SanDisk 2010 Annual Report Download - page 149

This is a TAB type table. Insert
conts here. Annual Report
We and our suppliers rely upon certain rare earth materials that are necessary for the manufacturing of our
products, and our business could be harmed if we or our suppliers experience shortages or delays of these rare
earth materials. Certain rare earth materials are critical to the manufacture of some of our products. We and/or
our suppliers acquire these materials from a number of countries, including the People’s Republic of China. We
cannot predict whether the government of China or any other nation will impose regulations, quotas or
embargoes upon the materials incorporated into our products that would restrict the worldwide supply of such
materials or increase their cost. If China or any other major supplier were to restrict the supply available to us or
our suppliers or increase the cost of the materials used in our products, we could experience a shortage in supply
or an increase in production costs, which would harm our results of operations.
Increased captive memory supply from Flash Forward may not produce results as expected. In July 2010,
we and Toshiba entered into an agreement to create Flash Forward to operate in Fab 5, of which we will own
49.9% and Toshiba will own 50.1%. Fab 5 is designed to be built in two phases. The Phase 1 building shell is
expected to be completed in the second quarter of calendar year 2011, after which equipment outfitting is
expected to begin, with initial NAND production scheduled for the third quarter of our fiscal year 2011.
However, if this new venture does not commence production as planned or does not meet anticipated
manufacturing output, we may not have sufficient supply to meet demand, which may lead to a loss in market
share and potential revenue growth. Conversely, this new venture with Toshiba could harm our business and
results of operations if our committed supply exceeds demand for our products. The adverse effects from excess
supply could include significant decreases in our product prices, significant excess, obsolete or lower of cost or
market inventory write-downs, and the impairment of our investment in this new venture with Toshiba. Any
future excess or shortage of supply could harm our business, financial condition and results of operations. In
addition, because all of the Flash Ventures are located in close proximity, any risk of supply disruption at
Toshiba’s Yokkaichi, Japan operations may impact all of our ventures with Toshiba, including this new venture,
which could impact all of our captive memory wafer supply.
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 during the production process
or improved until an actual product is manufactured and can be tested. We have, from time-to-time, experienced
yields that have adversely affected our business and results of operations. On more than one occasion, we have
experienced adverse yields 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 X2 and X3 NAND technology on
the latest process node 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.
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, to produce products with leading-edge technologies such as multi-
stack die packages and to provide order fulfillment to certain locations. In addition, our Shanghai facility is
responsible for packaging and shipping our retail products within Asia and Europe. Any delays or interruptions in
production or the ability to ship product, or issues with manufacturing yields at our captive facility could harm
our results of operations and financial condition. Furthermore, if we were to experience labor unrest, or strikes,
or if wages were to increase, our ability to produce and ship products could be impaired and we could experience
higher labor costs, which could harm our results of operations, financial condition, and liquidity.
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, chip assembly,
21