SanDisk 1999 Annual Report Download - page 24

In addition, the market for portable digital music players is very new
and it is uncertain how quickly consumer demand for these players
will grow. If this market does not grow as quickly as anticipated or
our customers are not successful in selling their portable digital
music players to consumers, our revenues could be adversely
affected. In addition, it is often the case with new consumer mar-
kets that after an initial period of new market formation and initial
acceptance by early adopters, the market enters a period of slow
growth as standards emerge and infrastructure develops. In the
event that this occurs in the portable digital music player market or
other emerging markets, sales of our products would be harmed.
The success of our new product strategy will depend upon, among
other things, the following:
•our ability to successfully develop new products with higher
memory capacities and enhanced features at a lower cost
per megabyte;
•the development of new applications or markets for our flash
data storage products;
•the extent to which prospective customers design our products
into their products and successfully introduce their products; and
•the extent to which our products or technologies become
obsolete or noncompetitive due to products or technologies
developed by others.
512 MEGABIT AND 1 GIGABIT SCALE FLASH MEMORY
CARD PRODUCTS
In October 1999, we entered into a nonbinding memorandum of
understanding with Toshiba providing for the joint development and
manufacture of 512 megabit and 1 gigabit flash memory chips and
Secure Digital Memory Card controllers. As part of this proposed col-
laboration, we and Toshiba plan to employ Toshiba’s future 0.16
micron and 0.13 micron NAND flash integrated circuit manufactur-
ing technology and SanDisk’s multilevel cell flash and controller
system technology. The development of 512 megabit and 1 gigabit
flash memory chips and Secure Digital Memory Card controllers is
expected to be complex and may incorporate SanDisk and Toshiba
technology that is still under development. We cannot assure you
that we and Toshiba will successfully develop these new products or
the underlying technology, or that any development will be com-
pleted in a timely or cost-effective manner. If we are not successful
in any of the above, our business, financial condition and results of
operations could suffer.
We may be unable to maintain market share.
We may be unable to increase our production volumes at a sufficiently
rapid rate so as to maintain our market share. Ultimately, our growth
rate depends on our ability to obtain sufficient flash memory wafers
and other components to meet demand. If we are unable to do so in
a timely manner, we may lose market share to our competitors.
Currently, our supply constraints are forcing some of our largest cus-
tomers to seek alternate sources of supply to meet their growing
flash memory product needs.
Our selling prices may be affected by future excess
capacity in the market for flash memory products.
Currently industry wide demand for flash memory products far
exceeds the available supply. This is primarily driven by an explo-
sion in the growth of cellular phones and internet appliances and
the accelerating shift in consumer electronics from analog to digital
devices. This strong demand had manifested itself in improved
bookings visibility and a more stable pricing environment. All major
flash memory suppliers, including SanDisk, are responding to this
strong demand by significantly increasing investments in new
advanced flash memory production capacity due to the broadly held
assumption that our industry is entering a prolonged growth phase
which will be able to absorb the new flash production output. If this
assumption should prove to be erroneous, or if one or several of our
target markets experience delays in anticipated growth, there may
be excess supply in market for our products. This excess capacity,
even if temporary in nature, could cause average selling prices to
drop significantly, thereby adversely impacting our product gross
margins and operating results in future quarters.
Our international operations make us vulnerable to
changing conditions and currency fluctuations.
POLITICAL RISKS
Currently, all of our flash memory wafers are produced by two UMC
foundries in Taiwan. We also use a third-party subcontractor in Taiwan
for the assembly and testing of our MultiMediaCard products. We may
therefore be affected by the political, economic and military conditions
in Taiwan. Taiwan is currently engaged in various political disputes with
China and both countries have recently conducted military exercises in
or near the other’s territorial waters and airspace. The Taiwanese and
Chinese governments may continue to escalate these disputes, resulting
in an economic embargo, a disruption in shipping routes or even mili-
tary hostilities. This could harm our business by interrupting or delaying
the production or shipment of flash memory wafers or MultiMediaCard
products by our Taiwanese foundries and subcontractor. See “ — We
depend on our suppliers and third party subcontractors.”
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SanDisk Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS