinces in connection with China’s second national land survey from 2007 to 2009, certain provinces in 2010, and other government related projects in 2011, as well as certain provinces and some government-related projects in 2012. In 2013, we also provided digital maps or location-based services for some government-related projects, such as the 3rdnational economic survey sponsored by State Statistics Agency. Revenues from this and other similar projects may fluctuate significantly from period to period, which makes it difficult for us to forecast revenues and cash flow and could adversely affect our working capital levels.  The resulting period-to-period fluctuation in our results of operations could also cause the price of our ADSs to fluctuate or decline.

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A significant portion of our revenues historically have been attributable to a limited number of automobile manufacturers, and if we are unable to maintain these key relationships or establish new relationships with additional automobile manufacturers, our revenues will be adversely affected.

In the in-dash navigation systems market, automobile manufacturers generally have the power to select map data suppliers, regardless of whether the selected map data supplier enters into contract directly with the automobile manufacturer or not.  In 2011, 2012 and 2013, revenues from our top five automobile manufacturer customers in each period accounted for approximately 63.3%, 54.1% and 48.7%, respectively, of our total revenues. We anticipate that a limited number of automobile manufacturers will continue to represent a significant percentage of our revenues for the foreseeable future.  However, there is no assurance that our relationships with our existing automobile manufacturer customers will continue in the future, and we are not guaranteed any minimum level of revenues from them.  We cannot assure you that revenues from our current customers will reach or exceed historical levels in any future period.  The loss of one or more of our key automobile manufacturer customers, whether due to a change of control or bankruptcy of a customer or other causes, a reduction in orders from them, difficulty or failure to collect payments from any key customer under financial distress, or our failure to attract additional key customers, would adversely affect our revenues.  In addition, our license agreements with automobile manufacturers typically cover specific car models for a defined period of time.  If our major automotive navigation customers do not renew their agreements with us for all or some of their new car models after the existing license agreements expire, revenues from our automotive navigation business may be adversely affected.

Our results of operations could suffer if we are not able to maintain the license fees we charge for the use of our map data and solutions in in-dash navigation systems and aftermarket navigation solutions.

We historically derived a substantial portion of our revenues from license fees we charge for the use of our map data in in-dash navigation systems and aftermarket navigation solutions including dealer option navigation systems and portable navigation devices.  The license fees we charge our customers are affected by a number of factors, including the competitive landscape, pricing of vehicles and hardware that use our map data and price sensitivity of end-users of navigation products and services.  Any one or a combination of these factors could require us to reduce our license fees and this could adversely affect our revenues and profitability.  We have in the past lowered, and may in the future need to lower, our license fees in order to preserve customer relationships or to expand the use of our map data and solutions to a broader range of products.  To the extent we lower our license fees in the future, we cannot assure you that we will be able to achieve related increases in the use of our map data and solutions or other benefits to fully offset the effects of these reductions.  If we are unable to achieve related increases in the use of our map data and solutions to fully offset the effects of reductions in per-unit license fees, our revenues could suffer.

Digital map data piracy exists in China, and our inability to adequately protect against the illegal copying and selling of our digital map data could adversely affect our revenues.

Like many other software products, digital map data is vulnerable to piracy.  While China has made progress to address the problem of piracy of intellectual property, the current legal system for intellectual property protection is still not well developed.  Piracy of digital map data exists in China and is widespread in the portable navigation device market, where the map data formats used by different portable navigation device manufacturers are similar, making it easier to use pirated digital map data.  Although we have taken a number of security measures to prevent piracy, and each copy of digital map data sold by us has been encrypted in accordance with the applicable government regulations, our digital map data has been illegally copied and sold through various channels because those security measures are not always effective against unlawful copying.  We have not taken any legal actions against those who have pirated our map data.  Preventing piracy is difficult, time-consuming and expensive, and may divert significant management and staff resources from our business operations.  Continued unauthorized copying and piracy of our map data not only could adversely affect our revenues, but may also harm our reputation if the unauthorized copy is incomplete, out of date, or of substandard quality.  In addition, large scale piracy of our digital map data could significantly impede our ability to recoup the substantial investments we have made in building and maintaining our digital map database.

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If we are unable to achieve and maintain certain required quality assurance standards, our key customers may not do business with us.

Many of our customers, particularly those in the automotive industry, require their suppliers to maintain certain quality assurance standards and certifications, including those pursuant to the ISO series of international standards.  We have obtained some of these certifications.  For instance, we were granted the ISO 9001:2008 certificate for our quality management system for design, production and service of navigation map and relevant support systems in July 2009, which was renewed in July 2012 and is valid until June 2015.  We were granted the ISO/TS 16949:2009 certificate for our automotive navigation map design and production operations in July 2009, which was renewed in June 2012 and is valid until June 2015. The ISO/TS 16949 standard applies to the design/development, production and, when relevant, installation and servicing of automotive-related products and is an important independent indicator of quality process management.  In addition, we have the ISO14001:2004 certificate for our design, production service and sale of navigation map and relevant support systems, which is valid between March 2013 and March 2016.  We were rated as the Automotive SPICE (Automotive Software Process Improvement and Capability Determination) Capability Level 3 in October 2012, and the CMMI (Capability Maturity Model Integration) Level 3 in December 2007. We cannot assure you that we will be able to continue to meet these standards on an on-going basis in the future.  Our customers may later require us to obtain and maintain certifications under different or more stringent standards, which we may or may not be able to accomplish.  If we are unable to obtain and maintain such certifications, those customers may refuse to do business with us, which could materially reduce our revenues and adversely affect our reputation.

A substantial portion of our cost of revenues is not directly linked to the level of our revenues.  As a result, any shortfall in revenues could adversely affect our gross profit.

The majority of our cost of revenues is related to data collection and processing, which serve as the foundation for all aspects of our business.  As a result, our cost of revenues is not directly linked to the level of our revenues.  In addition, as we pursue the expansion of our business in the mobile and internet location-based solutions segment, our cost levels are based, in part, on our expectation of future revenues from that market segment.  However, we may not be able to achieve the growth of revenues as we anticipated.  Any shortfall in revenues relative to our expectations in any given period would not necessarily result in a proportionate reduction in our costs, and could therefore have a material and adverse effect on our results of operations.

Our growth will depend in part on adding new solutions to our portfolio or adapting our business models in response to rapid changes in our industry, which can require significant expenditures in advance of revenues.

We face constant pressure to provide our customers and end-users with new solutions that incorporate the latest technology.  We must make significant expenditures to research and develop new navigation and location-based solutions before we can generate any revenues from those new solutions.  We may also be required to make unanticipated expenditures, for instance, to acquire key technologies to support or expand our solutions and replace outdated or failing equipment.  In addition, we may need to change our business models from time to time in response to the rapid changes in China’s navigation and location-based services industry.  The new business models may require substantial upfront capital expenditures.  If our new solutions are not received favorably by our customers or the end-users, or the new business models adopted by us do not work as well as we had expected, we may not be able to generate sufficient revenues to recoup the significant upfront expenditures, and our results of operations and financial position would be adversely affected.

User growth and activity on mobile devices depend upon effective use of mobile operating systems, networks and standards that we do not control.

Accessing digital map content and navigation and location-based solutions on mobile devices by users generally, and by our users specifically, has increased significantly, and we expect this trend to continue. To optimize mobile user experience, we are somewhat dependent on our user downloading our specific mobile applications for their particular device as opposed to accessing our sites from an internet browser on their mobile device. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices and platforms, and we may need to devote significant resources to the development, support and maintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties in the future in integrating our mobile applications into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, if our applications receive unfavorable treatment compared to competing applications on the download stores, or if we face increased costs to distribute or have users use our mobile applications. We are further dependent on the interoperability of our applications with popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our applications or give preferential treatment to competitive products could adversely affect the usage of our applications on mobile devices. In the event that it is more difficult for our users to access and use our applications on their mobile devices, or if our users choose not to access or to use our applications on their mobile devices or to use mobile products that do not offer access to our applications, our user growth could be harmed and our business, financial condition and operating results may be adversely affected.

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The surveying and mapping business is highly regulated in China.  If we fail to comply with applicable laws, rules and regulations, our surveying and mapping qualification certificates could be suspended or revoked, which would materially impede our business.

Due to national security concerns, the surveying and mapping business is highly regulated in China and is subject to a complex set of laws, rules and regulations administered primarily by the National Administration of Surveying, Mapping and Geoinformation (formerly known as the State Bureau of Surveying and Mapping), or the NASMG.  Only entities that have been granted a surveying and mapping qualification certificate for digital navigation map production by the NASMG are permitted to engage in data collection, editing, processing, formatting, geographic information integration and other digital map production activities.  In addition, the servers on which the map data are stored must be kept inside China with public internet protocol addresses provided.  AutoNavi Software, our variable interest entity in China, holds a Class A surveying and mapping qualification certificate for digital navigation map production and related activities and internet map service, valid until December 31, 2014.  Beijing MapABC Technology Co., Ltd., or MapABC Technology, and PDAger have obtained a Class A surveying qualification certificate for internet map service, valid until December 31, 2014.  Beijing Xingtiandi Information Technology Co., Ltd., or Xingtiandi Technology, a subsidiary of AutoNavi Software, holds a Class A surveying and mapping qualification certificate for aerial photogrammetry and a Class B surveying and mapping qualification for photogrammetry and remote sensing and related activities, valid until December 31, 2014. We cannot assure you that AutoNavi Software, MapABC Technology, Xingtiandi Technology and PDAger will always be in compliance with the various laws, rules and regulations governing the surveying and mapping business.  If any of them is found to be in violation of any of these laws, rules and regulations, we could face severe penalties, including postponement or denial of annual registration, downgrading of professional qualification, and suspension or even revocation of the surveying and mapping qualification certificates.  Any of these penalties could materially impede our ability to create, improve, license or distribute solutions incorporating digital map data, which could materially and adversely affect our financial condition and results of operations.

We rely on a third-party holder of a publishing license for electronic publication of our digital map data.  If we are unable to continue the use of this license, our business could be adversely affected.

Under the relevant PRC laws and regulations, our digital map data are deemed electronic publications, which can only be published by a publishing entity with a publishing license for electronic publications granted by the General Administration of Press and Publications, which was merged with the State Administration of Radio Film and Television and renamed as the General Administration of Press and Publication, Radio, Film and Television, or the GAPPRFT, in March 2013. Since we do not have such a license, we have entered into an agreement with SinoMaps Press, a publishing entity that holds a publishing license for electronic publications.  Under the agreement, SinoMaps Press is responsible for reviewing, seeking approval for and publishing the digital maps we produce and deliver to them.  For each electronic publication and its updated version, SinoMaps Press must submit the sample map and other required information to the NASMG and the GAPPRFT for approval.  Our agreement with SinoMaps Press is effective until November 2014.  We cannot assure you that SinoMaps Press will agree to renew this agreement upon the expiration of the current term.  If we fail to renew the agreement with SinoMaps Press or enter into a replacement contract with another holder of a publishing license for electronic publications, our business could be adversely affected.

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We depend on in-dash navigation system manufacturers to distribute our digital map data to automobile manufacturers, and any delays or errors in the distribution of our map data to automobile manufacturers could adversely affect our business.

In the in-dash navigation systems market, it is critical that we maintain a good reputation among automobile manufacturers, whether we have entered into contracts with them directly or through in-dash navigation system manufacturers.  We usually convert our digital map data into different proprietary formats of the in-dash navigation system manufacturers and send DVD copies or hard disk drives of the converted map data to these companies.  These companies then distribute the DVDs or hard disk drives along with their own products to the automobile manufacturers.  To the extent we continue to rely on in-dash navigation system manufacturers to distribute our map data, their failure to distribute our map data in a timely manner or meet the requirements of automobile manufacturers may harm our reputation and relationships with our automobile manufacturer customers.

If our customers do not accurately report the amount of fees owed to us under our agreements with them, we will not receive all of the revenues to which we are entitled.

For a portion of our sales to the mobile and internet location-based solutions business, we rely on our customers to accurately report the amount of fees owed to us under our agreements with them.  We could audit our customers’ records to verify this information.  However, these audits can be expensive, time-consuming and possibly harmful to our ongoing business relationships with our customers.  We have relied primarily on the data in our customers’ reports which we may challenge if we have doubt on them. However, we have not audited any customer to date.  To the extent those reports are inaccurate, the revenues we collect from our customers could be materially less than the amount we would be entitled to from them.  In addition, even if we conduct audits, there can be no assurance that any additional fees determined to be payable to us in such audits would be recoverable or that, if recoverable, such additional fees would be sufficient to cover our audit expenses.

We may not be able to effectively identify or pursue targets for acquisitions or investments, and even if we complete such transactions, we may be unable to successfully integrate them into, or realize anticipated benefits to, our business, which may adversely affect our growth and results of operations.

Historically, we have acquired new capabilities and additional customers through selected acquisitions.  For example, we gained internet-based map application capabilities in 2006 by acquiring control of MapABC Technology, one of our variable interest entities in China, a leading online map application solution provider in China.  In 2006, we added aerial photogrammetry to our portfolio of solutions by acquiring Xingtiandi Technology, which holds a Class A surveying and mapping qualification certificate for aerial photogrammetry issued by the NASMG.  In March 2011, we acquired all the equity interests in Shanghai eTag Information Technologies Limited, or eTag, in Shanghai and certain technologies and intellectual properties of eTag Information Services Co., Ltd., a software developer specializing in mobile location-based application software utilized in personal navigation systems; in the same month, we acquired the remaining 80% equity interest in PDAger, a mobile location-based service provider in China and major partner in China Telecom’s mobile navigation business, which had been 20% owned by us.  In January 2012, we acquired 20% equity interests in Ariadne’s Thread Co., Ltd., a company engaged in e-commerce of movie tickets through its proprietary mobile applications. In December 2013, we acquired all the equity interests in Alohar Mobile Inc., a company headquartered in California focusing on mobile location-based technologies. We expect to continue to selectively acquire or invest in businesses that complement our existing business.  We may not, however, be able to identify suitable candidates for acquisitions or investments in the future.  Even if we are able to identify suitable candidates, we may be unable to complete a transaction on terms commercially acceptable to us.  If we fail to identify appropriate candidates or complete the desired transactions, our growth may be impeded.

Even if we complete the desired acquisitions or investments, such acquisitions and investments may expose us to new operational, regulatory, market and geographic risks and challenges, including:

·                   diversion of our management’s attention and other resources from our existing business;

·                   our inability to maintain the key business relationships and the reputations of the businesses we acquire or invest in;

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·                   our inability to retain key personnel of the acquired or invested company;

·                   uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;

·                   failure to comply with laws and regulations as well as industry or technical standards of the markets into which we expand;

·                   our dependence on unfamiliar affiliates and partners of the companies we acquire or invest in;

·                   unsatisfactory performance of the businesses we acquire or invest in;

·                   our responsibility for the liabilities associated with the businesses we acquire, including those which we may not anticipate; and

·                   our inability to maintain internal standards, controls, procedures and policies.

Any of these events could disrupt our ability to manage our business.  These risks could also result in our failure to derive the intended benefits of the acquisitions or investments, and we may be unable to recover our investment in such initiatives or may have to recognize impairment charges as a result.

We face significant competition in the navigation and location-based services industry, and if we are unable to compete effectively with our existing and potential competitors, we could lose market share and our results of operations and financial condition may be materially and adversely affected.

The markets for navigation and location-based solutions in China are highly competitive.  We compete for customers and business with other solution providers on the basis of, among other things, the coverage and accuracy of map data, the amount and accuracy of point of interest information, the frequency of database update, variety of presentation features, the ability to provide customized solutions to meet customers’ specific needs, price and variety and quality of solutions offered.  We face competition in each line of navigation and location-based solutions that we offer.

·                   In the in-dash navigation systems market, our primary competitor is NavInfo Co., Ltd.  NavInfo has formed a joint venture with NAVTEQ Corporation, a subsidiary of Nokia Corporation and one of the two major international digital map providers.  The global reach of NAVTEQ Corporation, its pre-existing relationships with some of our key customers, its greater financial resources and its affiliation with large navigation hardware manufacturers may help our competitor expand its businesses. The portable navigation devices market for digital map solutions is highly competitive with multiple map data providers and, as a result, price competition is intense in that market.

·                   In mobile and internet location-based service platform, we do not have any single competitor that competes with us in all areas.  Rather, we compete with different competitors in different areas.  In pre-installed and downloadable navigation solutions for mobile devices, we face competition primarily from companies that offer similar solutions.  The competition is primarily based on product design, marketing and promotions.  In mobile and internet-based map application solutions, we compete primarily with some big internet companies.  The competition is primarily based on access to quality map data, richness of the content, ease of use, stability of solutions and technical support, targeted and useful location-based information, and marketing and promotions.

