SanDisk 2011 Annual Report Download - page 80

first quarter of fiscal year 2011, and we began investing in Flash Forward wafer capacity in the second quarter of
fiscal year 2011, resulting in additional captive memory supply beginning in the third quarter of fiscal year 2011.
Increases in captive memory supply from these ventures could harm our business and operating results if our
committed supply exceeds demand for our products. The adverse effects could include, among other things,
significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory
write-downs or under-utilization charges, such as those we experienced in fiscal year 2008, which would harm
our gross margins and could result in the impairment of our investments in Flash Ventures.
Our inability to obtain sufficient flash memory supply could cause us to lose sales and market share and
harm our operating results. We are currently experiencing growth in demand for our flash memory products, and
demand from our customers may exceed supply or may not match the available supply of captive and
non-captive flash memory available to us. It is uncertain whether additional supply provided by captive
technology transitions or fab expansions will enable us to meet expected demand. While we have various sources
of non-captive supply, our purchases of non-captive supply may be limited due to the required advanced
purchase order lead-times, the product mix available and the high cost. Our inability to obtain adequate or the
right mix of supply to meet demand may cause us to lose sales, market share and corresponding profits, which
would harm our operating results.
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 system
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, including disruptions
due to disasters, supply chain interruptions and other factors, would harm our operating results.
The concentration of Flash Ventures in Yokkaichi, Japan, magnifies the risks of supply disruption.
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 fourth quarter of fiscal year 2010, a
brief power fluctuation at the Yokkaichi municipal power plant 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 online.
Additionally, in the first quarter of fiscal year 2011, a maintenance issue at Flash Ventures resulted in a brief
power outage in Fab 4 which resulted in a loss of wafers and costs associated with bringing the Fab back on line.
Also, in the first quarter of fiscal year 2011, the March 11, 2011 earthquake and tsunami in Japan caused a brief
equipment shutdown at Flash Ventures, which resulted in some wafer loss. While the March 11, 2011 earthquake
did not directly damage Flash Ventures’ facilities, it did result in the delayed or canceled delivery of certain tools
and materials from suppliers impacted by the earthquake. The Yokkaichi location, and Japan in general, are often
subject to earthquakes, typhoons and other natural disasters, which could result in production stoppage, a loss of
wafers, the incurrence of significant costs, or supply chain shortages for memory production.
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 experience a 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
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