India lucrative; betting big on flash biz: SanDisk CEO

Sanjay Mehrotra co-founder, president and CEO, SanDisk, says that company's focus on only flash has helped the company to create new market opportunities and the company had clocked revenue of USD 5 billion in 2012, of the total USD 23 billion industry.

SanDisk focus in India is to leverage the number one position and market share and at the same time to enhance sales and bring more products to the consumers. The company has its R&D centre in Bangalore where it houses 350 employees, going forward the company plans to increase the head count.

Below is the edited transcript of his interview to CNBC-TV18.

Q: Twenty five years never the temptation to wear-away from flash and try and do something different?

A: It is exciting to see that SanDisk is celebrating its 25th anniversary. In last 25 years, we have been dedicated, focused, passionately pursuing opportunities in flash and helped create new market opportunities and that served us well.

I believe that our focus on flash memory evangelising new applications for flash memory, led to the creation of USD 23 billion industry. SanDisk had revenues of USD 5 billion last year. So, the strategy to focus on flash has worked very well for our company.

Q: You have been a believer in specialization from day one?

A: Absolutely. When you are targeting markets and opportunities that will continue to grow, then why should one look elsewhere? Why not focus on creating even more and more opportunity in flash.
  
Q: In terms of opportunity, India is strategically placed in part of the global markets that most companies are trying to address. The finance minister announced in his Budget speech brought in sweeteners for fab makers and chip makers. Would you be interested now or is it too little too late?

A: Our focus for India is to leverage our No. 1 brand position, No. 1 market share, enhancing product sales and to bring more products for Indian consumers. Of the total Indian population, 50 percent are below the age of 25 years, which is a sweet spot for digital savvy population. So, we are looking at growth opportunities in the market trends in India.

Q: Not manufacturing?

A: In addition to sales, under R&D we have a design center in Bangalore where we do cutting edge work and flash memory design - systems, integration, firmware, software development as well as IT infrastructure. We have around 350 employees in Bangalore design center and we further plan to grow that centre n India.  

Q: What is the reason for not undertaking manufacturing activity in India, is it that you don't need additional production capacity at this point in time or is India not an attractive investment destination from a manufacturing point of view?

A: We manufacture our flash memory chip in Japan in joint venture (JV) with Toshiba. Our backend assembly and test activity like converting the flash memory chips into the products such as solid state drives or flash products or mobile applications is done in China at Shanghai factory. Both facility are well serving our global needs for production and continue to serve well in foreseeable future as well. At this point those manufacturing centers are working well and we don't need any capacity expansion.     

Q: On upping production capacity. In 2012 there was oversupply problem which was an industry wide problem and most manufacturers tried to address that by being prudent but adding capacity. Is the industry passed that, do you believe 2013 you are going to feel the need to add capacity?

A: In the first half of 2012, the industry felt the pinch of some excess supply in the second half the industry was already beyond that and experienced healthy demand-supply environment in the second half of 2012. We expect the industry to experience healthy demand-supply fundamentals in 2013.

At SanDisk, we have not yet made any decision on add new wafer capacity in 2013, but we may take a call later if the demand trend continues. We will study the market trends, demand trends as well as our progress on the technology front before taking a call for adding new wafer capacity production in our fabs in Japan.

Q: In terms of the outlook because while there is cautious optimism as far as the US is concerned, Europe continues to be extremely fragile and extremely vulnerable. India is also slowing considerably; also China. How does that impact your outlook for 2013 because you did miss street estimates and consensus for the first quarter?

A: In our January earnings call we provided for first quarter of 2013. We also discussed the industry demand and supply balance for 2013 along with projected outlook of revenue growth and continuing growth in terms of profitability for our business in 2013 as well.

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Q: You expect revenue growth for the year to be between USD 5.3-5.5 billion whereas, the street was expecting it at USD 6 billion?

A: In our January call we guided the revenue range of USD 5.3 billion to USD 5.7 billion. The street was expecting bit higher but we also guided to strengthening of margins compared to 2012. In 2012, our gross margins were 34 percent and our guidance was 41 percent +/- 2 percent.

So, our guidance for 2013, reflects our strong focus on profitable growth, driving profitable growth, continuing to maximise the opportunity for us in our markets and continuing to focus on increasing the mix of our business towards higher value added products, like flash memory, solid state drives (SSD) that go into computing platforms as well as flash memory going into enterprise, server and storage applications, cloud computing. These are strong growth trends where there is lot of opportunity for value-add solutions and here Sandisk excels in. So, we feel good about 2013 guidance.

Q: More than 50 percent of your sales are outside the US. So, in the pecking order of emerging markets how would you rate India at this point in time and any specific challenges of doing business here in India?

A: India is an exciting market for SanDisk. When one looks at the number of mobile phones, smart phones, the demographics of which tends to be very young, tech savvy, very prone to be using our products to enjoy the smart digital lifestyle, the connected experience of all these devices – India is a strong growth market for us. I am very pleased with that number.

We like to gain more market share and increase the momentum. Emerging markets like India, China, Latin America, the Middle East and Africa are growing well for us. In 2012, under our retail business more than half of the units of the products that we sold worldwide were sold in emerging markets. We also supply flash memories to the original equipment manufacturers (OEMs) – the ones that manufacture handsets, tablets where flash can be embedded inside those devices as well.

Q: What can we expect in 2013? You did about three acquisitions. Will it be a big year? Are you planning to acquire any tech caps or acquiring market share? You are already number one in most markets so that couldn’t be the driver. What are you going to be looking at from an acquisition strategy point of view?