·                   Competition in public sector and enterprise applications is primarily based on technology capability, service capacity, customer relations, price and ability to provide integrated solutions consisting of both map data and software applications.

In addition, as technology and the regulatory environment in China evolve, new entrants may enter the business of developing digital maps.  If China’s regulatory regime for digital map production changes in the future to allow foreign companies to develop digital maps on their own, demand for our map data and solutions could be adversely affected.  Increased competition from our current competitors or new market entrants may result in price reductions, reduced profit margins and/or loss of market share by us.

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We may not be able to sustain or improve the strength of our brand, and we may consequently experience difficulties in improving market acceptance.

We intend to maintain a clear and consistent brand across all of our solutions and in all of our markets.  Maintaining and strengthening our brand will depend on our success in providing high-quality solutions that are favorably received by our customers and end-users.  The strength of our brand also depends in part on our being a technology leader in providing navigation and location-based solutions, and it is uncertain that our research and development efforts will continue to succeed in this regard.  In addition, the strength of our brand depends in part on the products and services of third parties whose products incorporate our map data and over which we have little or no control.  Defects, errors or failures in third-party products and services could damage our reputation or our brand.  Any negative publicity of our map database or solutions, or otherwise about our company, may have a negative impact on our reputation or brand.  If we fail to increase awareness of our brand and strengthen our reputation for providing high-quality solutions, or if any other factor negatively affects our reputation or our brand image, our business, results of operations or financial condition could be materially and adversely affected.

We may not be able to prevent unauthorized use of our intellectual property, which could reduce demand for our solutions, adversely affect our revenues and harm our competitive position.

We rely primarily on a combination of patent, copyright, software registration, trade secret, trademark and unfair competition laws and contractual rights to establish and protect our intellectual property rights for our database, software and related technologies.  We cannot assure you that the steps we have taken or will take in the future to protect our intellectual property from infringement, misappropriation or piracy will prove to be sufficient.  Implementation of intellectual property-related laws in China has historically been lacking, primarily due to ambiguity in the PRC laws and difficulties in enforcement.  Accordingly, intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other developed countries.  Current or potential competitors may use our intellectual property without our authorization in the development of databases, software or technologies that are substantially equivalent or superior to ours, which could reduce demand for our solutions, adversely affect our revenues and harm our competitive position.  Even if we were to discover evidence of infringement or misappropriation, our recourse against such competitors may be limited or could require us to pursue litigation, which could involve substantial costs and diversion of management’s attention from the operation of our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.

We require our employees, consultants, advisors and collaborators to enter into confidentiality agreements in order to protect our trade secrets and other proprietary information.  These agreements might not effectively prevent disclosure of our trade secrets, know-how or other proprietary information and might not provide an adequate remedy in the event of unauthorized disclosure of such confidential information.  In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties.  Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may face intellectual property infringement claims that could be time-consuming and costly to defend and may result in the loss of significant rights by us.

The validity, enforceability and scope of protection of intellectual property rights in digital map-related industries in China are evolving and uncertain.  Many industry participants actively seek protection for digital map-related technologies, including through copyright or patent registration and litigation.  Copyrights or patents issued or pending that are held by others may cover significant aspects of our technologies, solutions or business methods.  In addition, our database includes content from third parties such as certain point-of-interest and real time traffic information provided by our business partners and we also use certain third-party software.  We have procedures designed to reduce the likelihood that such content or third-party software might be used without proper licenses or third-party consents.  However, these procedures may not be effective in preventing the unauthorized posting of copyrighted content or other IP infringement.  Although we have not been subject to any material litigation, pending or threatened, alleging infringement of third parties’ intellectual property rights, we cannot assure you that such infringement claims will not be asserted against us in the future.

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Intellectual property litigation is expensive and time-consuming and could divert resources and management attention from the operation of our business.  If there is a successful claim of infringement, we may be required to alter our technologies, cease certain activities, pay substantial royalties and damages to, and obtain one or more licenses from, third parties.  We may not be able to obtain those licenses on commercially acceptable terms, or at all.  Any of those consequences could cause us to lose revenues, impair our customer relationships and harm our reputation.

Our future success depends on the continuing efforts to retain our existing management team and other key employees as well as to attract, integrate and retain highly skilled and qualified personnel, and our business may be adversely affected if we lose their services or if their outside business interests create conflicts or give rise to negative publicity.

Our future success depends heavily on the continued services of our current executive officers, particularly Congwu Cheng, our chief executive officer.  We also rely on the skills, experience and efforts of other employees, including management, sales, support, research and development, technical and services personnel.  Qualified employees are in high demand throughout technology-based industries in China, and our future success depends on our ability to attract, train, motivate and retain highly skilled employees and the ability of our executive officers and other members of senior management to work effectively as a team.

If one or more of our executive officers or other key employees is unable or unwilling to continue in their present positions, we may not be able to find suitable replacements easily or at all, which may disrupt our business operations.  We do not have key person insurance in place.  If any of our executive officers or other key employees joins a competitor or forms a competing company, we may lose customers, know-how, key professionals and staff members.  Each of our executive officers has entered into an employment agreement with us, which contains confidentiality and non-competition provisions.  However, if any dispute arises between our executive officers and us, we cannot assure you of the extent to which any of these agreements could be enforced in China, where these executive officers reside, because of the uncertainties of China’s legal system.  See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

In addition, some of our executive officers may have other business dealings or activities outside their employment with us that are relating to digital map information, navigation and location-based solutions and similar businesses, as well as businesses outside of our industry.  Conflicts of interest may arise between their outside business interests and our company.  We do not believe any of our executive officers currently has a conflict of interest with us.  In the event that a conflict of interest occurs in the future, we expect our executive officers to abide by our code of business conduct and ethics and their obligations under their respective employment agreements.  If any of them does not abide by the above, we intend to resort to appropriate remedies to address the situation.  However, we cannot assure you that conflicts of interests, if any, will always be resolved in our favor.  In addition, if any of the business associates or entities in which our executive officers are involved makes any claims or initiates litigation against them or against us, we may also be subject to costly legal proceedings and claims.  Our directors and senior management could also be subject to scrutiny by the media and the public, which may result in press coverage of unverified, inaccurate or misleading information about them.  Negative publicity about our directors or senior management, even if untrue or inaccurate, may have an adverse impact on our reputation and the trading price of our ADSs.

Security breaches, computer viruses, “denial of service” and computer hacking attacks could harm our business and results of operations.

As we further tap into the mobile and internet location-based services markets and move from a pure B2B business model to a combined B2B and B2C business model, we are subject to an increasing risk of security breaches, computer viruses, interruptions of access through the use of “denial of service” attacks, computer hacking or similar attacks.  Although we have not experienced security breach in the past, such attacks may occur to our map database and cloud service platform in the future.  Any security breach caused by hacking or other attacks, which involve efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions, loss, corruption or unavailability of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business and results of operations.  Because of our prominence in the navigation and location-based services industry, we may become an attractive target for such attacks.  Any loss or tampering of our map data or any failure to maintain availability, performance, reliability and security of our network infrastructure or navigation and location-based services to the satisfaction of our customers may harm our reputation and our ability to retain existing customers and attract new ones.

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Our operations rely on our technology, telecommunications and other infrastructure systems, which can suffer business interruptions and system failure and incompatibility that could increase our operating costs, cause delays in our operations and limit the growth of our business.

Our systems and operations are vulnerable to damage or interruption from fire, earthquake, flood, power loss, computer hardware and software failure, telecommunications failure, computer hacking and similar events.  Our disaster recovery plans and redundant systems may not be sufficient to cure such system failures in a timely manner.  We keep our production facility and the servers that store our digital map database and run our technology platforms at our offices in the Changping Hi-tech Park, Beijing. The occurrence of a natural disaster or unanticipated problems with our technology, telecommunications and other infrastructure systems could cause interruptions or delays in the ongoing development and enhancement of our digital map database and related software, and inhibit our ability to timely deliver our solutions to our customers, which in turn could cause us to lose customers or revenues.  Similarly, system failures and operational interruptions of our customers could also adversely affect our own revenues.  Our technology, telecommunications and other infrastructure systems may also be subject to capacity constraints which would cause increased operating costs in order to overcome these constraints.  In addition, our mobile and internet location-based service platform may not be compatible with the information technology systems of our business partners, enterprise customers or third-party application developers, which would limit the growth of our business.

We have limited insurance coverage.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies do.  We have purchased automobile insurance on certain vehicles, property and casualty insurance on some of our assets and group accident insurance for our field survey employees.  We have also purchased third-party liability insurance to cover product liability, product-completed operations liability and premises liability.  In addition, we have purchased medical insurance for our foreign employees.  Other than these, we do not have commercial insurance coverage on our digital map database, other assets and personnel, nor do we have insurance to cover our business or interruptions of our business.  We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance.  Any uninsured occurrence of loss or damage to property, litigation or business disruption may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

If we are not able to effectively manage risks associated with our potential expansion into international markets, out results of operations or profitability could be adversely affected.

We may expand our business into international markets in the future.  In our international expansion, we may face economic, regulatory, legal and political risks inherent in having relationships, operations and sales in other jurisdictions, including challenges caused by distance and linguistic and cultural differences, the potential for longer collection periods and for difficulty in collecting accounts receivable and enforcing contractual obligations, fluctuations in currency exchange rates, unanticipated changes in laws or regulatory requirements, including tariffs or other barriers to trade, and the potential for political, legal and economic instability.  Any of these or other factors could have an adverse effect on our sales or costs, on the market acceptance of our solutions or on our ability to compete in one or more jurisdictions, which could have a material and adverse effect on our business, results of operations or financial condition.

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Expansion into international markets may place significant additional burdens on our senior management and our sales and marketing teams.  We also may not be able to process and make available to our customers navigation and location-based solutions for a new geographic market in a timely or commercially favorable manner, in the native language or without substantial errors.  Moreover, our ability to expand successfully depends in part on our establishing sufficient operational resources and infrastructure.  Our sales and marketing efforts in a new geographic market may fail to establish a viable distribution network or our solutions may not gain market acceptance or brand recognition sufficient to offset the costs of geographic expansion.  If we fail to properly manage these risks, we may incur higher expenses and lower revenues, and any geographic expansion we undertake could have a material and adverse effect on our business, results of operations or financial condition.

End-user privacy concerns may limit the growth of our solutions.

Concerns have been raised with respect to the possibility that GPS-based navigation products could be used to violate personal privacy by making available a record of a person’s geographical location to others. While we pay high attention to user privacy control, the technological potential of our current or future solutions and applications may create privacy concerns in the general public.  If these or other problems with public opinion arise in connection with our solutions and applications or the navigation and located-based services industry in general, our reputation, results of operations or financial condition could be materially and adversely affected.

In addition, if new laws or regulations are passed relating to privacy concerns, our business operations may be adversely affected. In December 2012, the Standing Committee of the National People’s Congress of the PRC issued the Decision on Strengthening the Protection of Online Information. Subsequently, on July 16, 2013,  Ministry of Industry and Information Technology released Provisions on Protecting the Personal Information of the Telecommunications and Internet Users to stipulate detailed rules to implement the Decision on Strengthening the Protection of Online Information. Pursuant to the above rules, if an ICP operator wishes to collect or use personal electronic information, it must do so in a lawful and appropriate manner, and may do so only if it is necessary for the services it provides. It must disclose the purpose, method and scope of any such collection or use, and must seek consent from the relevant individuals. ICP operators are also required to publish their policies relating to information collection and use, must keep such information strictly confidential, and must take technological and other measures to ensure the safety of such information. ICP operators are further prohibited from disclosing, distorting or destroying any such personal electronic information, or selling or proving such information to other parties and are required to report to the administration authority immediately if users’ information is divulged, destructed or lost and serious consequence may be caused. We are an ICP operator due to our operation of several websites and therefore be subject to the decision.  Moreover, the Ministry of Industry and Information Technology released a notice to strengthen the administration on mobile applications in April 2013, which, among others, prohibits pre-installation on smartphones mobile applications that collect or alter users’ personal information without user consent or those facilitate others in violating users’ privacy, network and communication rights and safety. This notice has been implemented since November 1, 2013. We provide pre-installed and downloadable navigation solutions for mobile devices and therefore are subject to the notice.  However, the effect of these new laws and regulations still remain to be seen.

We depend on our dedicated and capable employees, and if we are not able to continue to hire, train and retain qualified employees or if labor costs increase, our business and results of operations could be materially and adversely affected.

Our continued success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees for our business operations, including data collection and procession and research and development employees.  We cannot assure you that we would be able to recruit or retain a sufficient number of qualified employees for our business.  Any material increase in employee turnover rates and any failure to recruit skilled personnel and to retain key staff due to factors such as failure to keep up with market average employee salary levels may make our growth strategy difficult to implement.  Any increased labor costs due to factors like competition, increased wage requirements and employee benefits would adversely impact our operating costs.  Any of the above would materially and adversely affect our business and results of operations.

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Our business and results of operations may be adversely affected by any global or Chinese economic downturn.

The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession.  The recovery from the lows of 2008 and 2009 was uneven and is facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy in 2012.  It is unclear whether the European sovereign debt crisis will be contained and whether the Chinese economy will resume its high growth rate.  There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China.  There have also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets, and over the possibility of a war involving Iran.  There have also been concerns about the territorial disputes involving China in Asia and the economic effects. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China.  Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

Since we derive substantially all of our revenues from our navigation and location-based solutions in China, any prolonged slowdown in the Chinese economy may have a negative impact on our business and results of operations.  Our revenues in the automotive navigation and mobile and internet location-based service platform segments ultimately depend on end-user spending, which in turn depend on the end-users’ level of disposable income, perceived future earnings and willingness to spend.  As there are still substantial uncertainties in the current and future conditions in the global and Chinese economies, consumers may avoid purchasing new automobiles and reduce their spending on discretionary items, such as portable navigation devices and mobile location-based services.  Moreover, to the extent we offer credit to any customer and such customer experiences financial difficulties due to the economic slowdown, we could have difficulty collecting payments from such customers.  Further disruptions of the financial markets could also significantly restrict our ability to obtain financing in the capital markets or from financial institutions.

Failure to renew our current leases or locate desirable alternatives for our facilities could materially and adversely affect our business.

We maintain a production facility in the Changping Hi-tech Park in Beijing, China, where we lease approximately 8,437 square meters of office space.  The lease for our production facility in the Changping Hi-tech Park will expire at the end of March 2015. In addition to such production facility, we also lease an aggregate of approximately 11,700 square meters of office space throughout China. If we are not be able to successfully extend or renew such leases upon expiration of the current term on commercially reasonable terms or at all, and may therefore be forced to relocate our affected operations. This could disrupt our operations and result in significant relocation expenses, which could adversely affect our business, financial condition and results of operations. In addition, we may not be able to locate desirable alternative sites for our facilities as our business continues to grow and such failure in relocating our affected operations could affect our business and operations.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

Our operations are vulnerable to interruption and damage from natural and other types of disasters, including earthquakes, fire, floods, environmental accidents, power loss, communication failures and similar events. If any natural disaster or other extraordinary events were to occur in the area where we operate, our ability to operate our business could be seriously impaired due to loss of personnel and damages to property, including our raw data, digital map database and technology systems. A disaster affecting a larger, more developed area could also cause an increase in our costs resulting from the efforts to resurvey the affected area. Moreover, our business could be materially and adversely affected by the outbreak of avian influenza, severe acute respiratory syndrome (SARS), the influenza A (H1N1, H7N9, etc.) or another epidemic. Such occurrences could cause severe disruption to our daily operations, including our field survey, data production and sales and marketing activities, and may even require a temporary closure of our data production facilities.  Our operation could also be severely disrupted if our suppliers, customers or business partners were affected by such natural disasters or health epidemics.

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Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in surveying and mapping, digital navigation map production, aerial photogrammetry and value-added telecommunication services, including but not limited to internet content services, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in surveying and mapping, the production of digital navigation maps, aerial photogrammetry and value-added telecommunication services, including but not limited to internet content services.  Specifically, a foreign investor may only hold a minority interest in a Chinese entity that engages in surveying and mapping, and foreign-invested companies are prohibited from engaging in the production of digital navigation maps and aerial photogrammetry.  In addition, foreign ownership in an internet content provider or other value-added telecommunication service providers may not exceed 50%.  We conduct our operations in China principally through contractual arrangements among our PRC subsidiary, AutoNavi Information Technology Co., Ltd., or AutoNavi Technology, two affiliated companies in the PRC, AutoNavi Software and MapABC Technology, and their respective shareholders.  AutoNavi Software and MapABC Technology and their subsidiaries hold the licenses and permits necessary to conduct our surveying and mapping business, value-added telecommunication services and related businesses in China.

