AMD 2006 Annual Report Download - page 47

Table of Contents
final test and assembly of some of its products. These constraints continued into the fourth quarter of fiscal 2006. While Spansion has worked internally and with
subcontractors to increase capacity to meet anticipated demand, it cannot be assured that it will not experience similar constraints in the future. These capacity
constraints limit Spansion’s ability to respond to rapid and short-term surges in demand for its products. If Spansion is unable to obtain sufficient manufacturing
capacity to meet anticipated demand, either in its own facilities or through foundry, subcontractor or similar arrangements with third parties, or if it is unable to
obtain foundry services at competitive rates, Spansion’s business may be materially adversely affected.
Spansion’s increased reliance on third-party manufacturers entails risks that could materially adversely affect Spansion.
Spansion currently obtains foundry services from other companies, including Taiwan Semiconductor Manufacturing Company Limited, and following the
sale of its JV1 and JV2 manufacturing facilities Spansion will also obtain foundry services from Fujitsu. Spansion also uses independent contractors to perform
some of the assembly, testing and packaging of its products. Third-party manufacturers are often under no obligation to provide Spansion with any specified
minimum quantity of product. Spansion depends on these manufacturers to allocate to Spansion a portion of their manufacturing capacity sufficient to meet
Spansion’s needs, to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to Spansion on a timely basis at
acceptable prices. These manufacturers may not be able to meet Spansion’s near-term or long-term manufacturing requirements. These manufacturers also make
products for other companies, including certain of Spansion’s competitors, and/or for themselves and could choose to prioritize capacity for themselves or other
customers beyond any minimum guaranteed amounts, reduce deliveries to Spansion or, in the absence of price guarantees, increase the prices they charge
Spansion on short notice, such that Spansion may not be able to pass cost increases on to Spansion’s customers. Because it could take several quarters or more to
establish a relationship with a new manufacturing partner, Spansion may be unable to secure an alternative supply for specific products in a short timeframe or at
all at an acceptable cost to satisfy Spansion’s production requirements. In addition, Spansion may be required to incur additional development, manufacturing
and other costs to establish alternative sources of supply. Other risks associated with Spansion’s increased dependence on third-party manufacturers include: their
ability to adapt to Spansion’s proprietary technology, reduced control over delivery schedules, quality assurance, manufacturing yields and cost, lack of capacity
in periods of excess demand, misappropriation of Spansion’s intellectual property, reduced ability to manage inventory and parts and risks associated with
operating in foreign countries. If Spansion is unable to secure sufficient or reliable suppliers of wafers or obtain the necessary assembling, testing and packaging
services, Spansion’s ability to meet customer demand for its products may be adversely affected, which could have a material adverse effect on Spansion.
Spansion’s business has been characterized by average selling prices that decline over relatively short time periods, which can negatively affect
Spansion’s results of operations unless it is able to reduce its costs or introduce new products with higher average selling prices.
Average selling prices for Spansion’s products historically have declined over relatively short time periods. Spansion is unable to predict pricing
conditions for future periods. Even in the absence of downturns or oversupply in the industry, average selling prices of Spansion’s products have decreased
during the products’ lives. When Spansion’s average selling prices decline, its net sales and net income decline unless it is able to compensate by selling more
units, reducing its manufacturing costs or introducing new, higher margin products that have higher densities and/or incorporate advanced features. Spansion has
experienced declining average selling prices in the past, and it has stated that it expects to continue to experience them in the future, although Spansion cannot
predict when they may occur or how severe they will be. If Spansion’s average selling prices continue to decline, its operating results could be materially
adversely affected. In addition, average selling prices for Spansion’s products may also be adversely affected by a significant decline in the price for NAND
products. Such a decline may result in downward price pressure in the overall Flash memory market, which would adversely affect Spansion.
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Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007