Western Digital 2008 Annual Report Download - page 28

If components and equipment that we use are available from only a limited number of suppliers or are in short supply, it may
negatively impact our production and cause us to lose revenue.
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. If we are
unable to obtain sufficient quantities of materials used in the manufacture of magnetic components, 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 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 and may enter into contractual commitments with other component suppliers, in an effort to
increase and stabilize the supply of those components, and enable us to purchase such components at favorable prices.
Some of these commitments require or may require us to buy a substantial number of components from the supplier or
make significant cash advances to the supplier; however, these commitments may not result in a satisfactory increase or
stabilization of the supply of such components.
Failure by certain suppliers to effectively and efficiently develop and manufacture components for our products may adversely
affect our operations.
We rely on suppliers for various component parts that we integrate into our hard drives but do not manufacture
ourselves, such as semiconductors, motors, flex circuits and suspensions. Some of these components must be specifically
designed to be compatible for use in our products, and are only available from a limited number of suppliers with whom
we are sole sourced for certain products. We are therefore dependent on the suppliers of these various components to be
able and willing to dedicate adequate engineering resources to develop technology that can be successfully integrated
with our products, and to manufacture these components efficiently. The failure of component suppliers to effectively and
efficiently develop and manufacture technology that can be integrated into our products may cause us to experience
inability or delay in our manufacturing and shipment of hard drive products, or our expansion into new technology and
markets, therefore adversely affecting our business and financial results.
There are certain additional capital expenditure costs and asset utilization risks to our business associated with our strategy
to vertically integrate our operations.
Our vertical integration of head and media manufacturing resulted in a fundamental change in our operating
structure, as we now manufacture heads and media for use in many of the hard drives we manufacture. Consequently, we
make more capital investments than we would if we were not vertically integrated and carry a higher percentage of fixed
costs than assumed in our prior financial business model. If the overall level of production decreases for any reason, and we
are unable to reduce our fixed costs to match sales, our head or media manufacturing assets may face under-utilization that
may impact our operating results. We are therefore subject to additional risks related to overall asset utilization,
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