SanDisk 1999 Annual Report Download - page 26

During the second half of 1999, we transferred a substantial portion
of wafer testing, packaged memory final testing, card assembly and
card testing to Silicon Precision Industries Co., Ltd. in Taiwan and
Celestica, Inc. in China. In fiscal 2000, we expect that they will be
assembling and testing a majority of our mature, high-volume prod-
ucts. This increased reliance on subcontractors is expected to
reduce manufacturing costs and give us access to increased pro-
duction capacity. During the transition period, we will continue full
operations at our Sunnyvale production facility while simultaneously
transferring test equipment and training personnel of our subcon-
tractors. However, we do not have sufficient duplicative production
testing equipment at Sunnyvale and at our subcontractors. Therefore,
any significant problems in this complex transfer of operations may
result in a disruption of production and a shortage of product to meet
customer demand in the first half of 2000 and beyond.
Continuing declines in our average sales prices
may result in declines in our gross margins.
In 1999, the average unit selling prices of our products declined
22% compared to 1998. In 1999, the average price per megabyte
shipped declined 52% compared to 1998. Because flash data stor-
age markets are characterized by intense competition and price
reductions for our products are necessary to meet consumer price
points, we expect that market-driven pricing pressures will continue.
This will likely result in a further decline in average sales prices for
our products. We believe that we can offset declining average sales
prices by achieving manufacturing cost reductions and developing
new products that incorporate more advanced technology, include
more advanced features and can be sold at stable average gross
margins despite continued declines in average selling price per
megabyte. However, if we are unable to achieve such cost reduc-
tions and technological advances, this could result in lost sales and
declining gross margins, and as a result, our business, financial
condition and results of operations could suffer.
The semiconductor industry is cyclical and we believe it is currently
in a recovery from one of its most severe down cycles. During most
of 1997 and 1998, the semiconductor industry experienced signif-
icant production over capacity, which reduced margins for
substantially all flash memory suppliers. Currently, the markets for
our products are supply constrained and our selling prices have
stayed relatively stable. There can be no assurance that this trend
will continue throughout 2000.
Our markets are highly competitive.
FLASH MEMORY MANUFACTURERS AND
MEMORY CARD ASSEMBLERS
We compete in an industry characterized by intense competition,
rapid technological changes, evolving industry standards, declining
average selling prices and rapid product obsolescence. Our
competitors include many large domestic and international compa-
nies that have greater access to advanced wafer foundry capacity,
substantially greater financial, technical, marketing and other
resources, broader product lines and longer standing relationships
with customers. Our primary competitors include:
•storage flash chip producers, such as Hitachi Ltd., Samsung
Electronics Company Ltd. and Toshiba Corporation;
•socket flash, linear flash and component manufacturers, such
as Advanced Micro Devices, Inc., Atmel Corporation, Intel
Corporation, Macronix International Co., Ltd., Micron
Technology, Inc., Mitsubishi Electronic Corporation, Sharp
Electronics Corporation and STMicroelectronics NV; and
•module or card assemblers, such as Lexar Media, Inc., M-Systems,
Inc., Pretec Electronics Corp., Simple Technology Inc., Sony
Corporation, Kingston Technology Company, Panasonic Consumer
Electronic Company, Silicon Storage Technology, Inc., TDK
Corporation, Matsushita Battery, Inc. Delkin Devices, Inc., Silicon
Tek and Viking Components, Inc., who combine controllers and
flash memory chips developed by others into flash storage cards.
In addition, over 25 companies have been certified by the
CompactFlash Association to manufacture and sell their own brand
of CompactFlash. We believe additional manufacturers will enter the
CompactFlash market in the future.
We have announced a memorandum of understanding under which
we, Matsushita and Toshiba will jointly develop and promote a next
generation flash memory card called the Secure Digital Memory
Card. Under this agreement, Secure Digital Memory Card licenses
will be granted to other flash memory card manufacturers, which
will increase the competition for our Secure Digital Memory Card,
CompactFlash and MultiMediaCard products. In addition,
Matsushita and Toshiba will sell Secure Digital Memory Cards that
will compete directly with our products. Other flash card manufac-
turers will be required to pay the SD Association license fees and
royalties which will be shared between Matsushita, Toshiba and
SanDisk. There will be no royalties or license fees payable among
the three companies for their respective sales of the Secure Digital
Memory Card. Thus, we will forfeit potential royalty income from
Secure Digital Memory Card sales by Matsushita and Toshiba.
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SanDisk Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS