SanDisk 2014 Annual Report Download - page 86

the past, particularly with respect to required capital expenditures, which reduces the cost benefits of
technology transitions and could limit our ability to keep pace with reductions in average selling prices.
Manufacturing yields are a function of both design and manufacturing process technology, and yields may
also be impacted by equipment malfunctions, fabrication facility accidents or human error. Any new
manufacturing node may be more susceptible to manufacturing yield issues. Manufacturing yield issues
may not be identified during the development or production process or solved until an actual product is
manufactured and tested, further increasing our costs. If we are unable to improve manufacturing yields or
other manufacturing efficiencies, our gross margin and results of operations would be harmed. In addition,
our products contain materials other than flash memory and require product level assembly and test. As
our product portfolio has evolved to include an increasing mix of complex products, the proportion of our
product costs attributable to materials other than flash memory has increased. If we are unable to reduce
the cost of these materials or manufacturing, our gross margin and results of operations would be harmed.
In addition, as 2D NAND technology reaches its limits of cost-effective technology scaling, our successful
development of 3D NAND and alternative technologies, such as 3D ReRAM, is crucial to continue the
cost reductions necessary to maintain adequate gross margin. We expect to invest in a 3D NAND pilot line
in the second half of fiscal year 2015 and ramp volume production of 3D NAND in fiscal year 2016. Our
failure to develop 3D NAND or other alternative technologies in a timely or effective manner, or at all, or
the failure of these technologies to effectively compete with those of our competitors, could harm our
revenue, gross margin and results of operations.
Our captive manufacturing capacity requires significant investments by us, and our reliance on and
investments in captive manufacturing capacity limit our ability to respond to industry fluctuations in supply and
demand. The semiconductor industry, and the NAND flash memory industry in particular, is highly cyclical
and is characterized by constant and rapid technological change, rapid product obsolescence, price
declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand.
Because we rely on our significant investments in Flash Ventures as a captive source of substantially all of
our NAND flash memory supply, we are limited in our ability to react or adjust our cost structure and
technology mix in response to these cyclical fluctuations.
Growth in our captive memory supply comes from investments in technology transitions, productivity
improvements and new capacity at Flash Ventures. These investment decisions require significant planning
and lead-time before an increase in supply can be realized, and are further determined by factors such as
the timing, rate and type of investment by us and Toshiba, our partner in Flash Ventures, agreement
between us and Toshiba as to these matters, our evaluation of the potential return on investment of the
addition of new capacity, particularly in light of the timing, cost and availability of next generation
technology, our profitability, our estimation of market demand and our liquidity position. A failure to
accurately forecast demand for our products or industry capacity could cause us to over-invest or under-
invest in technology transitions or the expansion of captive memory capacity in Flash Ventures.
Over-investment could result in excess supply, which could cause significant decreases in our product
prices, significant excess, obsolete or lower of cost or market inventory write-downs or under-utilization
charges, and the potential impairment of our investments in Flash Ventures. For example, in fiscal year
2008 and the first quarter of fiscal year 2009, we recorded charges for adverse purchase commitments
associated with under-utilization of Flash Ventures’ capacity. On the other hand, if we or Toshiba under-
invest in captive memory capacity or technology transitions, if we grow capacity more slowly than the rest
of the industry, if our technology transitions do not occur on the timeline that we expect or we encounter
unanticipated difficulties in implementing these transitions, or if we implement technology transitions
more slowly than our competitors, we may not have enough captive supply of the right type of memory or
at all to meet demand on a timely and cost effective basis and we may lose opportunities for revenue and
market share as a result, which would harm our ability to grow or maintain revenue. In such cases, we may
have only a limited ability to satisfy our supply needs from non-captive supply sources and may not be able
to obtain the right mix of non-captive product that meets our requirements within an adequate lead time
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