SanDisk 2009 Annual Report Download - page 75

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conts here. Annual Report
The semiconductor industry is subject to significant downturns that have harmed our business, financial
condition and results of operations in the past and may do so in the future. The semiconductor industry is highly
cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, 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. The flash memory industry has recently experienced significant excess supply, reduced demand, high
inventory levels, and accelerated declines in selling prices. If we again experience oversupply of NAND-based
flash products, we may be forced to hold excessive inventory, sell our inventory below cost, and record inventory
write-downs, all of which would place additional pressure on our results of operation and our cash position.
We depend on Flash Ventures and third parties for silicon supply and any disruption or shortage in our
supply from these sources will reduce our revenues, earnings and gross margins. All of our flash memory
products require silicon supply for the memory and controller components. The substantial majority of our flash
memory is currently supplied by Flash Ventures and to a much lesser extent by third-party silicon suppliers. Any
disruption or shortage in supply of flash memory from our captive or non-captive sources would harm our
operating results. The risks of supply disruption are magnified at Toshiba’s Yokkaichi, Japan operations, where
Flash Ventures are operated and Toshiba’s foundry capacity is located. Earthquakes and power outages have
resulted in production line stoppages and loss of wafers in Yokkaichi and similar stoppages and losses may occur
in the future. For example, in the first quarter of fiscal year 2006, a brief power outage occurred at Fab 3, which
resulted in a loss of wafers and significant costs associated with bringing the fab back on line. In addition, the
Yokkaichi location is often subject to earthquakes, which could result in production stoppage, a loss of wafers
and the incurrence of significant costs. Moreover, Toshiba’s employees that produce Flash Ventures’ products
are covered by collective bargaining agreements and any strike or other job action by those employees could
interrupt our wafer supply from Flash Ventures. If we have disruption in our captive wafer supply or if our
non-captive sources fail to supply wafers in the amounts and at the times we expect, or we do not place orders
with sufficient lead time to receive non-captive supply, we may not have sufficient supply to meet demand and
our operating results could be harmed.
Currently, our controller wafers are manufactured by SMIC, TSMC and UMC. Any disruption in the
manufacturing operations of our controller wafer vendors would result in delivery delays, adversely affect our
ability to make timely shipments of our products and harm our operating results until we could qualify an
alternate source of supply for our controller wafers, which could take several 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, we may lose potential sales and market share, and our business,
financial condition and operating results may suffer. Any disruption or delay in supply from our silicon sources
could significantly harm our business, financial condition and results of operations.
If actual manufacturing yields are lower than our expectations, this may result 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 and
manufacturing process technology and production delays may be caused by equipment malfunctions, fabrication
facility accidents or human error. Yield problems may not be identified or improved until an actual product is
manufactured 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 that 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 32-nanometer 2-bits per cell and 3-bits per cell NAND technology wafers does
not increase as expected, our cost competitiveness would be harmed, we may not have adequate supply or the
right product mix to meet demand, and our business, financial condition and results of operations will be harmed.
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