3Ware 2004 Annual Report Download - page 56

Our IC products are generally only qualified for production at a single foundry. These suppliers can allocate,
and in the past have allocated, capacity to the production of other companies’ products while reducing deliveries
to us on short notice. Because establishing relationships, designing or redesigning ICs, and ramping production
with new outside foundries may take over a year, there is no readily available alternative source of supply for
these products.
Our dependence on third-party manufacturing and supply relationships increases the risk that we will not
have an adequate supply of products to meet demand or that our cost of materials will be higher than
expected.
The risks associated with our dependence upon third parties which manufacture, assemble or package
certain of our products, include:
•reduced control over delivery schedules and quality;
•risks of inadequate manufacturing yields and excessive costs;
•difficulties selecting and integrating new subcontractors;
•the potential lack of adequate capacity during periods of excess demand;
•limited warranties on products supplied to us;
•potential increases in prices; and
•potential misappropriation of our intellectual property.
Difficulties associated with adapting our technology and product design to the proprietary process
technology and design rules of outside foundries can lead to reduced yields of our IC products. The process
technology of an outside foundry is typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be effectively determined or resolved until
an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until well into the production process, and
resolution of yield problems may require cooperation between us and our manufacturer. This risk could be
compounded by the offshore location of certain of our manufacturers, increasing the effort and time required to
identify, communicate and resolve manufacturing yield problems. Manufacturing defects that we do not discover
during the manufacturing or testing process may lead to costly product recalls. These risks may lead to increased
costs or delayed product delivery, which would harm our profitability and customer relationships.
If the foundries or subcontractors we use to manufacture our products discontinue the manufacturing
processes needed to meet our demands, or fail to upgrade their technologies needed to manufacture our products,
we may be unable to deliver products to our customers, which could materially adversely affect our operating
results.
Our requirements typically represent a very small portion of the total production of the third-party foundries.
As a result, we are subject to the risk that a producer will cease production of an older or lower-volume process
that it uses to produce our parts. We cannot be certain our external foundries will continue to devote resources to
the production of our products or continue to advance the process design technologies on which the
manufacturing of our products are based. Each of these events could increase our costs and materially impact our
ability to deliver our products on time.
Some companies that supply our customers are similarly dependent on a limited number of suppliers to
produce their products. These other companies’ products may be designed into the same networking equipment
into which our products are designed. Our order levels could be reduced materially if these companies are unable
to access sufficient production capacity to produce in volumes demanded by our customers because our
customers may be forced to slow down or halt production on the equipment into which our products are
designed.
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