Our contractual arrangements with AutoNavi Software and MapABC Technology and their respective shareholders enable us to:

·                   exercise effective control over AutoNavi Software and MapABC Technology;

·                   receive substantially all of the economic benefits of AutoNavi Software and MapABC Technology; and

·                   have an exclusive option to purchase all or part of the equity interests in each of AutoNavi Software and MapABC Technology when and to the extent permitted by PRC law.

Because of these contractual arrangements, we become the primary beneficiary of AutoNavi Software and MapABC Technology and hence treat them as our variable interest entities and consolidate their results.

If we, AutoNavi Technology or either of our variable interest entities is found to be in violation of any existing or future PRC laws or regulations, including the restrictions on foreign ownership of companies that engage in surveying and mapping, the production of digital navigation maps, aerial photogrammetry and value-added telecommunication services, including but not limited to internet content services, or fails to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the NASMG, which regulates digital navigation map production and aerial photogrammetry, the Ministry of Industry and Information Technology, which regulates value-added telecommunication services, and General Administration of Press and Publication, which regulates electronic and internet publication, as well as the Ministry of Commerce, which is the primary regulator of foreign investment in China, and the National Development and Reform Commission, would have broad discretion in dealing with such violations or failures, including:

·                   revoking the business and operating licenses and surveying and mapping qualification certificates of AutoNavi Technology and our variable interest entities;

·                   discontinuing or restricting AutoNavi Technology’s and variable interest entities’ operations;

·                   imposing fines, confiscating the income from AutoNavi Technology and variable interest entities’ operations, or imposing conditions or other requirements with which we or AutoNavi Technology or our variable interest entities may not be able to comply; and

·                   requiring us or AutoNavi Technology and our variable interest entities to restructure the relevant ownership structure or operations.

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The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. If any of these penalties results in our inability to direct the activities of any of our variable interest entities that most significantly impact their economic performance, and/or our failure to receive the economic benefits from any of our variable interest entities, we may not be able to consolidate the variable interest entity in our consolidated financial statements in accordance with U.S. GAAP.

In many cases, existing regulations with regard to foreign investors investing in companies that engage in surveying and mapping, producing digital navigation maps, aerial photogrammetry, and value-added telecommunication services, including but not limited to, internet content services, lack detailed explanations and operational procedures and are subject to interpretation, which may change over time.  Most of these regulations have not been interpreted by the relevant authorities in circumstances similar to our corporate structure.  Accordingly, we cannot be certain how the regulations will be applied to our business, either currently or in the future.  Moreover, new regulations may be adopted and the interpretation of existing regulations may change, any of which could result in a material and adverse effect on our ability to conduct our business.

We rely on contractual arrangements with AutoNavi Software and MapABC Technology and their shareholders for our China operations, which may not be as effective as direct ownership, in providing operational control.

We rely on contractual arrangements with our variable interest entities, AutoNavi Software and MapABC Technology, and their shareholders to operate our business.  For a description of these contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Our PRC Variable Interest Entities and Their Shareholders.”  These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entities.  Under the current contractual arrangements, as a legal matter, if our variable interest entities or their shareholders fail to perform their respective obligations under these contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective.

Under the equity pledge agreements between our subsidiary AutoNavi Technology and the respective shareholders of AutoNavi Software and MapABC Technology, those shareholders pledged their equity interests in AutoNavi Software and MapABC Technology to AutoNavi Technology to secure AutoNavi Software’s and MapABC Technology’s obligations under the exclusive technology and consulting service agreements, the know-how license agreements and, in the case of AutoNavi Software, the domain name license agreement and the patent license agreement.  Our PRC counsel, Jun He Law Offices, has advised us that these pledges were duly created by recording the pledge on AutoNavi Software’s and MapABC Technology’s respective register of shareholders in accordance with the PRC Security Law.  However, according to the PRC Property Rights Law, a pledge will not be effective unless it has been registered with the relevant administration for industry and commerce.  AutoNavi Software and MapABC Technology are in the process of registering the pledges with the relevant administration for industry and commerce in accordance with the PRC Property Rights Law. AutoNavi Technology may not be able to successfully enforce the pledges against any third parties who have acquired equity interests in good faith in AutoNavi Software and MapABC Technology.  As a result, if AutoNavi Software and MapABC Technology breach their obligations under the various agreements described above, and there are third parties who have acquired equity interests in good faith, AutoNavi Technology would need to resort to legal proceedings to enforce its contractual rights under the equity pledge agreements, or the underlying agreements secured by the pledges.

Under the existing contractual arrangements, AutoNavi Technology has entered into a series of service agreements with AutoNavi Software and MapABC Technology to enable it to receive substantially all of the economic benefits of AutoNavi Software and MapABC Technology. We believe that our exclusive option to purchase all or part of the equity interests in AutoNavi Software and MapABC Technology, when and to the extent permitted by PRC law, or request any existing shareholder of AutoNavi Software and MapABC Technology to transfer all or part of the equity interest in AutoNavi Software and MapABC Technology to another PRC person or entity designated by us at any time in our discretion, and the power of attorney that AutoNavi Software and MapABC Technology’s shareholders have granted to us, effectively enable us to have the ability to cause the related service contracts to be renewed when needed. However, if we are not able to renew these service agreements when they expire, our ability to receive the economic benefits of AutoNavi Software and MapABC Technology may be adversely affected.

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All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC.  Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.  The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our variable interest entities, and our ability to conduct our business may be negatively affected. In the event we are unable to enforce these contractual arrangements, we may not be able to have the power to direct the activities that most significantly affect the economic performance of our variable interest entities, and we may not be able to consolidate the financial results of AutoNavi Software, MapABC Technology and their subsidiaries into our consolidated financial statements in accordance with U.S. GAAP.

Contractual arrangements we have entered into with our variable interest entities and their respective shareholders may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entities and their subsidiaries owe additional taxes, which could substantially reduce our consolidated net income and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among AutoNavi Technology, our wholly-owned subsidiary in China, AutoNavi Software and MapABC Technology, our variable interest entities in China, and their respective shareholders were not entered into on an arm’s-length basis or resulted in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust AutoNavi Software’s and MapABC Technology’s income in the form of a transfer pricing adjustment.  A transfer pricing adjustment could, among other things, result in a reduction of, for PRC tax purposes, expense deductions recorded by AutoNavi Software and MapABC Technology, which could in turn increase their respective tax liabilities.  In addition, the PRC tax authorities may impose punitive interest on AutoNavi Software and MapABC Technology for the adjusted but unpaid taxes at the rate of 5% over the basic RMB lending rate published by the People’s Bank of China for a period according to the applicable regulations.  Our consolidated net income could be materially and adversely affected if our variable interest entities’ tax liabilities increase or if they are required to pay punitive interest.

The shareholders of our variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders of AutoNavi Software are Jun Hou, our co-founder and chairman, Congwu Cheng, our co-founder and chief executive officer, Jun Xiao, our former director, Derong Jiang, our co-founder and senior vice president of quality control, Wenzhi Ye, our co-founder, Peng Liu, our co-founder, Jianjun Yuan, our co-founder, and Zilong Liu, an independent third party. The shareholders of MapABC Technology are Jun Hou and Xiyong Tang, our senior vice president of operations and management. All these individuals are beneficial owners of our Cayman Islands holding company, and some of them serve as our directors or executive officers. See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

The interests of these individuals as the shareholders of our variable interest entities may differ from the interests of our company as a whole. For example, these individuals may breach or cause our variable interest entities or their subsidiaries to breach or refuse to renew existing contractual arrangements with us.  Currently, we do not have existing arrangements to address such potential conflicts of interest between these individuals and our company. We cannot assure you that when conflicts of interest arise, any or all of these individuals will act in the best interests of our company and our shareholders, or that conflicts of interest will be resolved in our favor. We rely on those of our variable interest entities’ shareholders who are also our directors or executive officers to abide by the laws of the Cayman Islands, which provide that a company’s directors and/or officers owe a fiduciary duty to the company, which requires them to act in good faith and in the best interests of our company and not to use their positions for personal gain. If we cannot resolve any conflicts of interest or disputes between us and those individuals, we would have to rely on legal proceedings, which could result in disruption of our business and substantial uncertainty as to the outcome of any such legal proceedings.

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Our subsidiaries in China are subject to restrictions on paying dividends and making other payments to our holding company.

AutoNavi Holdings Limited is our holding company incorporated in the Cayman Islands and does not conduct any business operations other than investing in our subsidiaries and affiliated entities. As a result of the holding company structure, it may rely on dividends and other distributions on equity paid by AutoNavi Technology, our PRC subsidiary, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur.

Under PRC laws and regulations, AutoNavi Technology, as a wholly foreign-owned enterprise in the PRC, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations.  AutoNavi Technology is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital.  At its discretion, it may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds.  These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of foreign currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if our subsidiaries in China incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If our subsidiaries in China are unable to pay dividends or make other payments to us, we may be unable to pay dividends on our ordinary shares and ADSs. See also “—Risks Related to Doing Business in China—Our global income or the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material and adverse effect on our results of operations.”

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from making loans to our PRC subsidiaries and variable interest entities or making additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiaries and variable interest entities.  We may make loans to our PRC subsidiaries and variable interest entities, or we may make additional capital contributions to our PRC subsidiaries.  Any loans to our PRC subsidiaries are subject to PRC regulations and foreign exchange loan registrations.  For example, loans by us to AutoNavi Technology to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE.  We may also decide to finance AutoNavi Technology by means of capital contributions.  These capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart.  Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our variable interest entities, each a PRC domestic company.  Meanwhile, we are not likely to finance the activities of our variable interest entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in the surveying and mapping business or value-added telecommunication services, including but not limited to internet content services, as well as licensing and other regulatory issues.

Pursuant to a SAFE Circular 142 promulgated by SAFE, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC.  In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company.  The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.  Violations of SAFE Circular 142 could result in severe monetary or other penalties. In addition, SAFE promulgated a SAFE Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. Furthermore, SAFE issued an internal guideline to its local counterparts, referred to as SAFE Circular 45, in November 2011. SAFE Circular 45 has never been formally announced to the public or posted on SAFE’s website. Based on the version of SAFE Circular 45 made publicly available by certain local governmental authorities on their websites, we understand that SAFE Circular 45 requires SAFE’s local counterparts to strengthen the control imposed by SAFE Circulars 142 and 59 over the conversion of a foreign-invested company’s capital contributed in foreign currency into RMB. SAFE Circular 45 stipulates that a foreign-invested company’s RMB funds, if converted from the company’s capital contributed in foreign currency, may not be used by the company to (i) extend loans (in the form of entrusted loans), (ii) repay borrowings between enterprises, or (iii) repay bank loans that it has obtained and on-lent to third parties.

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In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circulars 142, 59 and 45, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or any variable interest entities or with respect to future capital contributions by us to our PRC subsidiaries.  If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

If AutoNavi Software or MapABC Technology becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy its assets, which could materially and adversely affect our business.

We operate our business through contractual arrangements with AutoNavi Software and MapABC Technology as well as their respective shareholders. As part of these arrangements, AutoNavi Software and MapABC Technology hold assets that are important to the operation of our business.

We do not have priority pledges and liens against the assets of AutoNavi Software and MapABC Technology. As a contractual and property right matter, this lack of priority pledges and liens has remote risks. If AutoNavi Software or MapABC Technology undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets and we may not have priority against such third-party creditors on its assets. If AutoNavi Software or MapABC Technology liquidates, we may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding liabilities owed by AutoNavi Software or MapABC Technology to AutoNavi Technology under the contractual arrangements between them. To ameliorate the risks of an involuntary liquidation proceeding initiated by a third-party creditor, we closely monitor the operations and finances of AutoNavi Software and MapABC Technology through carefully designed budgetary and internal controls to ensure that AutoNavi Software and MapABC Technology are well capitalized and are highly unlikely to trigger any third party monetary claims in excess of their respective assets and cash resources. Furthermore, AutoNavi Technology has the ability, if necessary, to provide financial support to AutoNavi Software and MapABC Technology to avoid such an involuntary liquidation.

If the shareholders of AutoNavi Software or MapABC Technology were to attempt to voluntarily liquidate AutoNavi Software or MapABC Technology without obtaining our prior consent, we could effectively prevent such unauthorized voluntary liquidation by exercising our right to request their respective shareholders to transfer all of their equity interests to a PRC entity or individual designated by us in accordance with the exclusive purchase option agreements with the respective shareholders of AutoNavi Software or MapABC Technology, to the extent permitted by PRC laws. In the event that the shareholders of AutoNavi Software or MapABC Technology initiates a voluntary liquidation proceeding without our authorization or attempts to distribute the retained earnings or assets of AutoNavi Software or MapABC Technology without our prior consent, we may need to resort to legal proceedings to enforce the terms of the contractual agreements. Any such legal proceeding may be costly and may divert our management’s time and attention away from the operation of our business, and the outcome of such legal proceeding would be uncertain.

Risks Related to Doing Business in China

Adverse changes in the political and economic policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could adversely affect our business.

Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations there.  Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China.  The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.  While the Chinese economy has experienced significant growth in the past decades, the growth has been uneven, both geographically and among various sectors of economy.  We cannot assure you that the Chinese economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such a slowdown will not have a negative effect on our business.

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As the PRC economy is increasingly intricately linked to the global economy, it is affected in various respects by downturns and recessions of major economies around the world, such as the recent global financial crisis.  Stimulus measures designed to help China weather the recent global financial crisis may contribute to higher inflation, which could adversely affect our results of operations and financial condition.  For example, certain operating costs and expenses, such as direct production cost and employee compensation, may increase as a result of higher inflation.  Measures to control the pace of economic growth may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.  In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.  The PRC government exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.  It is unclear whether PRC economic policies will be effective in maintaining stable economic growth in the future.  Any slowdown in the economic growth of China could lead to reduced demand for our solutions, which could materially and adversely affect our business, financial condition and results of operations.

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Our PRC subsidiaries are subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese laws and regulations generally applicable to companies incorporated in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

The laws and regulations governing navigation and location-based services and related services in China are developing and subject to changes.  If we fail to maintain and renew existing or obtain additional licenses and permits necessary to conduct our operations in China, our business would be materially and adversely affected.

The navigation and location-based services and internet related services industry are highly regulated by the PRC government.  Various regulatory authorities of the PRC government, such as the NASMG, the GAPPRFT and the Ministry of Industry and Information Technology, are empowered to issue and implement regulations governing various aspects of the navigation and location-based services industry.

We are required to obtain various licenses and permits from different regulatory authorities in order to conduct our operations.  See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Licenses.”  According to the Opinions on Strengthening the Administration of Internet Map Services and the Websites that Provide Geographical Information Services jointly issued by eight government agencies in February 2008, the publication of internet maps is subject to the approval of the GAPPRFT and requires an internet publishing license.  We have been providing internet map solutions since 2006, but have not obtained an internet publishing license for such business.  Three of our variable interest entities have obtained the surveying and mapping qualification certificates for internet map service from the NASMG.  However, we cannot rule out the possibility that the GAPPRFT may demand that we suspend our internet map application business for the lack of an internet publishing license in the future and impose severe penalties on us.  Although we have not generated significant revenues from our internet map application business, suspension of this business may adversely affect our growth and prospects.

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In addition, AutoNavi Software holds a publication operating license necessary for sales of our digital map data.  However, Beijing ADF Navigation Technology Co., Ltd., or ADF Navigation, does not have such a license.  We derive a substantial portion of our revenues from licensing our digital map data to in-dash navigation system manufacturers and automobile manufacturers, mainly through ADF Navigation.  We cannot rule out the possibility that the GAPPRFT may demand that ADF Navigation suspend its business for the lack of a publication operating license and impose severe penalties on ADF Navigation.

Moreover, under current PRC laws and regulations, a commercial operator of internet content provisions services must obtain an ICP license, and a commercial operator of information services or call center services must obtain an SP license. We have obtained ICP licenses that are necessary for us to operate our websites and hold two SP licenses in order to provide value-added location-based solutions.

As the navigation and location-based services and related services industries in China are developing, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time to time.  As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the navigation and location-based services industry.

