SanDisk 2013 Annual Report Download - page 126

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 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 the U.S., Asia, Europe,
Canada and Latin America. Any delays in adding new equipment capacity, 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. In addition, investment decisions in adding new assembly and test
capacity require significant planning and lead-time, and a failure to accurately forecast demand for our
products could cause us to over-invest or under-invest in the expansion of captive assembly and test
capacity in our facility, which would lead to excess capacity and under-utilization charges, in the event of
over-investment, or insufficient assembly and test capacity resulting in a loss of sales and revenue
opportunities, in the event of under-investment. 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 rely on our suppliers, some of which are the sole source of supply for our non-memory components, and
capacity limitations of these suppliers expose our supply chain to unanticipated disruptions or potential
additional costs. We do not have long-term supply commitments from many of our suppliers, certain of
which are sole sources of supply for our non-memory components. For example, the controllers for a
majority of our SSD revenue are sourced from one third-party controller vendor. From time-to-time,
certain materials may become difficult or more expensive to obtain, including as a result of capacity
constraints of these suppliers, which could impact our ability to meet demand and could harm our
profitability. Our business, financial condition and operating results could be significantly harmed by
delays or reductions in shipments if we are unable to obtain sufficient quantities of these components or
develop alternative sources of supply in a timely manner, on competitive terms, or at all.
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, nor do we 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 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 revenue, diverted development resources, increased service costs, warranty
and indemnification claims and litigation. Our products are complex, must meet stringent user requirements
and may contain errors or defects, and the majority of our products provide a warranty period. Errors or
defects in our products may be caused by, among other things, errors or defects in the memory or
controller components or firmware, including memory and components that we procure from non-captive
sources. In addition, the substantial majority of our flash memory is supplied by Flash Ventures, and if the
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