A: Out of the three acquisitions that you referred to, one was Pliant Technology which we acquired in 2011 and that gave us entry into flash storage solutions for enterprise space for servers and cloud computing and data centre applications. We look at that as a strong growth driver for the future and are very excited about the progress we have been making on that front.

The other two were software-related acquisitions in 2012, where we leveraged software to make solid state drives (SSD) work faster in enterprise applications. They basically help consumers and businesses access data faster. So it is combining hardware and software really for enterprise applications is reflected in our acquisitions in 2011 and 2012.

Q: Will acquisition be driven by the need to buy innovation?

A: Acquisition is driven by strategies that help us expand our opportunities, complement the competencies that we already have and certainly give us new market opportunities or strengthen our technology portfolio. So, when we look ahead, of course we do study what are the possible opportunities to either acquire or to partner with. I do not really comment on our strategy for acquisitions.

Q: Will they be more on the software side like Schooner? What will you look at?

A: In last couple of years our focus has been both on software and hardware in terms of acquisitions to drive new market opportunities for us. SanDisk is about bringing value added solutions to provide richer experience to the businesses and to consumers worldwide. So we will look at opportunities that make sense - that are for the business, that are synergistic with our portfolio and with our direction going forward.

Q: No war chest that's been outlined though?

A: Nothing specific outlined at this point.

Q: On Apple versus Samsung debate. There are question marks on whether we are going to continue to see Apple’s decline in sales. They are your biggest customer. Surely, you are worried about their future as much as the street is so what’s your own take on this?

A: We are a supplier to broad set of customers in the mobile space, the handset manufacturers, the tablet manufacturers as well as SanDisk is very much engaged with notebook manufacturers and for that our SSD are used by leading 10 notebook manufacturers in the world as well as on the enterprise storage side, we are selling products to four major storage OEMs.

Our business and customers are very well diversified. This is point of our strategy. This is absolutely part of our strategy to continue to drive diversified set of business and absolutely address the sweet spot of the market growth rates.

Q: But do you see the smartphone market witnessing softness?

A: We expect the mobile market, smartphone market, computing market, notebook computers as well as enterprise computing to be the biggest growth drivers for our business in 2013. While our traditional markets were imaging cards, retail, USB drives as well as for example in the developed markets we sell Sansa audio players. Those traditional businesses particularly in the imaging and USB flash drives and retail mobile cards will also continue to be strong hold of our business.

Q: What would you see as the big challenge at this point in time to business? What would the number one risk be?

A: For us, I think when you look at the growth opportunities ahead in flash memory. There are many and I want to make sure that SanDisk is very much focused on continuing to lead the industry in bringing innovative solutions to the market place. So that's where really I focus the most on, in terms of making sure that our technology portfolio, product portfolio and the customer ecosystem is continuing to expand well.

From a SanDisk management business point of view, I do focus a lot on the supply growth, supply capacity additions in particular because managing the demand and supply environment for our business is important for our growth.

Q: In 25 years you have explored new markets, grown market share, driven innovation. What would the number one lesson have been for you as an entrepreneur?

A: Be adaptable and agile

Q: How do you continue to adaptable and agile as you grow?

A: That's the key. History of SanDisk says that they are able to adapt its business model very well as the market evolve and opportunities change. In 2008, when the global economies really experienced the financial meltdown and all businesses suffered in timeframe before that timeframe, SanDisk was much a global retail story.

We used that timeframe of the downturn in the global markets in 2008, to adapt our business and it do fast in terms of expanding our product portfolio and customer engagements.

As a result, SanDisk is the number one brand globally in retail and business is strong in terms of retail overall when you look at our reported results but we have also gained tremendous momentum than over a period of two-three years reflecting our adaptability and agility growing the business on the OEM side becoming a supplier to a diverse set of device manufacturers as well as now expanding the business on the solid state driver opportunity.

Q: How hard is it now to run a business which is beyond borders, how hard is it as a manager to oversee – you have tax problems in one country, you have macro economic problems in another country, what is the big challenge of running a multi-country operation at this point in time?

A: Certainly, our business is very large. SanDisk sell 700 million or so products on a yearly basis worldwide. The complexity, scale and pace at which the business moves are fairly demanding and exciting as well.

This is where SanDisk shines and this is where through innovation, moving fast and making adjustments as necessary we are able to continue to lead the industry even after the growth experienced during 25 years. Team is the key. When the business becomes large and complex you need to have right team players and at SanDisk we have a strong management team not only at the headquarters but we have a strong team worldwide as well.

Q: Where would you like to see the company three years from now?

A: Our strategy is to focus on profitable growth of the company, continue to invest in technologies and to continue to lead the industry with cutting edge innovative products, supplying to the markets and within that continuing to increase the mix of the profitable share of our market and that is our goal.

Q: It has always been profits over revenue for SanDisk?

A: It is about growth in revenues and profits in cashflow. We focus on all three of the things to optimize the business. It is about growing profitable revenue for example, 2013 guidance reflects a growth in our revenue over 2012. So, it is about growth of topline, bottomline and the cashflow.

Q: If you are not looking at manufacturing then what kind of investments can we expect for SanDisk to make in India?

A: SanDisk investments in India will be in the area of R&D center, in our employees and increasing capabilities of the center.

Q: Are you looking at aggressively upping the headcount or you are comfortable at where things are?

A: I believe in prudent management and we will continue to focus on developing the center as part of our global mix of centers of R&D that are worldwide. We have centers in California USA, Israel, Japan, Scotland and in India in terms of R&D activities. The growth in India will be within the framework of our global operation in the R&D center. I fully expect growth over the years in the center and then continue to invest in growing our sales here in the Indian market.