Western Digital 2006 Annual Report Download - page 24

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component suppliers, in an effort to increase and stabilize the supply of those components, and enable us to purchase such
components at favorable prices. Some of these commitments require or may require us to buy a substantial number of
components from the supplier or make significant cash advances to the supplier, however these commitments may not
result in a satisfactory increase or stabilization of the supply of such components.
We have high-volume hard drive manufacturing facilities in Malaysia and Thailand, which subjects us to the risk of
damage or loss of any of these facilities and localized risks to personnel in these locations.
Our hard drives are manufactured in facilities in Malaysia and 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
limit the total volume of hard drives we are able to manufacture and result in a loss of sales and revenue and harm our
operating results. Similarly, a localized health risk affecting our personnel in Malaysia and Thailand, such as a new
pandemic influenza in Asia Pacific, could impair the total volume of hard drives that we are able to manufacture.
Our head manufacturing operations include a single wafer fabrication facility in Fremont, California and a single head
gimbal/head stack assembly facility in Bang Pa-In, Thailand, which subjects us to substantial risk of damage or loss if
operations at either of these facilities are disrupted.
As we have previously discussed in public statements, our business plan presently contemplates that we plan to
design and manufacture approximately 70% of the heads required for the hard drives we manufacture. We fabricate
wafers in our Fremont, California facility, and the wafers are then sent to our Thailand facility for slider fabrication/wafer
slicing, HGA assembly and testing, and HSA assembly and testing. A fire, flood, earthquake or other disaster, condition
or event such as a power outage that adversely affects our facilities in Fremont, California or Bang Pa-In, Thailand would
significantly affect our supply of heads and limit our ability to manufacture hard drives which would result in a
substantial loss of sales and revenue and a substantial harm to our operating results.
Our head manufacturing operations may result in additional costs and risks to our business.
Our vertical integration of head manufacturing resulted in a fundamental change in our operating structure, as we
now manufacture heads for use in many of the hard drives we manufacture. Consequently, we make more capital
investments than we would if we were not vertically integrated and carry a higher percentage of fixed costs than assumed
in our prior financial business model. If the overall level of production decreases for any reason, and we are unable to
reduce our fixed costs to match sales, 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 drive media, that is optimized to work with our heads.
In addition, we may incur additional risks, including:
• insufficient head sources if we are unable to manufacture a sufficient supply of heads to satisfy our needs;
• third party head suppliers may not continue to do business with us or may not do business with us on the same
terms and conditions we have previously enjoyed;
• claims that our manufacturing of heads may infringe certain intellectual property rights of other companies; and
• difficulties locating 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.
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