Netgear 2012 Annual Report Download - page 26

Table of Contents
All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our third
party manufacturers are primarily responsible for obtaining most regulatory approvals for our products. If our third party manufacturers 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.
Specifically, substantially all of our manufacturing occurs in the Asia Pacific region and any disruptions from natural disasters, health
epidemics and political, social and economic instability would affect the ability of our ODMs to manufacture our products. In addition, our ODMs in
China have continued to increase our costs of production, particularly in the past couple of years. These increased costs have affected our margins
and ability to lower prices for our products to stay competitive. Recent labor unrest in China may also affect our ODMs as workers may strike and
cause production delays. If our third party manufacturers fail to maintain good relations with their employees or contractors, and production and
manufacturing of our products is affected, then we may be subject to shortages of products and quality of products delivered may be affected.
Further, if our manufacturers or warehousing facilities are disrupted or destroyed, we would have no other readily available alternatives for
manufacturing our products and our business would be significantly harmed.
As we continue to work with more third party manufacturers on a contract manufacturing basis, we are also exposed to additional risks not
inherent in a typical ODM arrangement. Such risks may include our inability to properly source and qualify components for the products, lack of
software expertise resulting in increased software defects, and lack of resources to properly monitor the manufacturing process. In our typical ODM
arrangement, our ODMs are generally responsible for sourcing the components of the products and warranting that the products will work against a
product's specification, including any software specifications. In a contract manufacturing arrangement, we would take on much more, if not all, of
the responsibility around these areas. If we are unable to properly manage these risks, our products may be more susceptible to defects and our
business would be harmed.
We are currently involved in numerous litigation matters and may in the future become involved in additional litigation, including litigation
regarding intellectual property rights, which could be costly and subject us to significant liability.
The networking industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding
infringement of patents, trade secrets and other intellectual property rights. In particular, leading companies in the data communications markets,
some of which are our competitors, have extensive patent portfolios with respect to networking technology. From time to time, third parties,
including these leading companies, have asserted and may continue to assert exclusive patent, copyright, trademark and other intellectual property
rights against us demanding license or royalty payments or seeking payment for damages, injunctive relief and other available legal remedies through
litigation. These also include third-party non-
practicing entities who claim to own patents or other intellectual property that cover industry standards
that our products comply with. If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could
be sued or we may be forced to initiate litigation to protect our rights. The cost of any necessary licenses could significantly harm our business,
operating results and financial condition. We may also choose to join defensive patent aggregation services in order to prevent or settle litigation
against such non-
practicing entities and avoid the associated significant costs and uncertainties of litigation. These patent aggregation services may
obtain, or have previously obtained, licenses for the alleged patent infringement claims against us and other patent assets that could be used
offensively against us. The costs of such defensive patent aggregation services, while potentially lower than the costs of litigation, may be significant
as well. At any time, any of these non-practicing entities, or any other third-
party could initiate litigation against us, or we may be forced to initiate
litigation against them, which could divert management attention, be costly to defend or prosecute, prevent us from using or selling the challenged
technology, require us to design around the challenged technology and cause the price of our stock to decline. In addition, third parties, some of
whom are potential competitors, have initiated and may continue to initiate litigation against our manufacturers, suppliers, members of our sales
channels or our service provider customers or even end user customers, alleging infringement of their proprietary rights with respect to existing or
future products. In the event successful claims of infringement are brought by third
22
•
unexpected increases in manufacturing and repair costs;
•
inability to control the quality and reliability of finished products;
•
inability to control delivery schedules;
•
potential lack of adequate capacity to manufacture all or a part of the products we require; and
• potential labor unrest affecting the ability of the third-
party manufacturers to produce our products.