SanDisk 2008 Annual Report Download - page 25

facility near Shanghai, China has increased significantly during fiscal year 2008 and we now utilize this factory
to satisfy a majority of our assembly and test requirements, and also to produce products with leading-edge
technologies such as multi-stack die packages. Any delays or interruptions in the production ramp or targeted
yields or any quality issues at our captive facility could harm our results of operations and financial condition.
We depend on our third-party subcontractors and our business could be harmed if our subcontractors do
not perform as planned. We rely on third-party subcontractors for a portion of our wafer testing, IC assembly,
packaged testing, product assembly, product testing and order fulfillment. From time-to-time, our subcontractors
have experienced difficulty meeting our requirements. If we are unable to increase the capacity of our current
subcontractors or qualify and engage additional subcontractors, we may not be able to meet demand for our
products. We do not have long-term contracts with our existing subcontractors nor do we expect to have long-
term contracts with any new subcontract suppliers. We do not have exclusive relationships with any of our
subcontractors, and therefore, cannot guarantee that they will devote sufficient resources to manufacturing our
products. We are not able to directly control product delivery schedules. Furthermore, we manufacture on a
turnkey basis with some of our subcontract suppliers. In these arrangements, we do not have visibility and
control of their inventories of purchased parts necessary to build our products or of the progress of our products
through their assembly line. Any significant problems that occur at our subcontractors, or their failure to perform
at the level we expect, could lead to product shortages or quality assurance problems, either of which would have
adverse effects on our operating results.
In transitioning to new processes, products and silicon sources, we face production and market acceptance
risks that may cause significant product delays, cost overruns or performance issues that could harm our
business. Successive generations of our products have incorporated semiconductors with greater memory
capacity per chip. The transition to new generations of products, such as products containing 32-nanometer X2
technology or 43-nanometer X3 technology, is highly complex and requires new controllers, new test procedures
and modifications of numerous aspects of manufacturing, as well as extensive qualification of the new products
by both us and our OEM customers. There can be no assurance that these transitions or other future technology
transitions will occur on schedule or at the yields or costs that we anticipate. If Flash Ventures encounters
difficulties in transitioning to new technologies, our cost per gigabyte may not remain competitive with the costs
achieved by other flash memory producers, which would harm our gross margins and financial results. Any
material delay in a development or qualification schedule could delay deliveries and adversely impact our
operating results. We periodically have experienced significant delays in the development and volume production
ramp-up of our products. Similar delays could occur in the future and could harm our business, financial
condition and results of operations.
Our products may contain errors or defects, which could result in the rejection of our products, product
recalls, damage to our reputation, lost revenues, diverted development resources and increased service costs and
warranty claims and litigation. Our products are complex, must meet stringent user requirements, may contain
errors or defects and the majority of our products are warrantied for one to five years. Errors or defects in our
products may be caused by, among other things, errors or defects in the memory or controller components,
including components we procure from non-captive sources. In addition, the substantial majority of our flash
memory is supplied by Flash Ventures, and if the wafers contain errors or defects, our overall supply could be
adversely affected. These factors could result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources, increased customer service and support costs and warranty claims and
litigation. We record an allowance for warranty and similar costs in connection with sales of our products, but
actual warranty and similar costs may be significantly higher than our recorded estimate and result in an adverse
effect on our results of operations and financial condition.
Our new products have from time-to-time been introduced with design and production errors at a rate higher
than the error rate in our established products. We must estimate warranty and similar costs for new products
without historical information and actual costs may significantly exceed our recorded estimates. Warranty and
similar costs may be even more difficult to estimate as we increase our use of non-captive supply.
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