SanDisk 2010 Annual Report Download - page 148

Our financial performance depends significantly on worldwide economic conditions and the related impact
on levels of consumer spending, which have deteriorated in many countries and regions, including the U.S., and
may not recover in the foreseeable future. Demand for our products is adversely affected by negative
macroeconomic factors affecting consumer spending. The tightening of consumer credit, low level of consumer
liquidity, and volatility in credit and equity markets have weakened consumer confidence and decreased
consumer spending primarily in the U.S. and European retail markets. These and other economic factors have
reduced demand growth for our products and harmed our business, financial condition and results of operations,
and to the extent such economic conditions continue, they could cause further harm to our business, financial
condition and results of operations.
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 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 the fourth
quarter of fiscal year 2010, a brief power fluctuation occurred that caused a disruption in operations at both Fab 3
and Fab 4, resulting in a loss of wafers and costs associated with bringing the fabs 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 third-party foundries. Any disruption in the
manufacturing operations of our controller wafer vendors would result in delivery delays, harm 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.
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