Western Digital 2006 Annual Report Download - page 23

Download and view the complete annual report

Please find page 23 of the 2006 Western Digital annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 116

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116

If we fail to maintain effective relationships with our major component suppliers, our supply of critical components may be at
risk and our profitability could suffer.
Under our business model, we do not manufacture many of the component parts used in our hard drives, however,
for some of our product families, we do make most of our own heads. As a result, the success of our products depends on
our ability to gain access to and integrate parts that are “best in class” from reliable component suppliers. To do so, we
must effectively manage our relationships with our major component suppliers. We must also effectively integrate
different products from a variety of suppliers, each of which employs variations on technology, which can impact, for
example, feasible combinations of heads and media components. In August 2003, we settled litigation with a supplier
who previously was the sole source of read channel devices for our hard drives. As a result of the disputes that gave rise to
the litigation, our profitability was at risk until another supplier’s read channel devices could be designed into our
products. Similar disputes with other strategic component suppliers could adversely affect our operating results.
Dependence on a limited number of qualified suppliers of components and manufacturing equipment could lead to delays, lost
revenue or increased costs.
Certain components are available from a limited number of suppliers. Because we depend on a limited number of
suppliers for certain hard drive components and manufacturing equipment, each of the following could significantly
harm our operating results:
• an increase in the cost of such components or equipment;
• an extended shortage of required components or equipment;
• consolidation of key suppliers;
• failure of a key supplier’s business process; or
• the failure of key suppliers to remain in business, adjust to market conditions, or to meet our quality, yield or
production requirements.
Our future operating results may also depend substantially on our suppliers’ ability to timely qualify their
components in our programs, and their ability to supply us with these components in sufficient volumes to meet our
production requirements. A number of the components that we use are available from only a single or limited number of
qualified outside suppliers, and may be used across multiple product lines. In addition, some of the components (or
component types) used in our products are used in other devices, such as mobile telephones and digital cameras. If there is
a significant simultaneous upswing in demand for such a component (or component type) from several high volume
industries, resulting in a supply reduction, or a component is otherwise in short supply, or if a supplier fails to qualify or
has a quality issue with a component, we may experience delays or increased costs in obtaining that component. For
example, the hard drive industry is currently facing a tightness in the availability of media (rotating magnetic disks)
components, and there are currently only three independent suppliers of aluminum media and three independent
suppliers of glass media in the market. Several of our competitors have an internal supply of media therefore allowing
them to better withstand a shortage of media while, if we are unable to obtain sufficient quantities of media, or other
necessary components, we may experience production delays which could cause us loss of revenue. If a component
becomes unavailable, we could suffer significant loss of revenue.
In addition, certain equipment we use in our manufacturing or testing processes is available only from a limited
number of suppliers. Some of this equipment uses materials that at times could be in short supply. If these materials are
not available, or are not available in the quantities we require for our manufacturing and testing processes, our ability to
manufacture our products could be impacted, and we could suffer significant loss of revenue.
Contractual commitments with component suppliers may result in us paying increased charges and cash advances for such
components.
To reduce the risk of component shortages, we attempt to provide significant lead times when buying these
components. As a result, we may be subject to cancellation charges if we cancel orders, which may occur when we make
technology transitions or when our component needs change. In addition, we have entered into contractual commitments
with component suppliers, such as suppliers of media, and may enter into contractual commitments with other
17