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Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (24197)	12/8/2003 11:17:15 PM
From: Howard R. Hansen	Respond to of 60323

I don't think there is a clear-cut method of quantifying the risk and reward of the decision to invest in the new plant. There may not be a clear-cut method or a best method of quantifying the risk or reward in building a new plant. But it seems like all the time managers are making decisions on whether to invest in a new product or plant based on market size, market share, and profit potential. I am sure SanDisk has made these calculations. But as far as I know the results of the calculations are proprietary and SanDisk will never publish the results. Hence, to judge how risky SanDisk decision to invest in a new fabrication plant was I am trying to make a reasonable estimate of whether SanDisk can earn at least 135 million a year from their investment in a new fabrication plant.

To: Mike Buckley who wrote (24197)	12/9/2003 6:48:10 AM
From: Dave	Read Replies (1) \| Respond to of 60323

Mike: It is somewhat difficult since a fab is extremely expensive to build and, once built, it really can't be used for something else such as make "potato" chips instead of memory chips. This "decision" can cut both ways and it's important to understand both sides of the coin. The "good" side While fabrication facilities are extremely expensive to build and maintain (think CapEx), a fab or two (or whatever number) can provide SanDisk with extreme economies of scale as long as SanDisk is good at implementing and leveraging current process technologies. If they are "good" at what they do, the fab. can provide SanDisk with outstanding cost leader which will, in the end, cause profit margins and ROEs and ROCs to be higher than the industry. The "bad" side The fabrication facility can be a "hole" in the ground. SanDisk pumps more and more funds into it, however since they cannot product chips as efficiently as their competitors, the fab. actually is a "destroyer" of value. Why? They just can't "blow it up". Once you make a decision to build the fab. it's almost as if "'till death do you part". If the other situation occurs, ROEs and other various return metrics will lag the industry. There are strengths and weaknesses of having a fab and not having a fab. Plenty of RAM "vendors" do not have fabs and they choose to outsource that function. When analyzing the two sides, think in terms of Intel & AMD. Both, basically, make pretty dog-gone good chips. Intel has been extremely profitable and generated excess returns for investors. AMD, on the other hand, has not been efficient; think K5, K6 In order to make comparisons, one should look at the competitors in this space who actually "fab" flash and see what you can find regarding the efficiencies.