Netgear 2006 Annual Report Download - page 21

Table of Contents
We depend on a limited number of third-party contract manufacturers for substantially all of our
manufacturing needs. If these contract manufacturers experience any delay, disruption or quality control
problems in their operations, we could lose market share and our brand may suffer.
All of our products are manufactured, assembled, tested and generally packaged by a limited number of original
design manufacturers, or ODMs, and original equipment manufacturers, or OEMs. We rely on our contract
manufacturers to procure components and, in some cases, subcontract engineering work. Some of our products are
manufactured by a single contract manufacturer. We do not have any long-term contracts with any of our third-party
contract manufacturers. Some of these third-party contract manufacturers produce products for our competitors. The
loss of the services of any of our primary third-party contract manufacturers could cause a significant disruption in
operations and delays in product shipments. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming.
Our reliance on third-party contract manufacturers also exposes us to the following risks over which we have
limited control:
All of our products must satisfy safety and regulatory standards and some of our products must also receive
government certifications. Our ODM and OEM contract manufacturers are primarily responsible for obtaining most
regulatory approvals for our products. If our ODMs and OEMs fail to obtain timely domestic or foreign regulatory
approvals or certificates, we would be unable to sell our products and our sales and profitability could be reduced,
our relationships with our sales channel could be harmed, and our reputation and brand would suffer.
If we are unable to provide our third-party contract manufacturers a timely and accurate forecast of our
component and material requirements, we may experience delays in the manufacturing of our products and the
costs of our products may increase.
We provide our third-party contract manufacturers with a rolling forecast of demand, which they use to
determine our material and component requirements. Lead times for ordering materials and components vary
significantly and depend on various factors, such as the specific supplier, contract terms and demand and supply for a
component at a given time. Some of our components have long lead times, such as wireless local area network
chipsets, switching fabric chips, physical layer transceivers, connector jacks and metal and plastic enclosures. If our
forecasts are not timely provided or are less than our actual requirements, our contract manufacturers may be unable
to manufacture products in a timely manner. If our forecasts are too high, our contract manufacturers will be unable
to use the components they have purchased on our behalf. The cost of the components used in our products tends to
drop rapidly as volumes increase and the technologies mature. Therefore, if our contract manufacturers are unable to
promptly use components purchased on our behalf, our cost of producing products may be higher than our
competitors due to an over supply of higher-priced components. Moreover, if they are unable to use components
ordered at our direction, we will need to reimburse them for any losses they incur.
We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use
this technology and future technology, our ability to develop, sell, maintain and support technologically
advanced products would be limited.
We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies
that are incorporated into and necessary for the operation and functionality of most of our products. In these cases,
because the intellectual property we license is available from third parties, barriers to entry may be lower than if we
owned exclusive rights to the technology we license and use. On the other hand, if a competitor or potential
competitor enters into an exclusive arrangement with any of our key third-party technology providers, or if any of
these providers unilaterally decide not to do business with us for any reason, our ability to develop and sell products
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unexpected increases in manufacturing and repair costs;
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inability to control the quality of finished products;
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inability to control delivery schedules; and
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potential lack of adequate capacity to manufacture all or a part of the products we require.