Seagate 2008 Annual Report Download - page 50

Table of Contents
investments required to do so, the disk drive industry has undergone significant consolidation as disk drive manufacturers and component
manufacturers merged with other companies or exited the industry. The trend toward consolidation is more pronounced during times of
macroeconomic contraction. For example, Toshiba recently announced that it intends to acquire Fujitsu's hard disk drive business. The
increasing technological challenges, associated levels of investment and competitive necessity of large-scale operations may also drive future
industry consolidation. Additionally, we may in the future face indirect competition from customers who from time to time evaluate whether to
offer electronic data storage products that may compete with our products.
Suppliers of Components and Capital Equipment
Due to industry consolidation, which may be accelerated by the current macroeconomic conditions, there are a limited number of
independent suppliers of components, such as recording heads and media, available to disk drive manufacturers. Vertically integrated disk drive
manufacturers, who manufacture their own components, are less dependent on external component suppliers than less vertically integrated disk
drive manufacturers.
Generally, we believe that there is more than adequate supply of components to meet currently identified industry demand. However, we
believe that the supply of glass substrates, a component in mobile disk drives, may be below adequate levels to support demand for mobile
drives. This supply constraint may be particularly pronounced if global macroeconomic conditions improve in the near term or if the shift in
demand from desktop to mobile accelerates.
Drive manufacturers have adjusted their capital spending plans in reaction to the reduction in demand. As a result, capital equipment
manufacturers may be increasingly financially constrained and, therefore, may be less able to supply equipment when needed.
Recording Heads and Media
We maintain a highly integrated approach to our business by designing and manufacturing a significant portion of the components we view
as critical to our products, such as recording heads and media. However, a vertically integrated model tends to have less flexibility when there is
a constraint in demand and exposes us to higher unit costs in a down cycle. As a result of the global macroeconomic conditions, our
manufacturing operations experienced a sharp reduction in utilization levels in portions of fiscal year 2009.
The extent of our use of externally sourced recording heads, media and aluminum substrates varies based on product mix, technology and
our internal capacity levels. We purchase from third parties all of our glass substrates, which are used to manufacture our disk drives for mobile
and small form factor CE products.
Commodity and Other Manufacturing Costs
The production of disk drives requires precious metals, scarce alloys and industrial commodities, that are subject to fluctuations in prices,
and the supply of which has at times been constrained. In order to mitigate susceptibility to these conditions, we may maintain increased
inventory of precious metals, scarce alloys and industrial commodities. We believe that currently there is adequate supply of these precious
metals, scarce alloys and industrial commodities. Additionally, volatility in fuel costs may increase our costs related to commodities,
manufacturing and freight, therefore, we may increase our use of ocean shipments to help offset any increase in freight costs.
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