SanDisk 2010 Annual Report Download - page 150

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 amount of capacity allocated to us from 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 some of our existing subcontractors. 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 subcontractors. 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 24-nanometer and
smaller process technologies and/or X3 and X4 NAND technologies, is highly complex and requires new
controllers, new test procedures, potentially new equipment and modifications to numerous aspects of any
manufacturing processes, as well as extensive qualification of the new products by our OEM customers and us. If
we fail to achieve OEM design wins with new technologies such as the use of X3 in embedded mobile
applications, we may be unable to achieve the cost structure required to support our profit objectives. There can
be no assurance that technology transitions will occur on schedule, at the yields or costs that we anticipate, or
that they will meet the specifications of certain customers or products. 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. In addition, we could
face design, manufacturing and equipment challenges when transitioning to the next generation of technologies
beyond NAND. Any material delay in a development or qualification schedule could delay deliveries and harm
our operating results. We have periodically 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 provide a warranty period, which ranges up to ten years.
Generally, our OEM customers have more stringent requirements than other customers and increases in OEM
product revenue could require additional cost to test products or increase service costs and warranty claims.
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,
indemnification of our customer’s product recall costs, 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. Underestimation
of our warranty and similar costs would have an adverse effect on our results of operations and financial condition.
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