Western Digital 2004 Annual Report Download - page 32

To reduce the risk of component shortages, we attempt to provide signiÑcant lead times when buying these
components. As a result, we may be subject to cancellation charges if we cancel orders, which may occur when we make
technology transitions.
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,
we have entered into a volume purchase agreement with Komag for the purchase of media components, and volume
purchase agreements with IBM and Marvell for the purchase of read channel devices. Our future operating results may
depend substantially on Komag's ability to timely qualify their components in our 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 any of these suppliers' ability to manufacture and supply us with the
components could harm our operating results.
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 suÅer signiÑcant loss of revenue.
If we are unable to timely and cost-eÅectively develop heads with leading technology and overall quality, 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 head manufacturing operations, we are developing and manufacturing a substantial portion of the
heads used in the hard disk drives we manufacture. Consequently, we are more dependent upon our own development
and execution eÅorts and less able to take advantage of head technologies developed by other head manufacturers. 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, or we may
encounter quality problems with the heads we manufacture. In addition, we may not have access to external sources of
supply without incurring substantial costs. If we fail to develop new technologies in a timely manner, or if we encounter
quality problems with the heads we manufacture, and if we do not have access to external sources of supply that
incorporate new technologies, we would have a competitive disadvantage to companies that are successful in this regard,
and our business and Ñnancial results could suÅer.
We will experience additional costs and risks in connection with our head manufacturing operations.
Our acquisition of head manufacturing assets represented a fundamental change in our operating structure, as we are
now manufacturing heads for use in the hard disk drives we manufacture. Consequently, we carry a higher percentage of
Ñxed costs than assumed in our prior Ñnancial business model. If the overall level of production decreases for any reason,
our head manufacturing assets may face under-utilization that may impact our results of operations. We are therefore
subject to additional risks related to overall asset utilization, including the need to operate at high levels of utilization to
drive competitive costs, and the need for assured supply of components, especially hard disk drive media, that is
optimized to work with our heads.
Moreover, capital expenditures and working capital investments required to support the head manufacturing
operations, including research and development expenses and expenses necessary to investigate new recording technologies
to extend technology, will increase.
In addition, we may incur additional costs, expenses and risks, including:
‚ we may not have suÇcient head sources in the event that we are unable to manufacture a suÇcient supply of
heads to satisfy our needs;
‚ third party head suppliers may not deal with us or may not deal with us on the same terms and conditions we
have previously enjoyed;
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