SanDisk 2007 Annual Report Download - page 63

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 56-nanometer X3 technology wafers and 43-nanometer X2 technology wafers do not increase as
expected in fiscal year 2008, we may not have enough supply to meet demand and our cost competitiveness,
business, financial condition and results of operations will be harmed.
We depend on our third-party subcontractors and our business could be harmed if our subcontractors do not
perform as planned. We rely on third-party subcontractors for much of our wafer testing, IC assembly, packaged
testing, product assembly, product testing and order fulfillment. From time-to-time, our subcontractors have
experienced difficulty meeting our requirements. If we are unable to increase the capacity of our current
subcontractors or qualify and engage additional subcontractors, we may not be able to meet demand for our
products. We do not have long-term contracts with our existing subcontractors nor do we expect to have long-term
contracts with any new subcontract suppliers. We do not have exclusive relationships with any of our subcon-
tractors, and therefore, cannot guarantee that they will devote sufficient resources to manufacturing our products.
We are not able to directly control product delivery schedules. Furthermore, we manufacture on a turnkey basis with
some of our subcontract suppliers. In these arrangements, we do not have visibility and control of their inventories
of purchased parts necessary to build our products or of the progress of our products through their assembly line.
Any significant problems that occur at our subcontractors, or their failure to perform at the level we expect, could
lead to product shortages or quality assurance problems, either of which would have adverse effects on our
operating results.
We have commenced production at a captive assembly and test manufacturing facility in China. We
commenced production at our captive assembly and test manufacturing facility in the Zizhu Science-Based Park
near Shanghai, China in the third quarter of fiscal year 2007. We expect to continue to depend on our third-party
subcontractors for the majority of our test and assembly needs; however, any delays or interruptions in the
production ramp or targeted yields or any quality issues at our captive facility could harm our results of operations
and financial condition.
In transitioning to new processes, products and silicon sources, we face production and market acceptance
risks that may cause significant product delays, cost overruns or performance issues that could harm our business.
Successive generations of our products have incorporated semiconductors with greater memory capacity per chip.
The transition to new generations of products, such as products containing 43-nanometer X2 technology or
56-nanometer X3 technology, is highly complex and requires new controllers, new test procedures and modifi-
cations of numerous aspects of manufacturing, as well as extensive qualification of the new products by both us and
our OEM customers. There can be no assurance that this transition or future technology transitions will occur on
schedule or at the yields or costs that we anticipate. If Flash Partners or Flash Alliance encounters difficulties in
transitioning to new technologies, our cost per megabyte may not remain competitive with the costs achieved by
other flash memory producers. Any material delay in a development or qualification schedule could delay deliveries
and adversely impact our operating results. We periodically have experienced significant delays in the development
and volume production ramp-up of our products. Similar delays could occur in the future and could harm our
business, financial condition and results of operations.
Our products may contain errors or defects, which could result in the rejection of our products, product recalls,
damage to our reputation, lost revenues, diverted development resources and increased service costs and warranty
claims and litigation. Our products are complex, must meet stringent user requirements, may contain errors or
defects and the majority of our products are warrantied for one to five years. Errors or defects in our products may be
caused by, among other things, errors or defects in the memory or controller components, including components we
procure from non-captive sources. In addition, in fiscal year 2007, approximately 95% of our NAND memory
purchases were from our captive flash ventures with Toshiba and if the wafers contain errors or defects, our overall
supply could be adversely affected. These factors could result in the rejection of our products, damage to our
reputation, lost revenues, diverted development resources, increased customer service and support costs and
warranty claims and litigation. We record an allowance for warranty and similar costs in connection with sales of
our products, but actual warranty and similar costs may be significantly higher than our recorded estimate and result
in an adverse effect on our results of operations and financial condition.
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