Netgear 2011 Annual Report Download - page 24

Table of Contents
service providers. Some of these entities purchase our products through our wholesale distributor customers. We generally have no minimum
purchase commitments or long-term contracts with any of these third parties.
Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. If the networking
sector does not experience sufficient growth, retailers may choose to allocate more shelf space to other consumer product sectors. A competitor
with more extensive product lines and stronger brand identity, such as Cisco Systems, may have greater bargaining power with these retailers.
Any reduction in available shelf space or increased competition for such shelf space would require us to increase our marketing expenditures
simply to maintain current levels of retail shelf space, which would harm our operating margin. The recent trend in the consolidation of online
retailers and DMR channels has resulted in intensified competition for preferred product placement, such as product placement on an online
retailer’s Internet home page. Expanding our presence in the VAR channel may be difficult and expensive. We compete with established
companies that have longer operating histories and longstanding relationships with VARs that we would find highly desirable as sales channel
partners. We also sell products to broadband service providers. Competition for selling to broadband service providers is intense. Penetrating
service provider accounts typically involves a long sales cycle and the challenge of displacing incumbent suppliers with established relationships
and field-deployed products. If we were unable to maintain and expand our sales channels, our growth would be limited and our business would
be harmed.
We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing
sales channel, our business could be harmed.
We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party
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
(“ODMs”) and original equipment manufacturers (“OEMs”). We rely on our manufacturers to procure components and, in some cases,
subcontract engineering work. Some of our products are manufactured by a single manufacturer. We do not have any long-term contracts with
any of our third-party manufacturers. Some of these third-party manufacturers produce products for our competitors. Due to weak economic
conditions, the viability of some of these third-party manufacturers may be at risk. Our ODM’s are increasingly refusing to work with us on
certain projects, such as projects for manufacturing products for our service provider customers. Because our service providers command
significant resources, including for software support, and demand extremely competitive pricing, our ODM’s are starting to refuse to engage on
service provider terms. The loss of the services of any of our primary third-
party manufacturers could cause a significant disruption in operations
and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming. As we
contemplate moving manufacturing into different jurisdictions, we will be subject to additional significant challenges in ensuring that quality,
processes and costs, among other issues, are consistent with our expectations. For example, while we expect our manufacturers to be responsible
for penalties assessed on us because of excessive failures of the products, there is no assurance that we will be able to collect such
reimbursements from these manufacturers, which causes us to take on additional risk for potential failures of our products.
Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:
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unexpected increases in manufacturing and repair costs;
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inability to control the quality and reliability of finished products;
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inability to control delivery schedules;
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potential lack of adequate capacity to manufacture all or a part of the products we require; and
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potential labor unrest affecting the ability of the third
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party manufacturers to produce our products.