Western Digital 2003 Annual Report Download - page 32

our SCSI enterprise hard drive product line early in the third quarter of 2000 and is one of the factors which led to our
decision to exit the SCSI enterprise hard drive market.
Dependence on a limited number of qualiÑed suppliers of components could lead to delays, lost revenue or increased costs.
Because we depend on a limited number of suppliers for certain hard drive components, an extended shortage of
required components or the failure of key suppliers to remain in business, adjust to market conditions, or to meet our
quality, yield or production requirements could signiÑcantly harm our operating results. A number of the components
used by us are available from only a single or limited number of qualiÑed outside suppliers, and there is continued
attrition and consolidation in our supplier base. In June 2003, Read-Rite Corporation, one of our suppliers of heads,
commenced voluntary Chapter 7 bankruptcy proceedings. In July 2003, we acquired the assets of Read-Rite in an eÅort
to increase our operational Öexibility and ensure our access to future head technologies. Although it is anticipated that our
acquisition will reduce our dependence on outside suppliers for heads, we may not be able to supply all of our head needs,
and, therefore, we may still be required to purchase heads, as well as other hard drive components, from outside sources.
If a component is in short supply, or a supplier fails to qualify or has a quality issue with a component, we may
experience delays or increased costs in obtaining that component. In addition, if a component becomes unavailable, we
could suÅer signiÑcant loss of revenue. For example, we lost revenue in September 1999 when we had to shut down
production of a product line for approximately two weeks as a result of a faulty power driver chip that was sole-sourced
from a third party supplier.
To reduce the risk of component shortages, we attempt to provide signiÑcant lead times when buying these
components. As a result, we may have to pay signiÑcant cancellation charges to suppliers if we cancel orders, as we did in
1998 when we accelerated our transition to giant magnetoresistive head technology, and as we did in 2000 as a result of
our decision to exit the SCSI enterprise hard drive market.
In some cases, not only are we dependent on a limited number of suppliers, but we also have entered into
contractual commitments that require us to buy a substantial number of components from certain suppliers. For example
in April 1999, we entered into a three-year volume purchase agreement with Komag under which we buy a substantial
portion of our media components from Komag. In October 2001, we amended the Komag volume purchase agreement
to extend the initial term to six years. Similarly, we have entered into contractual commitments with both IBM and
Marvell for the supply of our read channel devices. In February 2001, we entered into a two-year volume purchase
agreement with IBM under which we buy a portion of our read channel devices from IBM. EÅective June 2002, we
amended the IBM volume purchase agreement to extend the initial term through December 31, 2003. In addition, in
June 2002, we entered into a Ñve-year volume purchase agreement with Marvell under which we buy a portion of our
read channel devices from Marvell. These relationships have increased our dependence on each of Komag, IBM and
Marvell as a supplier. Our future operating results may depend substantially on Komag's ability to timely qualify its
media components in our new development programs, and each of Komag's, IBM's and Marvell's ability to supply us
with these components in suÇcient volume to meet our production requirements. A signiÑcant disruption in Komag's
ability to manufacture and supply us with media components or IBM's or Marvell's ability to manufacture and supply us
with read channel devices could harm our operating results.
If we are unable to timely and cost eÅectively develop heads with leading technology, our ability to sell our products may be
signiÑcantly diminished, which could materially and adversely aÅect our business and Ñnancial results.
As a result of our acquisition of the assets of Read-Rite, we are developing and manufacturing heads for use in the
hard drives we manufacture. Consequently, we will be more dependent upon our own development eÅorts and less able to
take advantage of head technologies developed by other head manufacturers. In November 2002, Read-Rite announced
that it had achieved an areal density of 146 gigabits per square inch using perpendicular recording technology. There can
be no assurance, however, that we will be successful in timely and cost eÅectively developing and manufacturing heads for
products using perpendicular recording technology, or other future technologies. We also may not achieve acceptable
manufacturing yields using such technologies necessary to satisfy our customers' product needs. In addition, we may not
have access to external sources of supply without incurring substantial costs. If we fail to timely manufacture heads
containing leading technology, or if we are unable to achieve acceptable manufacturing yields of heads, our ability to sell
our products may be adversely aÅected. Moreover, if we fail to develop new technologies in a timely manner, and if our
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