We cannot assure you that we will be able to maintain our existing licenses and certificates or renew any of them in a timely manner, or at all, when their current term expires.  For example, our Class A surveying and mapping qualification certificate for digital navigation map production and related activities, which was issued by the NASMG, is valid until December 31, 2014 and subject to annual review.  If we are unable to maintain and renew one or more of our licenses and certificates, particularly our Class A surveying and mapping qualification certificate for digital navigation map production and related activities, or obtain such renewals on commercially reasonable terms, our operations could be materially disrupted.  Furthermore, if the PRC government requires additional licenses or permits in the future in order for us to conduct our businesses, there is no guarantee that we would be able to obtain such licenses or permits in a timely manner, or at all.

Fluctuations in exchange rates may have a material and adverse effect on our results of operations and your investment.

The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China.  The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008.  Between July 2008 and June 2010, this appreciation was halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band.  Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, though there have been periods recently when the U.S. dollar has appreciated against the RMB.  It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB against the U.S. dollar.  To the extent that we need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion.  Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

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The reporting and functional currency of our Cayman Islands holding company is the U.S. dollar.  However, substantially all of the revenues and most of the expenses of our consolidated operating subsidiaries and variable interest entities are denominated in RMB.  Substantially all of our sales contracts are denominated in RMB and substantially all of our costs and expenses are denominated in RMB.  Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.  Fluctuations in the exchange rate will also affect the relative value of earnings from and the value of any U.S. dollar-denominated investments we make in the future.  These and other effects on our financial data resulting from fluctuations in the value of the RMB against the U.S. dollar could have a material and adverse effect on the market price of our ADSs and your investment.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China.  We receive substantially all of our revenues in RMB.  Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiary, AutoNavi Technology, to fund any cash and financing requirements we may have.  Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements.  Therefore, AutoNavi Technology is able to pay dividends in foreign currencies to us without prior approval from SAFE by complying with certain procedural requirements.  But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.  The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.  If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Regulation and censorship of information disseminated over the internet in China may adversely affect our business, and we may be liable for information displayed on, retrieved from, or linked to our internet websites.

The PRC government has adopted certain regulations governing internet access and the distribution of news and other information over the internet.  Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory.  Meanwhile, when internet content providers and internet publishers find that information falling within the categories described above is transmitted on their website or is stored in its electronic bulletin service system, they must terminate the transmission of such information or delete such information immediately and keep records and report this to the relevant authorities.  Failure to comply with these requirements could result in the revocation of the internet content provider license and other required licenses and the closure of the concerned websites.  The website operator may also be held liable for such prohibited information displayed on, retrieved from or linked to such website.

The Ministry of Industry and Information Technology has published regulations that subject website operators to potential liabilities for content included on their websites and the actions of users and others using their websites, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing.  The Ministry of Public Security has the authority to order any local internet service provider to block any internet website maintained outside China at its sole discretion.  Periodically, the Ministry of Public Security has stopped the dissemination over the internet of information which it believes to be socially destabilizing.  The State Secrecy Bureau, which is directly responsible for the protection of the PRC government’s state secrets, is authorized to block any website it deems to be leaking state secrets or fail to meet the relevant regulations relating to the protection of state secrets in the dissemination of online information. In December 2012, the Standing Committee of the National People’s Congress of the PRC issued the Decision on Strengthening the Protection of Online Information. Pursuant to the decision, an ICP operator shall improve its administration on the information published by its website users. If an ICP operator finds the publicized information is prohibited by laws and regulations, it must stop the dissemination and eliminate the publication of such information immediately, keep records and report to the relevant government authority.

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Through our variable interest entities in China, we operate our MapABC.com and other websites which, among other things, allow users to post location-related information on the websites.  As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a website operator.  In addition, we may not be able to control or restrict the content of other internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our users, despite our attempt to monitor such content.  To the extent that regulatory authorities find any portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information on our websites, and keep records and report to relevant authorities.  In addition, we may be subject to significant penalties for violations of those regulations, and our operations and reputation could be adversely affected.

PRC regulations relating to acquisitions in China may subject us to requisite approval by the Ministry of Commerce and the failure to obtain such approval could have a material and adverse effect on our business, results of operations, reputation and trading price of our ADSs.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Regulation, jointly issued by six PRC regulatory agencies, include provisions that purport to require the Ministry of Commerce’s approval for acquisitions by offshore entities established or controlled by domestic companies, enterprises or natural persons of onshore entities that are related to such domestic companies, enterprises or natural persons.  However, the interpretation and implementation of the M&A Regulation remain unclear with no consensus currently existing regarding the scope and applicability of the Ministry of Commerce approval requirement on foreign acquisitions among related parties.

We currently have various agreements with our variable interest entities and their shareholders that give us effective control over them, including operating agreements and equity pledges.  If the Ministry of Commerce subsequently determines that their approval was required for such contractual arrangements, we may need to apply for a remedial approval.  There can be no assurance that we will be able to obtain such approval or waiver of such approval from the Ministry of Commerce.  Inability to obtain such approval or waiver from the Ministry of Commerce may have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.  Further, we may be subject to certain administrative punishments or other sanctions from the Ministry of Commerce.  The Ministry of Commerce or other regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of our U.S. dollars funds into the PRC, or take other actions that could have further material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.

The M&A Regulation and certain other PRC regulations could also make it more difficult for us to pursue growth through acquisitions.

The M&A Regulation discussed in the preceding risk factor also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including a requirement that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if either threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council in August 2008 is triggered.  In addition, the Implementing Rules Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the PRC Ministry of Commerce in August 2011, specify that mergers and acquisitions by foreign investors involved in “an industry related to national security” are subject to security review by the PRC Ministry of Commerce, and prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control arrangement.  In the future, we may grow our business in part by directly acquiring complementary businesses rather than through our variable interest entities.  Complying with the requirements of these regulations to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.

Pursuant to a SAFE Circular No. 75 issued by SAFE in November 2005 and its implementation rules, PRC residents and PRC corporate entities are required to register with and obtain approval from local branches of SAFE in connection with their direct or indirect offshore investment activities.  These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.

Under these foreign exchange regulations, PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations, direct or indirect investments in offshore companies will be required to register those investments.  In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update the previously filed registration with the local branch of SAFE, with respect to that offshore company, to reflect any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, a transfer or swap of shares, a merger, division, long-term equity or debt investment or creation of any security interest.  Moreover, the PRC subsidiaries of that offshore company are required to urge the PRC resident shareholders to update their registration with the local branch of SAFE when such updates are required under applicable foreign exchange regulations.  If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into its PRC subsidiaries.  Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions.

We are aware that our PRC resident beneficial owners subject to the SAFE registration requirement have registered with the Beijing SAFE branch.  However, we cannot provide any assurance that all of our shareholders who are PRC residents will continue to make, obtain or update any applicable registrations or approvals required by these foreign exchange regulations.  The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border investment activities, limit our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

Under the applicable regulations and SAFE rules, PRC citizens who participate in an employee stock ownership plan or a stock option plan in an overseas publicly listed company are required to register with SAFE and complete certain other procedures.  Participants of an employee stock ownership plan must retain a PRC agent through the PRC subsidiary of the overseas listed company for which they work to handle matters regarding foreign exchange registration, bank account opening and foreign currency remittance.  The PRC agent could be a PRC subsidiary of the oversea listed company or a PRC institution that conducts assets custodian business appointed by the PRC subsidiary.  The PRC agent should also retain an overseas custodian agency to handle matters in connection with the exercises or sales of stock options for the stock option plan participants.  We and our PRC employees who have been granted stock options are subject to this rule and we and our PRC optionees are in the process of applying for the registration. However, we cannot assure you that we and our PRC optionees will complete such registration procedures in a timely manner, or at all.  If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.  See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Employee Stock Options Plan.”

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The discontinuation of any of the preferential tax treatments currently available to us in the PRC or imposition of any additional PRC taxes on us could adversely affect our financial condition and results of operations.

AutoNavi Technology, AutoNavi Software, MapABC Technology, AutoNavi Xiamen, ADF Navigation, Xingtiandi Technology and PDAger qualify as “high and new technology enterprises,” which entitles them to a preferential tax rate of 15%, subject to their maintenance of the “high and new technology enterprise” status. ADF Navigation also qualifies as a “manufacturing foreign-invested enterprise,” and it was entitled to full tax exemption between 2008 and 2009 and a further reduced tax rate of 12.5% between 2010 and 2012, and the preferential tax rate of 15% for “high and new technology enterprise” in 2013 and thereafter.  As a “high and new technology enterprise” located in Zhongguancun, a district in Beijing, China, AutoNavi Technology is entitled to the tax-exemption in 2009 followed by a reduced tax rate of 7.5% for the subsequent three years and the preferential tax rate of 15% for “high and new technology enterprise” in 2013 and thereafter. The continued qualification of a “high and new technology enterprise” is subject to annual evaluation and a three-year review by the relevant government authorities in China.  If any of AutoNavi Technology, AutoNavi Software, MapABC Technology, AutoNavi Xiamen, ADF Navigation, Xingtiandi Technology, and PDAger fails to maintain its “high and new technology enterprise” qualification or renew its qualification when its current term expires, its applicable enterprise income tax rate may increase to 25%, which could have a material and adverse effect on our financial condition and results of operations.

In addition to “high and new technology enterprise,” AutoNavi Software was recognized as a “key software enterprise” for 2010, 2011, 2012, and 2013 and was entitled to a preferential tax rate of 10% for these years and thereafter as long as it continues to qualify as “key software enterprise.”  The “key software enterprise” qualification is subject to examination and approval each year.

Preferential tax treatment granted to our PRC subsidiaries or consolidated variable interest entities by the local governmental authorities is subject to review and may be adjusted or revoked at any time.  The discontinuation of any preferential tax treatments currently available to our PRC subsidiaries and consolidated variable interest entities will cause our effective tax rate to increase, which could have a material and adverse effect on our financial condition and results of operations.  We cannot assure you that we will be able to maintain our current effective tax rate in the future.

Our global income or the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material and adverse effect on our results of operations.

Under the PRC Enterprise Income Tax Law and its implementation rules an enterprise established outside of the PRC with “de facto management body” within the PRC is considered a PRC resident enterprise and will be subject to the PRC enterprise income tax at the rate of 25% on its global income.  The implementation rules define the term “de facto management body” as the management body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise.  The SAT Circular 82 issued by State Administration of Taxation in April 2009 and a further notice issued in July 2011 provide certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China.  Although SAT Circular 82 and the further notice only apply to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, the determining criteria set forth therein may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners. Accordingly, we may be considered a PRC resident enterprise and may therefore be subject to the PRC enterprise income tax at 25% on our global income.  If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. See “Item 4.B. Business Overview—Regulation—Regulations on Tax—PRC Enterprise Income Tax.”

Pursuant to the PRC Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.  We are a Cayman Islands holding company and substantially all of our income may come from dividends we receive from our subsidiary located in Hong Kong, which is the direct holding company of AutoNavi Technology, our PRC subsidiary.  If our Hong Kong subsidiary is considered a non-PRC resident enterprise and holds at least 25% of the equity interest of AutoNavi Technology, dividends that it receives from AutoNavi Technology may be subject to withholding tax at a preferential rate of 5% under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, effective on January 1, 2007, upon receiving approval from the local tax authority.  However, if our Hong Kong subsidiary is not considered to be the beneficial owner of such dividends under a tax notice promulgated on October 27, 2009, such dividends would be subject to withholding tax at a rate of 10%.  See “Item 4.B. Business Overview—Regulation—Regulations on Tax—Dividend Withholding Tax.”

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We have been advised by our PRC counsel, Jun He Law Offices, that because there remains uncertainty regarding the interpretation and implementation of the PRC Enterprise Income Tax Law and its implementation rules, it is uncertain whether, if we are regarded as a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would be subject to any PRC withholding tax.  If we are required under the PRC Enterprise Income Tax Law to withhold PRC income tax on our dividends payable to our non-PRC enterprise shareholders and ADS holders, your investment in our ordinary shares or ADSs may be materially and adversely affected.

The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, investors are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e)(1)(iii) of its Rules of Practice and the Sarbanes-Oxley Act of 2002 against five PRC based accounting firms, including our independent registered public accounting firm. Rule 102(e)(1)(iii) proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission. The issues raised by the proceedings are not specific to our independent registered public accounting firm or to us, but affect equally all accounting firms based in China and all PRC based businesses with securities listed in the United States.

In January 2014, the administrative judge reached an initial decision, sanctioning four of those PRC based accounting firms from practicing before the SEC for six months.  However, it is currently impossible to determine the ultimate outcome of this proceeding, as the accounting firms have filed a petition for review of the initial decision, and the effect of the initial decision is suspended pending that review. The SEC will review the initial decision, determine whether there has been any violation and, if so, determine the appropriate remedy to be placed on those accounting firms.  Once such an order was made, the accounting firms would have a further right to appeal to the US federal courts, and the effect of the order might be further stayed pending the outcome of that appeal.

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Depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against those accounting firms may cause investor uncertainty regarding PRC based, United States listed companies and the market price of our ADSs may be adversely affected.

Risks Related to our ADSs

The market price for our ADSs has been and may continue to be volatile.

In 2013, the trading price of our ADSs on NASDAQ varied from $9.90 to $18.20. The trading price of our ADSs has been and may continue to be volatile and could fluctuate widely due to multiple factors, including the following:

·       the announcement of our proposed merger with an affiliate of Alibaba Group, and news regarding the development of the proposed merger, such as completion of the merger or termination of the merger agreement;

·                   regulatory developments in our target markets affecting us, our customers or our competitors;

·                   announcements of studies and reports relating to the quality of our solutions or those of our competitors;

·                   changes in the economic performance or market valuations of other companies that provide navigation and location-based solutions;

·                   actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

·                   changes in financial estimates by securities research analysts;

·                   conditions in the navigation and location-based services industry;

·                   announcements by us or our competitors of new solutions, acquisitions, strategic relationships, joint ventures or capital commitments;

·                   detrimental negative publicity about us, our competitors or our industry;

·                   sales or perceived potential sales of our ordinary shares or ADSs.

The securities markets in the United States, China and elsewhere have experienced significant price and volume fluctuations that are not related to the operating performance of particular companies, particularly in recent years. The securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities.  The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.  Any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities.

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In addition, it was reported that, since the first half of 2012, local industry and commerce administration authorities in a number of cities in China had significantly curtailed public access to corporate records and filings filed with these industry and commerce administration authorities.  Much of the previously publicly accessible information, such as financial reports and changes to equity interests, now can only be accessed by authorized government officers and officials from judicial authorities or lawyers involved in pending litigation relating to such company and with court-issued proof of such litigation. In March 2014, the State Administration of Industry and Commerce reformed the company filling system and cancelled the annual inspection requirements. The companies are therefore no longer required to submit financial reports to governmental authorities for inspection, but are encouraged to voluntarily release their annual reports to the public through the online system of industry and commerce administration authorities. It is not clear how these new rules will be implemented. The public may not be able to access information of a company if it does not voluntarily disclose it through its annual reports. Such limitation on the public access to corporate records and filings and the resulting concerns over the loss of, or limit in, an otherwise available source of information to verify and evaluate the soundness of China-based, U.S.-listed companies’ business operations in China may have an adverse effect on the overall investor confidence in China-based, U.S.-listed companies’ reported results or other disclosures, which may in turn cause the trading price of the securities of these China-based, U.S.-listed companies, including our ADSs, to decline.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Additional sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. The ADSs sold in our initial public offering in 2010 are freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act.  As of March 31, 2014, we had 278,101,145  ordinary shares outstanding, among which 125,350,003  ordinary shares are represented by ADSs. The remaining ordinary shares outstanding are available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act.  In addition, certain holders of our ordinary shares have the right to cause us to register under the Securities Act the sale of their shares.  Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.  If any existing shareholder or shareholders sell a substantial amount of ADSs, the market price of our ADSs could decline.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this annual report and in the deposit agreement, holders of our ADSs cannot exercise voting rights attaching to the shares represented by our ADSs on an individual basis.  Holders of our ADSs appointed the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings, and you may not receive cash dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities.  However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available.  Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act.  We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act.  Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

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The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses.  You will receive these distributions in proportion to the number of ordinary shares your ADSs represent.  However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs.  For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them.  In these cases, the depositary may decide not to distribute such property to you.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary.  However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties.  In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because our holding company is incorporated under Cayman Islands law, we conduct substantially all of our operations in China and all of our directors and executive officers reside outside the United States.

Our holding company is incorporated in the Cayman Islands and we conduct substantially all of our operations in China through our PRC subsidiaries and variable interest entities.  All of our directors and executive officers reside outside the United States and a substantial portion of their assets are located outside of the United States.  It may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise.  Even if you are successful in bringing an action of this kind in a U.S. court, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers.  There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2013 Revision) and common law of the Cayman Islands.  The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands.  The common law of the Cayman Islands is derived in part from comparatively limited judicial precedents in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority.  The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States.  In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors.  In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

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Our memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of holders of our ordinary shares and ADSs.

Our amended and restated memorandum and articles of association contains certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board of directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series.  The provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences.

Based on the price of our ADSs and ordinary shares and the composition of our assets, in particular the retention of a large amount of cash, we believe that it is very likely that we were classified as a passive foreign investment company, or a PFIC, for United States federal income tax purposes for our taxable year ended December 31, 2013, and we will likely be a PFIC for our current taxable year ending December 31, 2014 unless our share value increases and/or we invest a substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of active income.  In addition, it is possible that one or more of our subsidiaries may be or become classified as a PFIC for United States federal income tax purposes.  A non-U.S. corporation will be classified as a PFIC for any taxable year if either (1) 75% or more of its gross income consists of certain types of “passive” income or (2) 50% or more of the average quarterly value of its assets (as generally determined on the basis of fair market value) during such year produce or are held for the production of passive income.

If we were treated as a PFIC for any taxable year during which a U.S. Holder (as defined in Item 10. Additional Information — E. Taxation — United States Federal Income Taxation) holds our ADSs or ordinary shares, such U.S. Holder may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules. Further, a U.S. Holder will generally be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder’s holding period in which we become classified as a PFIC and subsequent taxable years (“PFIC-Tainted Shares”) even if, we, in fact, cease to be a PFIC in subsequent taxable years. Accordingly, a U.S. Holder, should to the extent an election is available, consider making a “mark-to-market” election to avoid owning PEIC-Tainted shares. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

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In December 2009, we distributed the equity interests in AutoNavi Shanghai to all of our shareholders or their designated persons.  AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software, had been engaged in the telematics business, which was not part of our core business.

On July 1, 2010, our ADSs, each representing four ordinary shares, commenced trading on the NASDAQ Global Select Market under the ticker symbol “AMAP.”  We issued and sold a total of 8,793,750 ADSs, representing 35,175,000 ordinary shares, and the selling shareholders sold an additional 1,125,000 ADSs, representing 4,500,000 ordinary shares, in each case at an initial offering price of $12.50 per ADS.  Net proceeds to us from the offering were approximately $98.1 million after deducting underwriting discounts and commissions as well as offering expenses payable by us.  Each Series A preferred share was automatically converted to one ordinary share upon the closing of our initial public offering on July 7, 2010.

In March 2011, we acquired the remaining 80% equity interest in PDAger, a mobile location-based service provider in China and a major partner in China Telecom’s mobile navigation business, which had been 20% owned by us, and also acquired certain technology from the shareholders of PDAger, for total cash consideration of approximately $8.3 million.

In March 2011, we acquired all the equity interests in eTag, and certain patent application rights and other intellectual property rights owned, directly and indirectly through a British Virgin Islands entity, by the individual shareholders of eTag for a total consideration of $3.2 million.  eTag is a software developer specializing in mobile location-based application software utilized in personal navigation systems.

In October 2011, we and TomTom Global Content B.V., or TomTom Global, originally named Tele Atlas B.V., established a joint venture named Beijing GoldenTom Information Technology Co., Ltd., or GoldenTom, pursuant to a strategic cooperation agreement we entered into with TomTom Global in October 2010.  GoldenTom is 51% owned by us and 49% held by TomTom Global.  GoldenTom provides digital map databases and traffic information in China, and acts as a distribution channel of our and TomTom Global’s products.

In January 2012, we acquired 20% equity interests in Ariadne’s Thread Co., Ltd., a company engaged in e-commerce of movie tickets through its proprietary mobile applications.

In May 2013, we entered into an investment agreement with Ali ET, pursuant to which Ali ET purchased 28,019,256 ordinary shares and 50,409,444 Series A preferred shares from us, accounting for 28% of our then total issued and outstanding shares on a fully-diluted basis, for an aggregate consideration of $294 million in cash.

In December 2013, we acquired all the equity interests in Alohar Mobile Inc., a company headquartered in California focusing on mobile location-based technologies, for a consideration of approximately $29.2 million in cash. We also issued 784,864 nonvested shares and 1,699,152 cash-settled nonvested share units with vesting terms of two to five years to Alohar’s employees as long-term incentives.

On April 11, 2014, we entered into the Merger Agreement with Alibaba Group. Pursuant to the Merger Agreement, Ali ET will be merged with and into us, with us continuing as the surviving corporation and a wholly-owned subsidiary of Alibaba Investment Limited, or AIL.  On the date when the merger becomes effective, or the Effective Time, each ordinary share, including ordinary shares represented by ADSs, issued and outstanding immediately prior to the Effective Time, other than (i) any securities owned by Alibaba Group Holding Limited or any of its subsidiaries, (ii) ordinary shares owned by any of our shareholder who validly exercises such shareholder’s right to dissent from the merger in accordance with Section 238 of the Companies Law (2013 Revision) of the Cayman Islands,  (iii) any ordinary shares owned by us or any of our subsidiaries, and (iv) any ordinary shares issued, outstanding and we reserved but not yet allocated, immediately prior to the Effective Time, for settlement upon exercise of any company share awards, will be cancelled in consideration for the right to receive US$5.25 in cash per ordinary share, or US$21.00 in cash per ADS, without interest and net of any applicable withholding taxes.  Consummation of the merger is subject to the satisfaction or waiver of various conditions set forth in the Merger Agreement including obtaining the requisite approval of our shareholders. Following consummation of the merger, we will be a wholly-owned subsidiary of AIL, and our ADSs would be delisted from NASDAQ. We will prepare and file with the SEC a Schedule 13E-3 transaction statement, which will include a proxy statement of the Company, in connection with the merger. The proxy statement will include a description of the Merger Agreement and contain other important information about the merger, us and the other participants in the merger.

Our principal executive offices are located at 16/F, Section A, Focus Square, No 6. Futong East Avenue, Wangjing, Chaoyang District, Beijing 100102, the People’s Republic of China.  Our telephone number at this address is +86 10 8410-7000.  Our registered office in the Cayman Islands is located at International Corporation Services Ltd., Harbour Place 2nd Floor, 103 South Church Street, PO Box 472, George Town, Grand Cayman KY1-1106, Cayman Islands.  Our main website is www.AutoNavi.com .  Our agent for service of process in the United States in connection with our registration statement on Form F-1 for our initial public offering in July 2010 is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

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B.                                     Business Overview

Overview

We are a leading provider of digital map content and navigation and location-based solutions in China.  Since 2011, we have built a mobile and internet location-based service platform that enables us to offer our customers and business partners a broad range of location-based solutions serving a variety of consumer needs.  This service platform also enables us to move away from a pure business-to-business, or B2B, model to a combined B2B and business-to-consumer, or B2C, model.

In 2012, we made great progress in building up our platform with our strategic partners, which include internet companies, device makers, telecom operators and vertical content service providers. These partnerships have helped to further enhance our leadership position in China’s location-based service industry.

At the core of our business is our proprietary comprehensive and in-depth nationwide digital map database that covered approximately 4.3 million kilometers of roadway and over 26 million points of interest across China as of December 31, 2013.  Almost all of China’s 1.3 billion people live within the area covered by our digital map database.  In addition, we had completed 3-D navigation maps of key areas in 60 major cities and photo-realistic 3-D models of 54 cities for public sector projects as of December 31, 2013. To further enrich our offerings, we integrate a wide range of third-party content, including local merchant content, users’ reviews and third parties’ promotions, into our database.

Through our nationwide digital map database and proprietary technology platform, we have become a market leader in offering the following comprehensive, integrated navigation and location-based solutions, each optimized for the Chinese market and users:

·                   Automotive Navigation.  We provide digital map data, navigation software, telematics service and traffic information service for in-dash navigation systems installed by a number of international and domestic automobile manufacturers in China, including multiple Audi, General Motors models, Honda, PSA, JLR and Mercedes-Benz. We also provide aftermarket software navigation solutions to leading dealers’ optional in-dash navigation systems and portable navigation device manufacturers in China, ranging from digital map data to a “total solution” which consists of digital map data, the navigation engine and the user interface.

·                   Mobile and Internet Location-based Service Platform.  Our mobile and internet location-based service platform is designed to meet the needs of people on the go. We offer ANavi, a pre-installed and downloadable navigation solution, to provide users with site searching, positioning, route planning and driving guidance services. ANavi also supports site searching and navigation launching through voice commands. It operates on three major mobile operating systems, namely, iOS, Android and Windows Phone. According to Analysys International, ANavi had No. 1 market share in China Mobile’s navigation market for the third consecutive year in 2013. We also offer AMAP, our mobile map application software, which is built on our proprietary digital map database to provide users with site searching, positioning and route planning services. Integrating our extensive in-depth point of interest database with location-relevant content from other leading service providers, it has increasingly served as a gateway for users to conduct searches for local sites. As of December 31, 2013, the number of users of AMAP amounted to over 200 million, representing a year-over-year growth rate of 104.1%, while the number of its monthly active users amounted to 92 million, representing a year-over-year growth rate of 87.7%. According to iiMedia Research, AMAP had No.1 market share in the mobile map application market in China in 2013. We provide both our navigation solutions and AMAP mobile map application software to our users for free.

In addition, our mobile and internet location-based service platform allows us to provide various mobile and internet based map solutions to internet companies, developers and enterprises. We also team up with several leading internet players to connect each other’s location-based services and users, which enables our mapping services to penetrate a variety of services and applications provided by these internet companies and allows us to integrate their in-depth content and services into our own products.

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·                   Public Sector and Enterprise Applications.  We provide a wide range of solutions to public sector and enterprise customers, including aerial photogrammetry solutions and 3-D modeling applications. We also license map data, with or without upgrades, to certain PRC government agencies and enterprises to support their location-based application. Our solutions have a wide range of applications, such as land resource planning, emergency response, fleet management and asset tracking.  We are a trusted provider of location-based solutions to many prestigious public sector and enterprise customers, including national ministries, state-owned public utilities, mobile operators, logistics companies, financial institutions, tobacco bureaus at various levels and large retail and consumer goods companies.

Our net revenues were $127.0 million in 2011, $159.7 million in 2012 and $141.7 million in 2013.  Net income attributable to our shareholders were $36.5 million in both 2011 and 2012, and net loss attributable to our shareholders was $25.4 million in 2013.  In 2011, 2012 and 2013, we incurred share-based compensation expenses of $5.4 million, $12.5 million and $13.4 million, respectively.

We derive substantially all of our revenues from our operations in China.  With over ten years of investments in the industry, we possess the requisite understanding of the Chinese market and the technological capabilities to construct and maintain a comprehensive nationwide digital map database and provide navigation and location-based solutions that meet the needs of the Chinese market.

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Automotive Navigation

In-dash Navigation Systems.  We provide digital map data to in-dash navigation system manufacturers and automobile manufacturers.  Our map data for in-dash navigation is generally a two-dimensional or bird’s-eye view representation of roads in China.  For certain luxury vehicle models, we also provide map data with detailed 3-D representation of key areas in 60 cities. We also offer our proprietary total solution, which includes navigation engine software and digital map data, for several car models. Before we ship our map data to a particular in-dash navigation system manufacturer or an automobile manufacturer, we first convert our data into the specific format required.

After we are selected to supply the map data by an automobile manufacturer, we work closely with the automobile manufacturer directly or through its in-dash navigation system manufacturer to ensure system compatibility between our map data, the in-dash navigation system and the particular vehicle model.  We conduct multiple rounds of indoor and outdoor testing of our map data for stability and accuracy.  Upon request by the navigation system manufacturers, we provide updated map data periodically based on separately negotiated terms.  In general, our update cycles range from quarterly to annually.  Because providing updated map data is deemed to be publication of digital map data under applicable PRC regulations, we must obtain governmental approval before we can provide updates to automobile manufacturers.

In addition to providing our digital map data to in-dash navigation system manufacturers and automobile manufacturers, we also combine our navigation software with the map data to provide a more complete solution to both domestic and foreign automobile manufacturers.  With more and more automobile manufacturers introducing connected services, our strong navigation software capabilities, as well as our location-based cloud service platform, put us in a strong position to capture more business opportunities.

We enter into contractual relationships with either in-dash navigation system manufacturers or automobile manufacturers.  Under these contracts, we receive a license fee for each copy of our map data delivered and complete solution provided.  Our digital map data is currently used in in-dash navigation systems on over 100 car models made by a number of international and domestic automobile manufacturers, such as Audi, BMW and General Motors.

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Aftermarket Navigation Solutions .  We provide aftermarket software navigation solutions to dealer-option navigation systems and portable navigation device manufacturers, ranging from map data to a “total solution,” which consists of map data, a navigation engine and a user interface.  The total solution supports processing of real-time traffic information and interactive navigation.

We generally receive a license fee for each copy of our map data delivered to our aftermarket solutions customers. Users of some models of dealer-option navigation systems or portable navigation devices can download updated map data from our website, a.autonavi.com , or from the websites of relevant manufacturers.  We also provide updated map data through distribution channels such as automobile dealerships and consumer electronics stores.  Users of dealer-option navigation systems and portable navigation devices that are connected to a mobile network can also download navigation map updates.  For certain models, we support online real-time updates of points of interest.

We generally charge a license fee based on the number of copies provided to the customer.  We price our customized solutions primarily based on the complexity of our solutions and market conditions.

Mobile and Internet Location-based Solutions

Leveraging our core mapping competencies, we have built a mobile and internet location-based service platform to meet the needs of people on the go.

Pre-installed and Downloadable Online Mobile Application — AMAP .  We offer AMAP, online map application software specifically designed for mobile phone users, which provides users with full integration of route planning and navigation services with an increasing number of online-to-offline shopping options, by integrating our digital map database with complementary content from vertical service providers.  As of December 31, 2013, our map applications included over 500,000 group buying deals and coupons,  100,000 hotels, 200,000 restaurants, and 400 movie theaters available for reservations; and over 35,000 real estate available for renting or purchasing.  In addition, users can also use our mobile map applications to call taxi and book housekeeping and designated driving services.

AMAP covers all the leading mobile operating systems, and is provided to users free of charge. As of December 31, 2013, the number of our mobile map application users grew to over 200 million, compared to 98 million as of December 31, 2012, and the number of monthly active users grew 88% year-over-year to approximately 92 million as of the end of the fourth quarter of 2013. According to iiMedia Research, AMAP led the mobile map application market for ninth straight quarter as the first ranked mobile map application in China.

Pre-installed and Downloadable Navigation Application for Consumers .  Our navigation application provides users with fully offline navigable map, voice-guided turn by turn directions and speed cameras. The latest version contains several unique features that have already been embraced by our users, including “Place Me” which enables users to track their driving history and share the information with friend, and a platform within the application that includes a number of services tailored for drivers.  In 2012, we introduced the first English-language mobile navigation application in the China market.

We offer our mobile navigation services to customers in a number of ways.  We have collaborated with leading smartphone and tablet computer manufacturers in the Chinese market, such as Samsung, to pre-install our offline navigation solutions on mobile phones and tablet computers.  We have also released a user-end navigation solution in China, which can be downloaded from most of China’s leading application stores, such as iPhone’s online application store. Starting from August 2013, we offer our mobile navigation application to both smartphone and tablet computer manufacturers and users for free.

As of December 31, 2013, our mobile navigation application had been downloaded and pre-loaded on a total of approximately 98 million smartphones, with the number of monthly active users growing to approximately 10.6 million. According to Analysys International, our paid mobile navigation application maintained its No. 1 market position in China Mobile’s navigation market with a market share of 39.2% in the fourth quarter of 2013.

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Solutions for Mobile Operators .  We provide mobile map and/or navigation solutions to support location-based services offered by mobile operators in China.  Since 2006, we have provided a nationwide digital map database to support the mobile location-based services of China Mobile, the world’s largest mobile operator by number of subscribers.  We share a portion of the fees charged by China Mobile for certain aspects of the business, and receive from China Mobile fees based on the level of usage of our map data by China Mobile’s subscribers for other aspects of the business, subject to a monthly cap.  In November 2009, China Mobile engaged us to jointly develop and operate a new mobile navigation service, and this service is currently available across mainland China.  Under this cooperation arrangement, we develop and operate China Mobile branded navigation application that is pre-installed on China Mobile subscribers’ mobile phones.  Meanwhile, when certain China Mobile developed applications need map displays, the system will automatically utilize our map and navigation services.  We shared a portion of the fees charged by China Mobile before 2013, received payments in the form of a fixed fee in 2013 and will continue to receive payments in the form of a fixed fee after 2013.  In addition, we also work with China Mobile on certain geographic information system (GIS) projects and location-based projects.

