Western Digital 2008 Annual Report Download - page 27

could adversely affect our operating margins. Furthermore, if other high volume industries increase their demand for
materials such as these, our costs may further increase which could have an adverse effect on our operating margins. The
volatility in the cost of oil also affects our transportation costs and may result in lower operating margins if we are unable
to pass these increased costs through to our customers.
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.
We make most of our own heads and media for some of our product families; however, we do not manufacture many
of the component parts used in our hard drives. 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.
Violation of labor or environmental laws and practices by our suppliers or sub-suppliers could harm our business.
We expect our suppliers to operate in compliance with applicable laws and regulations, including labor and
environmental laws, and to otherwise meet our required supplier standards of conduct. While our internal operating
guidelines promote ethical business practices, we do not control our suppliers or sub-suppliers or their labor or
environmental practices. The violation of labor, environmental or other laws by any of our suppliers or sub-suppliers, or
divergence of a supplier’s or sub-supplier’s labor or environmental practices from those generally accepted as ethical in the
U.S., could harm our business by:
• interrupting or otherwise disrupting the shipment of our product components;
• damaging our reputation;
• forcing us to find alternate component sources;
• reducing demand for our products (for example, through a consumer boycott); or
• exposing us to potential liability for our supplier’s or sub-supplier’s wrongdoings.
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, and we are sole sourced with some of these
suppliers on certain products. 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, such as the acquisition of Brilliant Manufacturing Limited by Nidec Corporation,
the acquisition of Agere Systems Inc. by LSI Corporation, the acquisition of Infineon Technologies’ hard drive
semiconductor business by LSI Corporation, the acquisition of Alps Electric Co. Ltd.’s magnetic device division’s
assets and related intellectual property by TDK Corp, and the acquisition of Magnecomp Precision Technology
Public Company Limited by TDK Corp;
• failure of a key supplier’s business process; or
• failure of key suppliers to remain in business, to remain independent merchant suppliers, to adjust to market
conditions, or to meet our quality, yield or production requirements.
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