SanDisk 2009 Annual Report Download - page 76

We depend on our captive assembly and test manufacturing facility in China and our business could be
harmed if this facility does not perform as planned. Our reliance on our captive assembly and test manufacturing
facility near Shanghai, China has increased significantly and we now utilize this factory to satisfy a significant
portion of our assembly and test requirements, and also to produce products with leading-edge technologies such
as multi-stack die packages. 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.
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 a portion of our wafer testing, IC assembly,
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 subcontractors. We do not have exclusive relationships with any of our subcontractors, 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
subcontractors. 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.
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 32-nanometer process technologies and/
or 3-bits per cell and 4-bits per cell NAND technologies, is highly complex and requires new controllers, new test
procedures, potentially new equipment and modifications to numerous aspects of any manufacturing processes, as
well as extensive qualification of the new products by our OEM customers and us. There can be no assurance that
these transitions or other future technology transitions will occur on schedule or at the yields or costs that we
anticipate. If Flash Ventures encounters difficulties in transitioning to new technologies, our cost per gigabyte may
not remain competitive with the costs achieved by other flash memory producers, which would harm our gross
margins and financial results. In addition, we could face design, manufacturing and equipment challenges when
transitioning to the next generation of technologies beyond NAND. Any material delay in a development or
qualification schedule could delay deliveries and harm our operating results. We have periodically 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 up to ten years. Generally, our OEM
customers have more stringent requirements than other customers and increases in OEM product revenue could
require additional cost to test products or increase service costs and warranty claims. 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, the substantial majority of our flash
memory is supplied by Flash Ventures, 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, indemnification of our
customer’s product recall costs, 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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