Western Digital 2005 Annual Report Download - page 36

‚ it may be difficult 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 profit margins and negatively impacting our operating
results.
If we are unable to timely and cost-effectively develop heads with leading technology and overall quality, our ability to
sell our products may be significantly diminished, which could materially and adversely affect our business and
financial 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 efforts 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-effectively 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. For example, the Company anticipates using perpendicular recording heads in
certain products in the future. If we fail to develop new technologies such as perpendicular recording 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 financial results could suffer.
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 Thailand. In addition, we operate a head wafer
fabrication and research and development facility in Fremont, California and a slider fabrication, head gimbal assembly,
head stack assembly, and research and development facility in Thailand. A fire, flood, earthquake or other disaster,
condition or event such as a power outage that adversely affects any of these facilities or our ability to manufacture could
result in a loss of sales and revenue and harm our operating results.
Manufacturing our products abroad subjects us to numerous risks.
We are subject to risks associated with our foreign manufacturing operations, including:
‚ obtaining requisite United States and foreign governmental permits and approvals;
‚ currency exchange rate fluctuations or restrictions;
‚ political instability and civil unrest;
‚ transportation delays or higher freight rates;
‚ labor problems;
‚ trade restrictions or higher tariffs;
‚ exchange, currency and tax controls and reallocations;
‚ increasing labor and overhead costs; and
‚ loss or non-renewal of favorable tax treatment under agreements or treaties with foreign tax authorities.
Because we manufacture our products abroad, our operating costs are subject to fluctuations in foreign currency
exchange rates. Further fluctuations in the exchange rate of the Thai Baht and of the Malaysian Ringgit may negatively
impact our operating results.
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