SanDisk 2005 Annual Report Download - page 92

cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price
declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The
industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product
cycles of both semiconductor companies’ and their customers’ products and declines in general economic
conditions. These downturns have been characterized by diminished product demand, production overcapacity,
high inventory levels and accelerated declines in selling prices. We have experienced these conditions in our
business in the past and may experience such downturns in the future.
Our business and the markets we address are subject to significant fluctuations in supply and demand and our
commitments to our ventures with Toshiba may result in losses. Through our ramp in Flash Partners, we expect our
2006 captive memory supply to increase by a higher percentage than our flash memory supply increased in either of
the last two years. Our obligation to purchase 50% of the output from FlashVision and Flash Partners could harm our
business and results of operations if our committed supply exceeds demand for our products. The adverse effects
could include, among other things, significant decreases in our product prices, significant excess, obsolete or lower
of cost or market inventory write-downs and the impairment of our investments in the ventures with Toshiba. Any
future excess supply could have a material adverse effect on our business, financial condition and results of
operations.
We depend on third-party foundries for silicon supply and any shortage or disruption in our supply from these
sources will reduce our revenues, earnings and gross margins. All of our flash memory card products require
silicon supply for the memory and controller components. The substantial majority of our flash memory is currently
supplied by our ventures with Toshiba and by Toshiba pursuant to our foundry agreement, and to a lesser extent by
Renesas and Samsung. Any disruption in supply of flash memory from our captive or non-captive sources would
harm our operating results. For example, we intend to increase production at Fab 3 and we also procure wafers from
non-captive sources. If Fab 3 production ramp does not increase as anticipated or our non-captive sources fail to
supply wafers in the amounts and at the times we expect, we may not have sufficient supply to meet demand and our
operating results will be harmed. Currently, our controller wafers are only manufactured by Tower and UMC, and
some of these controllers are sole-sourced at either UMC or Tower. Any disruption in the manufacturing operations
of Tower or UMC would result in delivery delays, would adversely affect our ability to make timely shipments of
our products and would harm our operating results until we could qualify an alternate source of supply for our
controller wafers, which could take three or more quarters to complete. In times of significant growth in global
demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers
available to us from our current sources. If our silicon vendors are unable to satisfy our requirements on competitive
terms or at all due to lack of capacity, technological difficulties, natural disaster, financial difficulty, power failure,
labor unrest, their refusal to do business with us, their relationships with our competitors or other causes, we may
lose potential sales and our business, financial condition and operating results may suffer. In addition, these risks are
magnified at Toshiba’s Yokkaichi operations, where the ventures are operated and Toshiba’s foundry capacity is
located. For example, earthquakes, as well as unrelated power outages, have resulted in production line stoppage
and loss of wafers in Yokkaichi and similar stoppages and losses may occur in the future. Also, the Tower
fabrication facility, from which we source controller wafers, is facing financial challenges and is located in Israel,
an area of political turmoil. Any disruption or delay in supply from our silicon sources could significantly harm our
business, financial condition and results of operations.
Our actual manufacturing yields may be lower than our expectations resulting in increased costs and product
shortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean
environment. Semiconductor manufacturing yields and product reliability are a function of both design technology
and manufacturing process technology and production delays may be caused by equipment malfunctions, fab-
rication facility accidents or human errors. Yield problems may not be identified or improved until an actual product
is made and can be tested. As a result, yield problems may not be identified until the wafers are well into the
production process. We have from time to time experienced yields which have adversely affected our business and
results of operations. We have experienced adverse yields on more than one occasion when we have transitioned to
new generations of products. If actual yields are low, we will experience higher costs and reduced product supply,
which could harm our business, financial condition and results of operations. For example, if the production ramp
and/or yield of the 70-nanometer, 300-millimeter Flash Partners wafers does not increase as expected, we may not
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