We are also cooperating with China Telecom to provide end-users with a business platform software, which integrates China Telecom’s map data with its point of interest data and ultimately supports its location-based mobile navigation business platform, called “E Surfing,” across China Telecom’s nationwide network.  Our cooperation with China Telecom in relation to the “E Surfing” service is through PDAger.  We share a portion of the fees charged by China Telecom.  The cooperation agreement will expire in June 2014.

API Solutions and Internet and Mobile location-based Services.   We provide websites access to our digital map database, including access through map API, which enables our customers to embed rich and interactive location-relevant content into their websites or mobile applications and also provide other location-based services. The map database is stored either on our customers’ servers or on our servers.  The services are currently provided for free.  For a small number of customers that require use of advanced features of our digital map database, we charge either a fee based on the number of requests of our location-based services or a fixed annual fee.  We also provide project-based customized services to some customers for a fee.  As of December 31, 2013, the number of daily service requests of our location-based services increased to 1.5 billion.

In 2012, our map and location service has been selected by an American multinational corporation to power its mapping and location platform in mainland China.  The service went live in the fourth quarter 2012, as part of its global operating system update.  As a result, its map application consumes our map service when end users are in China, and its voice recognized intelligent personal assistant gets local search outcome, such as information related to local merchants and business, from us in China.  In addition, our service is integrated into its MapKit, so that third-party applications that use its built-in mapping and location functionalities will use our service.

We also formed a number of strategic partnerships with some Chinese leading internet companies. For example, we have launched the first location-based social networking service platform with SINA Weibo, enabling interconnection between SINA Weibo and AMAP applications. Our AMAP users are able to sign on using Weibo Connect and access content directly from SINA Weibo, while SINA Weibo users also have access to the content and functionality of AMAP. We also provide map services to Qihoo 360 and other search engines that allow their users to access and search our location-based content through their personal computers. Furthermore, we extended our mapping service to the Qihoo mobile browser and Easou’s mobile solution.

In addition, through www.amap.com, our internet map portal, we also provide internet users with certain free location-based services including location-based search, public transportation search, route planning, real-time traffic information and online community services.

Mobile Internet Solutions for Public Sectors and Enterprises.  By combining mobile-internet and mobile terminal technologies, we have developed location-based solutions designed to help municipal governments and enterprise customers improve civil management and operational efficiency.  These solutions have been implemented by a number of municipal government agencies such as those in Beijing, Shanghai, Shenzhen, Harbin, Chengdu, Chongqing, Nanjing, Jinan, Jiangsu and Zibo and a number of enterprises including telecom carriers, logistics companies, hotel chains, banks, electronic power enterprises, retailors, and restaurants. We often provide our enterprise solutions as part of a larger offering provided by a system integrator to the enterprise customer, and charge a fee for these extra solutions on a project basis.

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We also provide enhanced location-based business intelligence services for commercial enterprise customers.  The services integrate our core mapping competencies and location-based service expertise with software provided by a leading Japanese engineering and spatial information consultancy company.  Our location-based business intelligence services allow for improved selection assistance for evaluating new store locations, asset tracking, investigating potential locations for sales promotion, identifying new market opportunities and analyzing consumer behavior as well as a variety of other location-relevant services for commercial enterprises.

Vehicle Connectivity Solutions .  We help automotive manufacturers develop vehicle connectivity solutions that integrate the driver, vehicle and surrounding environment into a dynamic network through connected in-car telecommunication devices.  For example, we assisted a number of international and domestic automotive manufacturers in launching an automotive connectivity solution that provides traditional telematics functions such as roadside assistance and real time traffic information, popular internet content including weather forecasts, news updates and stock market information, as well as rich location-based information such as the location of nearby gas stations, parking lots, car dealerships and banks.

Public Sector and Enterprise Applications

Aerial Photogrammetry .  We use advanced aerial photogrammetry technologies such as a high-definition digital mapping camera (DMC) system and LIDAR to collect, process and classify geographic data.  We were the first private company in China to obtain the Class A surveying and mapping qualification certificate for aerial photogrammetry issued by the NASMG.  We provide aerial digital images to government agencies and large state-owned enterprises for use in various fields, including land usage survey, urban planning, mapping, environmental protection, public security, agriculture and other projects.  For example, we provided aerial digital images of two entire provinces and parts of three other provinces in connection with China’s second national land survey pursuant to contracts with the Chinese government from 2007 to 2009, certain provinces in 2010, and other government related projects in 2011 and 2012. We expect to collect and process aerial photogrammetry images for supporting our mobile offerings.

3-D Modeling Applications .  We have the capability to construct photo-realistic 3-D models of landscape and geographic features and develop 3-D geographic information systems.  Our 3-D geographic information system allows users to perform functions such as search, browsing, positioning, routing and spatial measuring and analysis in a 3-D virtual environment.  It can serve as a city’s base management platform, onto which other additional functions designed for specific government agencies or industries can be added.  We have developed 3-D digital city models and base geographic information systems for 53 cities upon commission by the respective local governments.

We provide 3-D modeling applications based on our proprietary AnGeo geographic information system, or AnGeo GIS.  AnGeo GIS integrates 2-D and 3-D geographic data and supports massive 3-D model and topology uploading which allows smooth display of an entire city model on a personal computer.  We have further developed specific AnGeo GIS industrial modules for industrial uses such as pipeline planning, traffic management and utilities.

We derive revenues from our aerial photogrammetry solutions and 3-D modeling applications primarily on a project basis.  We expect to construct 3-D modeling applications for supporting our mobile offerings.

Map Data Licensing .  We provide map data, with or without upgrades, to certain PRC government agencies and enterprises to support their location-based application.

Technology

We have built technologies to enable the evolution of our core map database and to strengthen our ability to deliver map, navigation and location based services to our customers and partners, through both online and offline solutions.

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Our Database

Almost all of China’s 1.3 billion people live within the areas covered by our database.  Our database includes more than 200 detailed road attributes, traffic rules and driver assistance features, such as street and highway names, road grades, road signs, number of lanes, entries and exits, overhead crossings, traffic lights, one-way roads, turning restrictions, sharp turns, steep gradients and other traffic rules that are necessary to provide navigation functions. Additionally, our database contains a searchable and dynamically updated collection of points of interest, such as office buildings, residential communities, restaurants, hotels, tourist attractions, gas stations and parking lots.  The roadways covered by our database grew from approximately 3.3 million kilometers at the end of 2011 to approximately 4.3 million kilometers as of December 31, 2013, while the number of points of interest covered increased from approximately 20 million at the end of 2011 to approximately 26 million as of December 31, 2013.

In the course of building our database, we have accumulated a massive amount of raw location relevant data.  Our database also includes data licensed from third parties such as satellite images, location and local business relevant data, and raw real-time traffic information provided by our business partners.

Quality Assurance . We have implemented a strict quality assurance program for the construction and maintenance of our digital map database.  Our software tools conduct automatic checks to ensure that all data has been correctly entered into our database.  We also conduct quality inspections throughout the database creation process.  We were granted the ISO 9001:2008 certificate for our quality management system for design, production and service of navigation map and relevant support systems in July 2009 and had it renewed in July 2012.  In addition, we were granted the ISO/TS 16949:2009 certificate for our automotive navigation map design and production operations in July 2009 and had it renewed in July 2012. The ISO/TS 16949 standard applies to the design, development, production and, when relevant, installation and servicing of automotive-related products and is an important independent indicator of our quality process management.  We also have the ISO14001:2004 certificate for our design, production and service of navigation map and relevant support systems, which is valid between March 2013 and March 2016.  We were rated as the Automotive SPICE (Automotive Software Process Improvement and Capability Determination) Capability Level 3 in October 2012, and the CMMI (Capability Maturity Model Integration) Level 3 in December 2007. We also have a certificate for value-added telecommunications business covering call center and information service business.

Database Protection . Because of national security concerns, digital map production is subject to certain PRC laws and regulations governing national secrecy.  We have detailed policies and procedures in place that are designed to comply with these laws and regulations and prevent unauthorized access to our database.  Backup copies are created for all of the raw data collected and stored both in our production facility and offsite in Beijing.  A copy of the master database is stored at a secure offsite location.  Most of the areas in our production facility are under video surveillance and require a valid employee ID card to access.  In addition, fingerprint access control systems have been installed in areas where critical information is stored, such as the raw data storage room and the server room, to further limit access.

Map Data Technology

We have developed a proprietary integrated technology platform that serves as the foundation for all aspects of our business, particularly the development and delivery of our various navigation and location-based solutions to our customers.

Data Collection . We use a range of data collection methods.  We have developed an extensive array of methods and standard procedures for our field surveys.  For a given area, our field employees collect road and point of interest information by driving and walking through roadways and streets throughout the area.  To supplement field survey, we use advanced aerial photogrammetry technologies, such as high-definition digital mapping camera (DMC) systems and light detection and ranging (LIDAR), an optical remote sensing technology used to build 3-D models, to obtain high-resolution aerial images that are used to, among other things, verify and update information in our digital map database.  We also use satellite images obtained from third-party data providers to further supplement data collected through field surveys.  In addition, we rely on feedback from customers and end-users, information gathered from the internet and various industry specific data obtained through our public sector and enterprise application projects.  We rely on third parties for raw real time traffic data.

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Data Processing . In our production facility in Beijing, our production employees process collected data into a uniform electronic format using our proprietary data processing technologies and aggregate the data into our master digital map database.  Our technologies are designed to adapt to China’s rapidly changing and non-standardized road systems and to support the conversion of our map data into the different digital map formats used by various market segments.  Our employees analyze and verify the data collected from sources other than field survey using a proprietary online data processing platform, which consists of a market intelligence processing system, an online data production and management system, a real-time update integration system and a quality control system.  Data that have been verified through this rigorous process are promptly added into our master database and published. Our master digital map database is created in our proprietary format.  We convert the map data into our customers’ formats as needed.  We have developed a proprietary application suite that supports conversion of our map data into different digital map presentation formats used by our customers.

Third-Party Content Integration . We license from a wide range of third parties in-depth POI contents, such as business ratings, user reviews and pricing, to enrich our map database. We have developed technologies to integrate contents from third-party providers.  We have built cooperation relationships with leading vertical service providers in China, such as the SINA Weibo, Dianping and Ctrip for restaurants, hotels and other local business categories. We also work with a number of nation-wide logistics companies, banks and insurance companies to acquire street addresses and local business data.  Our technology in third-party content integration enables us to enrich our map data and to complement our own map data collection and processing. The integration also facilitates a high quality end-user experience by enabling the delivery of rich local information and more accurate search results, and provides the flexibility to incorporate a wide array of content. The flexibility of our platform allows us to quickly add new content providers and meet evolving market demands.

Application and Technical Solutions for Devices.  Our application and technical solutions for devices are composed of software components for client applications and systems, web portals and services, and map and location APIs that allow third-party developers to build into their software through our Software Development Kit.  These technologies are designed for in-car navigation systems, mobile phones, PCs and tablets, and Smart TVs.

Mobile Map & Navigation Applications . We have developed mobile map application and mobile navigation application for all main stream smartphone operating systems including iOS, Android and Windows Phone. The applications integrate base map and 3-D object rendering technologies to provide close to real-world user experiences.

In-car Navigation System . We have also developed navigation engine and software modules for in-car navigation systems.

PC & Mobile Web Portal . We operate web portals designed for PC users and mobile phone users accessing map service through internet browser, such as Microsoft’s Internet Explorer and Google’s Chrome.

Map Application for Smart TV . We have also developed a map application for Smart TVs, such as Samsung Smart TV that runs on Android operating system.

Cloud-based Technology . To strengthen our capability of delivering core services through our internet cloud, we have been building the foundation services for cloud, and have migrated our engine technologies to cloud.

Core Server Engine. We provide core engine technologies through cloud-based services, such as POI search engine, geocoding and location service engine, map tiling engine, navigation and route planning engine, public transit and pedestrian routing engine and live traffic broadcast service.

Telematics Service . We have developed technology to enable us deliver live and dynamic information from our cloud directly to in-car navigation system.  This service provides core information, such as live traffic info and traffic optimized routing, and value-add information, such as weather, gas price and parking facility status.

Large Scale Service Technology. In order to provide the cloud-based services with high performance, high availability and high scalability, we adapt foundation cloud technologies and develop solutions to fit our own needs, in areas such as large scale data storage, distributed processing of large scale data, on-demand service deployment, and service management and monitoring.

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Internet Service Infrastructure and Operations . We have built an internet service infrastructure that empowers large-scale location-based services for end-users accessing our services through internet and mobile internet. The internet service infrastructure is composed of multiple datacenters across China and enables a robust and distributed topology for cloud-based computing and global traffic management.  It is capable of redirecting incoming requests to a near-by datacenter and then load balancing across multiple servers. Our datacenters have direct network connection to China Telecom, China Unicom and China Mobile, the three major backbone ISPs of China as well as other regional ISPs. Network connectivity is thus optimized for both fixed-line internet users and 3G mobile internet users.  This allows us to provide fast and quality services to all our customers around China. Our internet service infrastructure has the capacity to deliver over 300 terabytes of contents to tens of millions of end-users and to serve hundreds of millions of requests in a day. Our operation staff monitor online services hosted in our datacenters 24 hours a day, 7 days a week.  We are able to deliver 99.95% SLA (Service Level Agreement) to our customers and partners.

Sales and Marketing

We employ different sales strategies in approaching different types of customers, according to their procurement practices.  As of December 31, 2013, we had a sales and marketing force of over 260 individuals, mainly based in Beijing and Shanghai.

Historically, automobile manufacturers selected map data suppliers through in-dash navigation system manufacturers.  However, in recent years, some automobile manufacturers have built a direct procurement relationship with the map data suppliers.  Generally, we are selected as map data suppliers by automobile manufacturers through their formal supplier selection processes.  The engineering design department of an automobile manufacturer first sends out a “request for proposal (RFP),” usually about two to four years before a new vehicle model is launched.  We then partner with an in-dash navigation system manufacturer to submit a bid.  We sometimes submit multiple bids together with different in-dash navigation system manufacturers.  The entire selection process may take one to three years.  Once we are selected, we negotiate a sales contract with the in-dash navigation system manufacturer selected by the automobile manufacturer or directly with the automobile manufacturer.  For aftermarket navigation solutions, we focus our sales effort on large dealer option navigation system and portable navigation device manufacturers that are willing to pay a premium for high quality customized solutions.

We also market our solutions through sponsorships, attendance and exhibition at trade shows and conferences, advertisements in relevant industry publications and internet-based marketing using our own corporate websites.  In May 2011, we held a press conference to promote the launch of AMAP, which was attended by a large number of journalists, many hailing from influential news and media outlets.  In December 2011, we served as a diamond sponsor for the Telematics@China 2011 Conference in Shanghai, which attracted representatives from a diverse cross-section of industries including major telecom operators in China and over 50 leading automakers in China’s automotive market. In August 2013, we held a press conference to announce that our navigation applications are free, and around 200 journalists across the country attended the conference and gave wide and deep report on it.

We also promote our brand name through public relation activities.  In May 2011 and June 2012, we conducted two contests entitled “AutoNavi China LBS Challenge,” respectively, which attracted a wide range of internet and mobile application developers and received considerable attention from the industry. In November 2012, we held a “Technology Open Day” to welcome journalists to visit our data production base, and we also held a press conference concerning the strategic cooperation with SINA, both of the two activities attracted lots of major media covering the first tier cities including Beijing, Shanghai and Guangzhou.

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We also raise our brand awareness through advertisement. “AMAP knows every place well”as a slogan of AMAP was showed on the outdoor media in the first-tier cities such as Beijing, Shanghai, Guangzhou and Chengdu in 2013. We also cooperated with popular TV show to form users’ habit of searching restaurants through AMAP. In September 2013, we marketed AMAP brand with the popular film “Jobs” to promote awareness that we are the map data and service provider to Apple in China.  In December 2013, we invited Lin Zhiling, a popular star in China, as our spokeswoman of AMAP and ANavi.

We further expanded our distribution channels in 2013. 360 Mobile Assistant was the largest distribution channel of our Android-based mobile products. We also cooperated with a number of mobile phone makers and carriers to pre-load our mobile map applications on their devices.

We sometimes utilize social media, such as, microblog and Wechat to prompt our products exposure and to respond to end user questions on our products. In the public sector and enterprise applications business, we direct our sales efforts either directly at prospective end-users of our solutions or at system integrators, which integrate our solutions into their product and service offerings for the end-users.  In the mobile location-based solutions business, we obtain contracts generally through participation in formal bidding processes organized by mobile operators.

