SanDisk 2011 Annual Report Download - page 87

This is a TAB type table. Insert
conts here. Annual Report
We depend on our captive assembly and test manufacturing facility and planned future expansion 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 majority of our assembly and test requirements, to produce products with leading-edge
technologies such as multi-stack die packages and to provide order fulfillment. In addition, our Shanghai, China
facility is responsible for packaging and shipping our retail products within Asia and Europe. We plan to further
expand our assembly and test manufacturing facility in Shanghai, China, which will expand our reliance on these
facilities. Any delays or interruptions in production or the ability to ship product, or issues with manufacturing
yields at our captive facility could harm our operating results and financial condition. Furthermore, if we were to
experience labor unrest, or strikes, or if wages were to significantly increase, our ability to produce and ship
products could be impaired and we could experience higher labor costs, which could harm our operating results,
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,
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 amount of capacity allocated to us from 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 some of our existing 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
or quality assurance. 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 harm on our operating results.
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, 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 provide a warranty period, which is usually less than three
years with a small number of products having a warranty ranging up to ten or more years. Generally, our OEM
customers have more stringent requirements than other customers and our concentration of revenue from OEMs,
especially OEMs who purchase our enterprise storage and client storage products, could result in increased
expenditures for product testing, or increase our service costs and potentially lead to increased warranty or
indemnification 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 harmed. 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 and other 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 harm our operating results and financial
condition.
Our new products have, from time-to-time, been introduced with design and production errors at a rate
higher than the error rate in our established products. We must estimate warranty and similar costs for new
products without historical information and actual costs may significantly exceed our recorded estimates.
Warranty and similar costs may be even more difficult to estimate as we increase our use of non-captive supply.
Underestimation of our warranty and similar costs would harm our operating results and financial condition.
Certain of our products contain encryption or security algorithms to protect third-party content and user-
generated data stored on our products. To the extent our products are hacked or the encryption schemes are
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