Western Digital 2004 Annual Report Download - page 33

‚ the costs of operating head manufacturing assets may exceed the prices we have historically paid for heads or the
prices that might be otherwise available to us from other vendors;
‚ we may be subject to claims that our manufacturing of heads may infringe certain intellectual property rights of
other companies;
‚ we could incur substantial costs, including clean up costs, Ñnes and civil or criminal sanctions, as a result of
violations of or liabilities under environmental laws applicable to our Fremont, California facility, including those
governing the discharge of pollutants into the air and water; and
‚ it may be diÇcult and time-consuming for us to locate suitable manufacturing equipment for our head
manufacturing processes and replacement parts for such equipment.
If we do not adequately address the challenges related to our head manufacturing operations, our ongoing operations
could be disrupted, resulting in a decrease in our revenue or proÑt margins and negatively impacting our operating
results.
To develop new products, we must maintain eÅective partner relationships with our major component suppliers.
Under our business model, we do not manufacture any of the component parts used in our hard disk drives, other
than heads as a result of our acquisition of head manufacturing assets in July 2003. As a result, the success of our
products depends on our ability to gain access to and integrate parts that are ""best in class'' from reliable component
suppliers. To do so, we must eÅectively manage our relationships with our major component suppliers. We must also
eÅectively integrate diÅerent products from a variety of suppliers, each of which employs variations on technology, which
can impact, for example, feasible combinations of heads and media components. In August 2003 we settled litigation we
were engaged in with Cirrus Logic, Inc., a supplier who previously was the sole source of read channel devices for our hard
disk drives. As a result of the disputes that gave rise to the litigation, our proÑtability was at risk until another supplier's
read channel devices could be designed into our products. Similar disputes with other strategic component suppliers could
adversely aÅect our operating results.
Our failure to timely and eÇciently transition our enterprise resource planning software from the version we currently use to
a new version could adversely aÅect our business and Ñnancial results.
We use enterprise resource planning software in the operation of our business and maintenance of business and
Ñnancial data related to our daily operations. We are in the process of upgrading this software and we anticipate
transitioning to new enterprise resource planning software during the next year. We may experience unexpected
diÇculties in transitioning to the new software, including diÇculties related to the failure or ineÇcient operation of the
new software. Such diÇculties or failures could result in our inability to access business and Ñnancial information stored
on the system or the loss of such information. Any inability to access, or loss of, such information could aÅect our daily
operations, including our ability to ship products and invoice our customers, which could have a signiÑcant adverse
impact on our business, Ñnancial condition and results of operations.
Some of our customers have adopted a subcontractor model that increases our credit risk and could result in an increase in
our operating costs.
Some of our computer manufacturer customers (also referred to as OEMs) have adopted a subcontractor model that
requires us to contract directly with companies that provide manufacturing services to our OEM customers. Because these
subcontractors are generally not as well capitalized as our direct OEM customers, this subcontractor model exposes us to
increased credit risks. Our agreements with our OEM customers may not permit us to increase our product prices to
alleviate this increased credit risk. Any credit losses we may suÅer as a result of this increased risk would increase our
operating costs, which may negatively impact our operating results.
We have two high-volume hard-drive manufacturing facilities and two facilities supporting our head manufacturing
operations, which subjects us to the risk of damage or loss of any of these facilities.
Our hard disk drives are manufactured in facilities in Malaysia and in Thailand. In addition, following our
acquisition of head manufacturing assets in July 2003, we are operating a head wafer fabrication and research and
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