Customers

A small number of customers in in-dash navigation systems, portable navigation devices and public sector and enterprise applications markets have historically accounted for a substantial portion of our total net revenues. In 2011, 2012 and 2013, our top five customers accounted for 72.0%, 72.1% and 69.3% of total net revenues, respectively. AW (Shanghai) Autoparts Trading Co., Ltd. and Alpine Electronic (China) Co., Ltd. contributed 31% and 12%, respectively, of our total revenues for the year ended December 31, 2013, as compared to 30% and 21%, respectively, of our total revenues for the year ended December 31, 2012. Samsung accounted for 18.2% of our total revenues for the year ended December 31, 2013. We anticipate that a limited number of customers will continue to represent a significant percentage of our total net revenues for the foreseeable future.  As we further develop our various businesses, especially the mobile and internet location-based solutions, which have historically not accounted for a significant portion of our total net revenues, the identity and concentration of our top customers may change.

Customer and End-User Services and Support

We provide services and technical support to both our customers and end-users of our solutions through our service department, which consists of our call center operating on a 24 hours a day, 7 days a week basis and our technical support team.  In the course of providing services and support, our service personnel routinely collect feedbacks from customers and end-users on our data and solutions and pass the information to other departments to improve quality.

Seasonality

Seasonality has not been a significant factor affecting our historical quarterly results of operations.  Other factors, however, may cause our quarterly results of operations to fluctuate, including, among others, general demand in the automotive market, changes in car models produced by automobile manufacturers, timing of recognition of revenues and certain expenses and charges, and the project-based nature of our public sector and enterprise applications business.

Competition

The competitive landscape in China varies across the different markets in which we operate.  While we face competition in each line of location-based solutions we offer, we believe none of our competitors provides as broad a spectrum of solutions as we do.

Automotive Navigation .  In the in-dash navigation systems market, our primary competitor is NavInfo Co., Ltd.  In addition, the aftermarket navigation solutions market for digital map solutions is highly competitive with multiple map data and solutions providers.

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We believe that the principal factors affecting our competitive position in the automotive navigation markets are:

·                   the quality of the map database, including the accuracy, comprehensiveness and richness of the map data and point of interest information and the frequency of updates;

·                   the variety of features, such as real-time traffic information and 3-D presentation, included in the map data;

·                   the ability to package data into the major map file formats used by hardware manufacturers;

·                   the user-friendliness of the user interface;

·                   the ability to provide integrated and customized software and map data solutions to meet customers’ specific needs;

·                   the price to customers for the use of the map data and solutions; and

·                   the variety and the quality of solutions offered, including after-sales support.

Mobile and Internet Location-based Solutions .  The mobile and internet location-based solution offering is an emerging industry and includes a broad range of new areas.  We do not have any single competitor that competes with us in all these areas.  Rather, we compete with different competitors in different areas.

·                   In pre-installed and downloadable navigation solutions for mobile devices, we face competition primarily from companies that offer similar solutions.  The competition is primarily based on product design, marketing and promotions.

·                   In solutions for mobile operators, we have been providing China Mobile with mobile map and navigation solutions and China Telecom with navigation solutions to support their location-based services to individual mobile subscribers throughout its nationwide network, and have not faced significant competition with respect to this business.

·                   In mobile and internet-based map application solutions, we compete primarily with some big internet search and information service providers.  Some of them have more widely recognized brand names, greater financial resources and more experience in attracting and retaining users than we do.  The competition is primarily based on access to quality map data, richness of the location-based content, ease of use, volume of users, strategic relationships and technological advancements, and marketing and promotions.

Public Sector and Enterprise Applications .  In our aerial photogrammetry and 3-D modeling applications businesses, we face competition primarily from state-owned enterprises that have aerial photogrammetry capabilities and companies with 3-D geographic modeling capabilities.  The competition is based primarily on technology capability, service capacity, customer relations and pricing.  In providing location-based municipal management and enterprise solutions, we compete primarily with companies with digital map production capabilities as well as small, local service providers.  The competition is primarily based on the ability to provide integrated solutions consisting of both map data and software applications.

Facilities

Our corporate headquarters are located at 16/F, Section A, Focus Square, No 6. Futong East Avenue, Wangjing, Chaoyang District, Beijing, where we own approximately 4,900 square meters of office space.  We also own approximately 4,090 square meters of office space at 18/F, Daheng Scitech Mansion, South Section, No. 3 Suzhou Street, Haidian District, Beijing, the address of our former headquarters and the current home of our research and development center.  We maintain a production facility in the Changping Hi-tech Park in Beijing, China, where we lease approximately 8,437 square meters of office space.  The lease for this production facility expired at the end of March 2013, and we are communicating with the lessor to have the lease renewed, while we continue to use the premises under the existing lease.  We also own approximately 3,200 square meters of office space in Xiamen and lease an aggregate of approximately 4,800 square meters of office space in Shanghai, Wuhan, Guangzhou and Shenzhen.  In addition, we also entered into a set of agreements to acquire under-construction premises with an aggregate gross floor area of approximately 27,000 square meters in the Industrial Park of National Geographic Information Technology in Beijing’s Shunyi District, which will serve primarily as our new map data facility and support our overall expansion after completion.

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We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations.  Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC legal counsel.  We have been further advised by our PRC counsel that if the PRC government finds that the agreements that establish the structure for operating our PRC navigation and location-based solutions businesses do not comply with PRC government restrictions on foreign investment in surveying and mapping, digital navigation map production, aerial photogrammetry and value-added telecommunication services, including but not limited to internet content provision, we could be subject to severe penalties, including being prohibited from continuing our operations.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in surveying and mapping, digital navigation map production, aerial photogrammetry and value-added telecommunication services, including but not limited to internet content services, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

In 2011, 2012 and 2013, we derived $114.1 million, $134.5 million and $116.9 million net revenues, respectively, from our consolidated variable interest entities through contractual arrangements, representing a great majority of our total net revenues. For a detailed description of the contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Our PRC Variable Interest Entities and Their Shareholders.”  For a detailed description of the risks associated with our corporate structure, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”

Regulations on Licenses

We are required to hold a variety of permits and licenses, which, among others, include:

Certificate for Surveying and Mapping Qualification.  Pursuant to the relevant PRC laws and regulations, enterprises engaging in surveying, mapping, production of maps including digital maps and internet map services must obtain proper surveying and mapping qualification certificates.  AutoNavi Software holds a Class A surveying and mapping qualification certificate for digital navigation map production, map drawing (digital map, real 3-D map and other special maps), photogrammetry survey and remote observation geographic information system engineering, and internet map services issued by the NASMG and the term of this certificate is valid until December 31, 2014.  This certificate is required for the creation and updating of our digital map database and the provision of navigation and location-based solutions to our customers.  Xingtiandi Technology, a subsidiary of AutoNavi Software, holds a Class A surveying and mapping qualification certificate for aerial photogrammetry and a Class B surveying and mapping qualification for photogrammetry and remote sensing and related activities issued by the NASMG.  We need these certificates in order to provide aerial photogrammetry solutions to our customers.  In accordance with the Notice on Strengthening the Administration of Internet Map promulgated by the NASMG in December 2009, an internet map service provider must obtain the surveying and mapping qualification certificate for internet map services and operate its business within the permitted business scope.  Three of our variable interest entities have obtained the surveying and mapping qualification certificates for internet map service from the NASMG. The internet map used for providing value-added services must be reviewed and approved by the surveying and mapping authority.  The surveying and mapping qualification certificate for digital map drawing or digital navigation map production is required for drawing and updating internet maps.

Certificate for Internet Map Service Qualification.  According to the Administrative Rules of Surveying Qualification Certificate and the amended Standard for Internet Map Services issued by the NASMG in March 2009 and May 2010, respectively, the provision of internet map services by any non-surveying and mapping enterprise is subject to the approval of the NASMG and requires a surveying and mapping qualification certificate.  Pursuant to the Notice on Further Strengthening the Administration of Internet Map Services Qualification issued by the NASMG in December 2011, any entity without applying for a surveying qualification certificate for internet map services is prohibited from providing any internet map services.  Our variable interest entity, MapABC Technology, obtained a surveying qualification certificate for internet map service on July 8, 2010, and PDAger obtained a surveying qualification certificate for internet map service on February 12, 2011; both certificates are effective until December 31, 2014.  The Class A surveying and mapping qualification certificate held by AutoNavi Software covers internet map service in addition to other map production and related activities.

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ICP License.  Under current PRC laws and regulations, a commercial operator of internet content provision services must obtain a value-added telecommunications business operating license, or ICP license, from the appropriate telecommunications authorities in order to carry on any commercial internet content provision operations in China.  The ICP license is necessary for us to operate our websites as an internet content provider.  We have obtained ICP licenses, issued by the Beijing Communications Administration, for our Autonavi.com, MapABC.com, AMAP.com and pdager.com.cn websites.

SP License.  Under current PRC laws and regulations, a commercial operator of information services or call center services must obtain a value-added telecommunications business operating license, or SP license, from the appropriate telecommunications authorities in order to carry on any commercial information services or call center service operations in China.  We currently hold two SP licenses, each issued by the Ministry of Industry and Information Technology, which we need in order to provide value-added location-based solutions.  AutoNavi Software has an SP license for both information services and call center services, and PDAger has an SP license for information services.

Internet Publishing License.  The GAPPRFT and the Ministry of Industry and Information Technology jointly impose a license requirement for any company that intends to engage in internet publishing, which is defined as any act by an internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the internet.  According to the Tentative Measures for Internet Publication Administration (2002), the provision of online map services is deemed an internet publication activity.  According to the Opinions on Strengthening the Administration of Internet Map Services and the Websites that provide Geographical Information Services jointly issued by eight government agencies in February 2008, the publication of internet maps is subject to the approval of the GAPPRFT and requires an internet publishing license.  However, we have not obtained an internet publishing license from the GAPPRFT for our internet map solutions business, nor are we aware of any other internet map service provider in China that has obtained an internet publishing license.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws and regulations governing navigation and location-based services and related services in China are developing and subject to changes. If we fail to maintain and renew existing or obtain additional licenses and permits necessary to conduct our operations in China, our business would be materially and adversely affected.”

Publication Operating License.  Under current PRC laws and regulations, enterprises engaging in the sale and distribution of publications including electronic publications must obtain a publication operating license.  AutoNavi Software holds a publication operating license necessary for selling our digital map data.  However, ADF Navigation does not have such a license. We derive a substantial portion of our revenues from licensing our digital map data to in-dash navigation system manufacturers and automobile manufacturers, mainly through ADF Navigation.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws and regulations governing navigation and location-based services and related services in China are developing and subject to changes. If we fail to maintain and renew existing or obtain additional licenses and permits necessary to conduct our operations in China, our business would be materially and adversely affected.”

Regulations on the Surveying and Mapping Industry

Pursuant to the relevant PRC laws and regulations, enterprises engaging in surveying, mapping and production of maps including digital maps, must obtain proper surveying and mapping qualification certificates.  An enterprise must obtain the surveying and mapping qualification certificates for every specific business activity of surveying and mapping it intends to engage in, for instance, map drawing, digital navigation map production, aerial photogrammetry, geographic information system engineering and internet map services.  The surveying and mapping qualification certificates, which are divided into four classes, Class A, Class B, Class C and Class D, specify the particular scope of surveying and mapping activities that an enterprise is permitted to engage in.  Class A surveying and mapping qualification certificates represent the first rank in all classes.  A holder of a Class A surveying and mapping qualification certificate must, among other requirements, have been granted an ISO 9000 Attestation Certificate of Quality Control System.  A holder of a Class A surveying and mapping qualification certificate that includes aerial photogrammetry in the permitted business scope must also have more than 25 technical specialists, aerial photogrammetry equipment and other special equipment.  The Class A surveying and mapping qualification certificates are issued by the NASMG and are effective for no more than five years subject to an annual review.  Sixty days before the expiration of the Class A surveying and mapping qualification certificate, the holder must apply to the NASMG to renew the surveying and mapping qualification certificate.

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Enterprises engaging in surveying and mapping must conduct their business within the scope specified in the surveying and mapping qualification certificate.  Before publishing a map, enterprises engaging in map production must submit a sample of the map to the national or local bureau of surveying and mapping for review and approval.  The national or local bureau of surveying and mapping will assign a review number to each map sample submitted for review.  Such review number must be marked on the published version of the map.  The publication of map must also be approved by the GAPPRFT.  With regard to digital navigation maps, basic requirements regarding safety processing technology should be observed.  Each digital navigation map must be submitted for review and approval before it is published, presented and used.  Any change in the map is subject to review and approval of the relevant bureau of surveying and mapping.  A sample of the published digital navigation map must be submitted to and registered with the relevant bureau of surveying and mapping.

Moreover, an internet map service provider must obtain the surveying and mapping qualification certificate for internet map services and operate its business within the permitted business scope.  The map provided by the websites must be approved by the provincial-level branch of the NASMG.  The websites are prohibited from providing links to overseas internet map service providers or providing virtual image maps without approval.

Regulations on Electronic Publications

According to relevant PRC laws and regulations, our digital map data are electronic publications, which can only be published by a publishing entity with an electronic publication publishing license granted by the GAPPRFT and sold by an entity with a publication operating license granted by the GAPPRFT or its local counterparts.  We hold a publication operating license which we need in order to sell our digital map data.  However, we do not have an electronic publication publishing license; therefore, we have entered into an agreement with SinoMaps Press, a publishing entity that holds an electronic publication publishing license.  According to the agreement, we are responsible for surveying and data processing relating to the digital maps to be produced, while SinoMaps Press is responsible for map review, approval application and publishing work.  The agreement is effective until November 2014.  For every electronic publication and its updated version, SinoMaps Press must submit the sample map and other required information to the NASMG and the GAPPRFT for approval.

Regulations on Mobile Applications

The Ministry of Industry and Information Technology released a notice to strengthen the administration on mobile applications in April 2013, which, among others, prohibits pre-installation on smartphones mobile applications that (i) collect or alter users’ personal information without user consent; (ii) change the communication functions on smartphones, causing data usage and incurring communication fees, without clearly notifying users and obtaining user consent; (iii) negatively impact smartphones’ normal operation or communication safety; (iv) do not comply with existing telecommunication regulations, or spread rumors or false information; and (v) facilitate others in violating users’ privacy, network and communication rights and safety. This notice was implemented on November 1, 2013. We provide pre-installed and downloadable navigation solutions for mobile devices and therefore will be subject to the notice.

Regulations on Information Security

Due to national security concerns, enterprises engaging in surveying and mapping activities are subject to strict state secrecy laws and regulations.  Surveying data and achievements are divided into two categories, basic surveying achievements and non-basic surveying achievements.  Basic surveying achievements generally include, without limitation, data and pictures obtained for the purpose of establishing a nationwide uniform surveying and mapping benchmark and system, data and video obtained through basic aerial photogrammetry and other data and information regarding basic geographic information system.  Other surveying achievements are deemed to be non-basic surveying achievements.  Upon completing surveying and mapping activities, an enterprise must submit a copy of the basic surveying achievements and a list of the non-basic surveying achievements to the relevant bureau of surveying and mapping.  The achievements obtained in projects financed by the central government should be submitted to the NASMG, while the others are to be submitted to the provincial-level branch of the NASMG.

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Certain basic surveying achievements are defined as state secrets, which may not be used without approval from the NASMG.  The basic surveying achievements that have been defined as state secrets may not be provided to foreign organizations or individuals or foreign-invested enterprises.  Our digital map data which utilize the basic surveying achievements defined as state secrets have been reviewed by the relevant bureau of surveying and mapping and have been duly processed to meet the secrecy protection requirements stipulated by relevant laws and regulations.  If a holder of a surveying and mapping qualification certificate violates the measures for protecting secrecy, the PRC government may revoke its surveying and mapping qualification certificate and the holder may be subject to a variety of administrative or even criminal liabilities. With respect to our internet map service, we are prohibited from disclosing any geography sensitive information or information involving state secret, otherwise our internet map service will be suspended.

Internet content in China is also regulated and restricted from a national security standpoint.  The National People’s Congress, China’s national legislative body, has enacted the Decisions on Maintaining the Internet Security, which may subject violators to criminal punishment in China for any effort to:  (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (ii) leak State secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights.

The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of State secrets or a spread of socially destabilizing content.  The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus.  If we, as an ICP license holder, violate these measures, the PRC government may revoke our ICP license and shut down our websites.

