Seagate 2009 Annual Report Download - page 10

Table of Contents
advantage over captive manufacturers in working with OEMs because they do not compete with OEMs for computer system sales. We believe
the competitive dynamics of the disk drive industry favor vertically integrated, independent manufacturers with the scale to make substantial
technology investments and apply them across a broad product portfolio and set of customers.
We pursue a vertically integrated business strategy based on the ownership of critical component technologies, allowing us to maintain
control over our product roadmap and component cost, quality and availability. We believe that because of our vertical design and
manufacturing strategy, we are well suited to meet the challenges posed by the close interdependence of components for disk drives. Our
manufacturing efficiency and flexibility are critical elements of our integrated business strategy. We continuously seek to improve our
manufacturing efficiency and cost by:
•
employing manufacturing automation to enhance our efficiency;
• improving product quality and reliability and reducing costs;
• integrating our supply chain with suppliers and customers to enhance our demand visibility and reduce our working capital
requirements;
• coordinating between our manufacturing group and our research and development organization to rapidly achieve volume
manufacturing; and
•
rationalizing the facilities we operate and reducing the number of personnel we employ.
A vertically integrated model, however, tends to have less flexibility when demand moderates because it exposes us to higher unit costs as
capacity utilization is not optimized.
Due to the significant challenges posed by the need to continually innovate and improve manufacturing efficiency and the continued
demands on capital and research and development 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 Corporation acquired Fujitsu Limited's hard disk drive
business in October 2009. 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.
Components and Raw Materials
All of our disk drive products incorporate certain components, including a head disk assembly and a printed circuit board mounted to the
head disk assembly, which are sealed inside a rigid base and top cover containing the recording components in a contamination controlled
environment. 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.
Read/Write Heads. The function of the read/write head is to scan across the disk as it spins, magnetically recording or reading
information. The tolerances of recording heads are extremely demanding and require state-of-the-art equipment and processes. Our read/write
heads are manufactured with thin-film and photolithographic processes similar to those used to produce semiconductor integrated circuits,
though challenges in magnetic film properties and topographical structures are unique to the disk drive industry. We perform all primary stages
of design and manufacture of read/write heads at our facilities. We use a combination of internally manufactured and externally sourced
read/write heads, the mix of which varies based on product mix, technology and our internal capacity levels.
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