SanDisk 2012 Annual Report Download - page 119

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• errors or defects in our products caused by, among other things, errors or defects in the memory or
controller components, including memory and non-memory components we procure from third-party
suppliers;
• the financial strength and market share of our customers; and
• the other factors described in this “Risk Factors” section and elsewhere in this report.
Competitive pricing pressures may result in lower average selling prices for our products, and if such price
declines are not offset by a corresponding increase in demand for our products, our revenues may decline. The
price of NAND flash memory is influenced by, among other factors, the balance between supply and demand,
including the effects of new fab capacity, macroeconomic factors and business conditions, technology transitions,
conversion of industry DRAM capacity to NAND, and new technologies or other actions taken by us or our
competitors to gain market share. In particular, the NAND flash memory industry has, from time-to-time,
experienced periods of excess supply, resulting in significant price declines. Industry capacity is expected to
continue to grow, and if capacity grows at a faster rate than market demand, the industry could again experience
significant price declines. If we are not able to offset significant price declines with sufficient increases in unit
sales or average memory capacity per unit or a shift in product mix towards products with higher average selling
prices, our revenues and operating results may be harmed.
If we are unable to reduce our manufacturing costs to keep pace with reductions in average selling prices,
our gross margins may be harmed. Because of the historical and expected future declines in the price of NAND
flash memory, we need to reduce our manufacturing costs in order to maintain adequate gross margins. Our
ability to reduce our cost per gigabyte of memory produced depends on technology transitions and the
improvement of manufacturing efficiency, including manufacturing yields. If our technology transitions (for
example, the production ramp of NAND technology on the 1Y-nanometer process node) take longer or are more
costly to complete than anticipated, our manufacturing costs may not remain competitive with other flash
memory producers, which would harm our gross margins and financial results. Furthermore, the inherent
physical technology limitations of NAND flash technology may result in more costly technology transitions that
we have experienced in the past, which could further limit our ability to keep pace with reductions in average
selling prices. Manufacturing yields are a function of both design and manufacturing process technology, and
yields may also be impacted by equipment malfunctions, fabrication facility accidents or human error. Yield
problems may not be identified during the production process or solved until an actual product is manufactured
and tested, further increasing our costs. If we are unable to improve manufacturing yields or other manufacturing
efficiencies, our gross margins and results of operations would be harmed.
Our reliance on and investments in captive manufacturing capacity limit our ability to respond to industry
fluctuations in supply and demand. The semiconductor industry, and the NAND flash memory industry in
particular, is highly cyclical and is characterized by constant and rapid technological change, rapid product
obsolescence, price declines, evolving standards, short product life cycles and wide fluctuations in product
supply and demand. We are limited in our ability to react or adjust our cost structure in response to these cyclical
fluctuations. We rely on our significant investments in Flash Ventures as a captive source of the vast majority of
our NAND flash memory supply. Growth in our captive memory supply comes from investments in technology
transitions and new capacity at Flash Ventures. These investment decisions require significant planning and lead-
time before an increase in supply can be realized, and are further determined by factors such as the timing, rate
and type of investment by us and Toshiba, our partner in Flash Ventures, agreement between us and Toshiba as
to these matters, our profitability, our estimation of market demand and our liquidity position. A failure to
accurately forecast demand for our products or industry capacity could cause us to over-invest or under-invest in
the expansion of captive memory capacity in Flash Ventures. Over-investment could result in excess supply that
could cause significant decreases in our product prices, significant excess, obsolete or lower of cost or market
inventory write-downs or under-utilization charges, and the potential impairment of our investments in Flash
Ventures. For example, we recorded charges of $121 million and $63 million in fiscal year 2008 and the first
quarter of fiscal year 2009, respectively, for adverse purchase commitments associated with under-utilization of
Flash Ventures’ capacity. On the other hand, if we or Toshiba under-invest in captive memory capacity or
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