SanDisk 2013 Annual Report Download - page 121

We require an adequate level of product gross margin to continue to invest in our business, and our product
gross margin may vary significantly depending on a number of factors. Our ability to generate sufficient
product gross margin and profitability to invest in our business is influenced by supply and demand balance
in the flash memory industry, our ability to reduce our cost per gigabyte at an equal or higher rate than the
price decline per gigabyte, our ability to develop new products and technologies, the rate of growth of our
target markets, the competitive position of our products, the mix of our products, the continued
acceptance of our products by our customers and our management of production capacity. Other factors
that could result in volatility in our product gross margin include fluctuations in customer mix, as well as
variations in the technologies or form factors of our products. For example, we experienced negative
product gross margin for fiscal year 2008 and the first quarter of fiscal year 2009 due to sustained
aggressive industry price declines as well as inventory charges primarily due to lower of cost or market
write-downs. If we fail to maintain adequate product gross margin and profitability, our business and
financial condition would be harmed and we may have to reduce, curtail or terminate certain business
activities, including funding technology development and capacity expansion. Furthermore, as we diversify
the products that we sell, changes in our product mix could result in volatility in our product gross margin,
since we have significant variation in our product gross margin across product lines, and some of the
products that we sell have product gross margin that is significantly below our overall average.
Any disruption or shortage in our supply chain could reduce our revenue, earnings and gross margin. All of
our flash memory products require silicon supply for the memory and controller components. Substantially
all 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, work stoppages, 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. The
Yokkaichi location and Japan in general are subject to earthquakes, typhoons and other natural disasters.
Moreover, Toshiba’s employees who 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. A disruption in our captive wafer supply, including but not limited to disruptions from
natural disasters, emergencies such as power outages, fires or chemical spills, or employee strikes or other
job actions could cause us not to have sufficient supply to meet demand, resulting in lost sales and market
share, as well as significant costs, including wafer loss. For example, the March 11, 2011 earthquake and
tsunami in Japan caused a brief equipment shutdown at Flash Ventures, which resulted in some wafer loss
as well as delayed or canceled deliveries of certain tools and materials from suppliers impacted by the
earthquake. In addition, Flash Ventures has, from time-to-time, experienced power outages and power
fluctuations, which have resulted in a loss of wafers and increased costs associated with bringing the facility
back online.
Currently, wafers for our internally-designed controllers are manufactured by third-party foundries. In
addition, we purchase controllers from third-party sources, and some of our products require other
non-flash memory components and materials for which we do not have captive supply, such as the DRAM
included in some of our SSDs and MCP storage solutions that we supply for use in mobile devices. A
disruption in the manufacturing operations of our controller wafer vendors, third-party controller vendors
or suppliers of other non-flash memory components, such as DRAM, could 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 these components, which could take several quarters to complete.
Our business depends significantly upon sales through retailers and distributors, and if our retailers and
distributors are not successful, we could experience reduced sales, substantial product returns or increased price
protection claims, any of which would harm our business, financial condition and operating results. A
significant portion of our sales is made through retailers (for our retail channel) and distributors (for both
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Annual Report