SanDisk 2008 Annual Report Download - page 24

industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product
cycles of both semiconductor companies’ and their customers’ products and declines in general economic
conditions. The flash memory industry is currently experiencing significant excess supply, reduced demand, high
inventory levels, and accelerated declines in selling prices. If the oversupply of NAND-based flash products
continues, we may be forced to hold excessive inventory, sell our inventory below cost, and record inventory
write-downs, all of which would place additional pressure on our results of operation and our cash position. We
are currently experiencing these conditions in our business and may experience such downturns in the future.
We depend on Flash Ventures and third parties for silicon supply and any disruption or shortage in our
supply from these sources will reduce our revenues, earnings and gross margins. All of our flash memory
products require silicon supply for the memory and controller components. The substantial majority of our flash
memory is currently supplied by Flash Ventures and to a much lesser extent by third-party silicon suppliers. Any
disruption or shortage in supply of flash memory from our captive or non-captive sources would harm our
operating results. The risks of supply disruption are magnified at Toshiba’s Yokkaichi, Japan operations, where
Flash Ventures are operated and Toshiba’s foundry capacity is located. Earthquakes and power outages have
resulted in production line stoppages and loss of wafers in Yokkaichi and similar stoppages and losses may occur
in the future. For example, in the first quarter of fiscal year 2006, a brief power outage occurred at Fab 3, which
resulted in a loss of wafers and significant costs associated with bringing the fab back on line. In addition, the
Yokkaichi location is often subject to earthquakes, which could result in production stoppage, a loss of wafers
and the incurrence of significant costs. Moreover, Toshiba’s employees that produce Flash Ventures’ products
are covered by collective bargaining agreements and any strike or other job action by those employees could
interrupt our wafer supply from Flash Ventures. If we have disruption in our captive wafer supply or if our
non-captive sources fail to supply wafers in the amounts and at the times we expect, we may not have sufficient
supply to meet demand and our operating results could be harmed.
Currently, our controller wafers are manufactured by SMIC, TSMC, Tower and UMC. Any disruption in the
manufacturing operations of our controller wafer vendors would result in delivery delays, adversely affect our
ability to make timely shipments of our products and harm our operating results until we could qualify an
alternate source of supply for our controller wafers, which could take several quarters to complete. In times of
significant growth in global demand for flash memory, demand from our customers may outstrip the supply of
flash memory and controllers available to us from our current sources. If our silicon vendors are unable to satisfy
our requirements on competitive terms or at all, we may lose potential sales and our business, financial condition
and operating results may suffer. Any disruption or delay in supply from our silicon sources could significantly
harm our business, financial condition and results of operations.
If actual manufacturing yields are lower than our expectations, this may result in increased costs and
product shortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra
clean environment. Semiconductor manufacturing yields and product reliability are a function of both design
technology and manufacturing process technology and production delays may be caused by equipment
malfunctions, fabrication facility accidents or human errors. Yield problems may not be identified or improved
until an actual product is made and can be tested. As a result, yield problems may not be identified until the
wafers are well into the production process. We have from time-to-time experienced yields that have adversely
affected our business and results of operations. We have experienced adverse yields on more than one occasion
when we have transitioned to new generations of products. If actual yields are low, we will experience higher
costs and reduced product supply, which could harm our business, financial condition and results of operations.
For example, if the production ramp and/or yield of 43-nanometer X3 technology wafers, or 43-nanometer or
32-nanometer X2 technology wafers do not increase as expected in fiscal year 2009, our cost competitiveness
would be harmed, we may not have adequate supply or the right product mix to meet demand, and our business,
financial condition and results of operations will be harmed.
We depend on our captive assembly and test manufacturing facility in China and our business could be
harmed if this facility does not perform as planned. Our reliance on our captive assembly and test manufacturing
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