Regulations on End-User Information Protection

In December 2012, the Standing Committee of the National People’s Congress of the PRC issued the Decision on Strengthening the Protection of Online Information. Subsequently on July 16, 2013, the Ministry of Industry and Information Technology released Provisions on Protecting the Personal Information of Telecommunications and Internet Users to stipulate detailed rules to implement the National People’s Congress’s decision. Pursuant to the above rules, if an ICP operator wishes to collect or use personal electronic information, it must do so in a lawful and appropriate manner, and may do so only if it is necessary for the services it provides. It must disclose the purpose, method and scope of any such collection or use, and must seek consent from the relevant individuals. ICP operators are also required to publish their policies relating to information collection and use, must keep such information strictly confidential, and must take technological and other measures to ensure the safety of such information. ICP operators are further prohibited from disclosing, distorting or destroying any such personal electronic information, or selling or proving such information to other parties and are required to report to the administration authority immediately if user’s information is divulged, destructed or lost and serious consequence may be caused. We are an ICP operator due to our operation of several websites and therefore be subject to the decision.  Moreover, the Ministry of Industry and Information Technology released a notice to strengthen the administration on mobile applications in April 2013, which, among others, prohibits pre-installation on smartphones mobile applications that collect or alter users’ personal information without user consent or those facilitate others in violating users’ privacy, network and communication rights and safety. This notice has been implemented since November 1, 2013. We provide pre-installed and downloadable navigation solutions for mobile devices and therefore are subject to the notice.  However, the effect of these new laws and regulations still remain to be seen.

Regulations on Tax

PRC Enterprise Income Tax

The PRC enterprise income tax is calculated based on the taxable income determined under the PRC laws and accounting standards.  The PRC Enterprise Income Tax Law imposes a uniform enterprise income tax rate of 25% on all domestic enterprises, including foreign-invested enterprises, unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential treatments available under previous tax laws and regulations.  Under the PRC Enterprise Income Tax Law and its implementation rules, enterprises that were established before March 16, 2007, the date when the PRC Enterprise Income Tax Law was promulgated, and already enjoyed preferential tax treatments will continue to enjoy them (i) in the case of preferential tax rates, for a period of five years from January 1, 2008, while the tax rate will gradually increase from 15% to 25% during the five-year period, or (ii) in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term.

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The PRC Enterprise Income Tax Law and its implementation rules permit certain “high and new technology enterprises strongly supported by the State” which hold independent ownership of core intellectual property and simultaneously meet a list of other criteria, financial or nonfinancial, as stipulated in the implementation rules, to enjoy a reduced 15% enterprise income tax rate.  The State Administration of Taxation, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises delineating the specific criteria and procedures for the “high and new technology enterprises” certification in April 2008.

AutoNavi Technology, AutoNavi Software, MapABC Technology, Xingtiandi Technology, PDAger and AutoNavi Xiamen were recognized by the local provincial level Science and Technology Commission, Finance Bureau, and State and Local Tax Bureaus as “high and new technology enterprise” in May 2009, December 2008, May 2009, June 2009, December 2008 and December 2009, respectively, and are therefore entitled to the preferential enterprise income tax rate of 15% under the PRC Enterprise Income Tax Law.  ADF Navigation was recognized as a “high and new technology enterprise” in December 2009, but it was entitled to full tax exemption between 2008 and 2009 and a further reduced tax rate of 12.5% between 2010 and 2012 because of its status as a “manufacturing foreign-invested enterprise.”ADF Navigation was entitled to the preferential enterprise income tax rate of 15% in 2013. AutoNavi Technology, AutoNavi Software, AutoNavi Xiamen, MapABC Technology, ADF Navigation, Xingtiandi Technology and PDAger Technology have successfully renewed their “high and new technology enterprise” qualification in 2011 and 2012.

Pursuant to the Notice of the Ministry of Finance and the State Administration of Taxation on Certain Preferential Policies regarding Enterprise Income Tax issued in February 2008, an accredited “key software enterprise under state planning” will be able to enjoy a further reduced 10% income tax rate on its yearly taxable income for which it is accredited, if it otherwise would be subject to a tax rate of more than 10% for that year. In addition to “high and new technology enterprise,” AutoNavi Software was recognized as a “key software enterprise” for 2010, 2011, 2012 and 2013 and was entitled to a preferential tax rate of 10% for these years and thereafter as long as it continues to qualify as “key software enterprise.” The “key software enterprise” qualification is subject to examination and approval each year.

Moreover, under the PRC Enterprise Income Tax Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income.  The relevant implementation rules define the term “de facto management body” as the management body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise.  Specifically, the SAT Circular 82 issued by State Administration of Taxation in April 2009 and a further notice issued in July 2011 provide that a foreign enterprise controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements are satisfied: (i) the senior management and core management departments in charge of its daily operations function mainly in the PRC; (ii) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the enterprise’s directors or senior management with voting rights reside in the PRC.  Although SAT Circular 82 and the further notice only apply to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, the determining criteria set forth therein may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.

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We do not believe that our holding company AutoNavi Holdings Limited, its wholly-owned subsidiary AutoNavi International Limited or AutoNavi Asia Limited meets all of the conditions above.  These three entities are holding companies incorporated outside of the PRC, and their key assets and records, including accounting books, company seals, and minutes and files of their respective board and shareholders’ meetings, are located and maintained outside of the PRC.  In addition, we are not aware of any offshore holding companies with a similar corporate structure as ours ever having been deemed a PRC “resident enterprise” by the PRC tax authorities.  Therefore, we believe that none of these three offshore entities should be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” were deemed applicable to us.  However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities.  In the event that any of these entities is considered a PRC resident enterprise, (i) we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income; and (ii) dividend income that AutoNavi Asia Limited receives from AutoNavi Technology, however, may be exempt from the PRC withholding tax since such income is exempted under the PRC Enterprise Income Tax Law for a PRC resident enterprise recipient.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our global income or the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material and adverse effect on our results of operations.”

PRC VAT and Business Tax

Pursuant to the PRC Provisional Regulation on the Value Added Tax, or VAT, and its implementation rules, any entity or individual engaged in the sales of goods, provision of specified services and importation of goods into China is generally required to pay a VAT at the rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by such entity. However, pursuant to Certain Policies for Encouraging Software Industry and Integrated Circuits Industry issued in 2000, the Notice of the State Council on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries issued in 2011 and the Notice of the Ministry of Finance and the State Administration of Taxation on Value Added Tax Policies for Software Products issued in 2011, an enterprise classified as a “software enterprise” will be entitled to a rebate of its net VAT liability to the extent that it exceeds 3% of the actual VAT burden relating to sales of software products made by itself (excluding export sales).  Such refund will not be treated as taxable income and must be used for funding its software research and development and the expansion of its production capacity.  Pursuant to the Notice of the Ministry of Finance and the State Administration of Taxation on Value Added Tax Policies for Software Products issued in 2011, an entity that develops software products on commission may be entitled to an exemption of VAT if, according to the contractual arrangement, the copyright of the products developed by it shall be owned by the commissioning party or jointly owned by the developer and commissioning party.

Taxpayers providing taxable services in China are required to pay a business tax at a normal tax rate of 5% of their revenues. In November 2011, the PRC Ministry of Finance and the State Administration of Taxation jointly issued two circulars setting out the details of the pilot VAT reform program, which change the charge of sales tax from business tax to VAT for certain pilot industries. The pilot VAT reform program initially applied only to the pilot industries in Shanghai, and have been expanded to eight additional regions, including, among others, Beijing and Guangdong province, in 2012 and to nationwide in 2013. Substantially all of our PRC subsidiaries and variable interest entities fall within the scope of the pilot program.  Taxable services provided by these entities are subject to the VAT at the tax rate of 6% or 3% instead of the business tax at the tax rate of 5%.

Dividend Withholding Tax

We are a Cayman Islands holding company and substantially all of our income may come from dividends we receive from our subsidiary located in Hong Kong, which is the direct holding company of AutoNavi Technology, our PRC subsidiary.  Pursuant to the PRC Enterprise Income Tax Law and its implementation rules, dividends generated after January 1, 2008 and distributed to our Hong Kong subsidiary by AutoNavi Technology are subject to withholding tax at a rate of 5%, provided that our Hong Kong subsidiary is determined by the relevant PRC tax authorities to be a “non-resident enterprise” under the PRC Enterprise Income Tax Law and holds at least 25% of the equity interest of our PRC subsidiary.  The State Administration for Taxation promulgated a SAT Circular 601, which provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements.  According to SAT Circular 601, a beneficial owner generally must be engaged in substantive business activities.  An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits.  The conduit company normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits.  In addition, as described above, our Hong Kong subsidiary may be considered a PRC resident enterprise for enterprise income tax purposes, in which case dividends received by it from AutoNavi Technology, our PRC subsidiary, may be exempt from the PRC withholding tax because such income is exempted under the PRC Enterprise Income Tax Law for a PRC resident enterprise recipient.

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As there remains uncertainty regarding the interpretation and implementation of the PRC Enterprise Income Tax Law and its implementation rules, it is uncertain whether, if we are deemed a PRC resident enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would be subject to any PRC withholding tax.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our global income or the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material and adverse effect on our results of operations.”

Regulations on Foreign Exchange

RMB is convertible for current account items, including the distribution of dividends, interest and royalties payments, trade and service-related foreign exchange transactions.  Conversion of RMB for capital account items, such as direct investment, loan, securities investment and repatriation of investment, however, is still subject to the approval of SAFE.

Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.  Capital investments by foreign-invested enterprises outside of China are also subject to limitations, including approval by the Ministry of Commerce, SAFE and the National Development and Reform Commission or their local counterparts.

Pursuant to a SAFE Circular 142 issued by SAFE in August 2008, the RMB fund from the settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the examination and approval department of the government, and cannot be used for domestic equity investment unless it is otherwise provided for.  Documents certifying the purposes of the RMB fund from the settlement of foreign currency capital, including a business contract, must also be submitted for the settlement of the foreign currency.  In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company.  The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of the loans have not been used.  In addition, SAFE promulgated a SAFE Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. Furthermore, it recently came to our attention that SAFE issued an internal guideline to its local counterparts, referred to as SAFE Circular 45, in November 2011. SAFE Circular 45 has never been formally announced to the public or posted on SAFE’s website. Based on the version of SAFE Circular 45 made publicly available by certain local governmental authorities on their websites, we understand that SAFE Circular 45 requires SAFE’s local counterparts to strengthen the control imposed by SAFE Circulars 142 and 59 over the conversion of a foreign-invested company’s capital contributed in foreign currency into RMB.  SAFE Circular 45 stipulates that a foreign-invested company’s RMB funds, if converted from the company’s capital contributed in foreign currency, may not be used by the company to (i) extend loans (in the form of entrusted loans), (ii) repay borrowings between enterprises, or (iii) repay bank loans that it has obtained and on-lent to third parties.

Regulations on Dividend Distribution

Under applicable PRC laws and regulations, wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations.  In addition, a wholly foreign-owned company is required to set aside at least 10% of its accumulated profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital.  At the discretion of these wholly foreign-owned companies, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds.  These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

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Regulations on Offshore Investment by PRC Residents

Pursuant to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, generally known in China as SAFE Circular No. 75, issued on October 21, 2005, (i) a PRC citizen residing in the PRC, who is referred to as a PRC resident in SAFE Circular No. 75, must register with the local branch of the SAFE before it establishes or controls an overseas special purpose company, for the purpose of overseas equity financing (including convertible debts financing); (ii) when a PRC resident contributes the assets of or its equity interests in a domestic enterprise into an overseas special purpose company, or engages in overseas financing after contributing assets or equity interests into a special purpose company, such PRC resident must register his or her interest in the special purpose company and the change thereof with the local branch of SAFE; and (iii) when the special purpose company undergoes a material event outside of China, such as change in share capital or merger and acquisition, the PRC resident must, within 30 days from the occurrence of such event, register such change with the local branch of SAFE.

Under SAFE Circular No. 75, failure to comply with the registration procedures set forth above may result in penalties, including imposition of restrictions on a PRC subsidiary’s foreign exchange activities and its ability to distribute dividends to the overseas special purpose company.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.”

Regulations on Employee Stock Options Plan

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, setting forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account.  In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions, such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly listed company.  In February 2012, SAFE issued the Notice on Several Issues Relating to Domestic Individuals Participating in Share Incentive Plan of Overseas Listed Company, or the New Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan previously issued in March 2007 and aim to clarify and simplify the relevant foreign exchange procedures.  The New Stock Option Rules regulate the foreign exchange administration of PRC domestic individuals who participate in employee stock ownership plans and stock option plans of overseas listed companies.

According to the New Stock Option Rules, if a PRC domestic individual participates in any employee stock ownership plan or stock option plan of an overseas listed company, the participant must retain a PRC agent through the PRC subsidiary of the overseas listed company for which he/she works to handle matters regarding foreign exchange registration, bank account opening and foreign currency remittance.  The PRC agent could be a PRC subsidiary of the oversea listed company or a PRC institution that conducts assets custodian business appointed by the PRC subsidiary.  The PRC agent must apply to the local branch of SAFE to make the foreign exchange registration for the participants.  If the participants need to use RMB to participate in the employee stock ownership plan or stock option plan, the PRC agent should open a special account to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of stock, any dividends issued upon the stock and any other income or expenditures approved by SAFE.  The PRC agent should also retain an overseas custodian agency to handle matters in connection with the exercises or sales of stock options for the stock option plan participants.

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Under the Foreign Currency Administration Rules, as amended in 2008, the foreign exchange proceeds of domestic entities and individuals can be remitted into China or deposited abroad, subject to the terms and conditions to be issued by SAFE.  However, the implementation rules in respect of depositing the foreign exchange proceeds abroad have not been issued by SAFE.  The foreign exchange proceeds from the sales of stock can be converted into RMB or transferred to such individuals’ foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the PRC domestic bank.  If stock options are exercised in a cashless exercise, the PRC domestic individuals are required to remit the proceeds to special foreign exchange accounts.

We and our PRC employees who have participated in our share incentive plans are subject to the New Stock Option Rules.  If we or our PRC employees fail to comply with the New Stock Option Rules, we and our PRC employees may face sanctions imposed by the PRC foreign exchange authority or any other PRC government authorities, including restriction on foreign currency conversions and additional capital contribution to our PRC subsidiary.

In addition, the State Administration of Taxation has issued a few circulars concerning employee stock options.  Under these circulars, our employees working in China who exercise stock options will be subject to PRC individual income tax.  Our PRC subsidiary has obligations to file documents related to employee stock options with relevant tax authorities and withhold the individual income taxes of those employees who exercise their stock options.  If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or any other PRC government authorities.

C.                                     Organizational Structure

The following diagram illustrates our corporate structure, including our subsidiaries and variable interest entities as of the date of this annual report.

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D.                                     Property, Plants and Equipment

Our corporate headquarters are located at 16/F, Section A, Focus Square, No 6. Futong East Avenue, Wangjing, Chaoyang District, Beijing, where we own approximately 4,900 square meters of office space.  We also own approximately 4,090 square meters of office space at 18/F, Daheng Scitech Mansion, South Section, No. 3 Suzhou Street, Haidian District, Beijing, the address of our former headquarters and the current home of our research and development center.  We maintain a production facility in the Changping Hi-tech Park in Beijing, China, where we lease approximately 8,437 square meters of office space.  The lease for this production facility expired at the end of March 2013, and we are communicating with the lessor to have the lease renewed, while we continue to use the premises under the existing lease.  We also own approximately 3,200 square meters of office space in Xiamen and lease an aggregate of approximately 4,800 square meters of office space in Shanghai, Wuhan, Guangzhou and Shenzhen.

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In August 2012, we entered into agreements to acquire under-construction premises with an aggregate gross floor area of approximately 27,000 square meters in the Industrial Park of National Geographic Information Technology in Beijing’s Shunyi District. The location will serve primarily as our new map data facility, while also supporting our overall expansion. The aggregate consideration for acquiring the new premises is approximately RMB270 million ($44.6 million), to be paid in installments until construction is completed and accepted. As of December 31, 2013, we had paid approximately RMB54.1 million ($8.9 million) in accordance with the agreements. Pursuant to the agreements, the premises will be delivered to us by the end of 2014.

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In 2013, net revenues from our automotive navigation, mobile and internet location-based solutions, and public sector and enterprise applications accounted for 51.3%, 37.0% and 10.4%, respectively, of our total net revenues.

Our net revenues were $127.0 million in 2011, $159.7 million in 2012 and $141.7 million in 2013.  Net income attributable to our shareholders was $36.5 million in both 2011 and 2012, and net loss attributable to our shareholders was $25.4 million in 2013.  In 2011, 2012 and 2013, we incurred share-based compensation expenses of $5.4 million, $12.5 million and $13.4 million, respectively.