Western Digital 2007 Annual Report Download - page 27

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There are certain additional capital expenditure costs and asset utilization risks to our business associated with our strategy
to vertically integrate our operations.
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. Similarly, our planned integration of Komag’s
media business into our overall operations will allow us to manufacture media components to work with our heads.
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 or planned media 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 that we do not manufacture ourselves.
In addition, we may incur additional risks, including:
• if we are unable to manufacture a sufficient supply of heads, or media following our planned acquisition of
Komag, there may be insufficient third party sources to satisfy our needs;
• third party head or media 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, or media following our planned acquisition of Komag, may infringe
certain intellectual property rights of other companies; and
• difficulties locating in a timely manner suitable manufacturing equipment for our head or planned media
manufacturing processes and replacement parts for such equipment.
If we do not adequately address the challenges related to our head or planned media manufacturing operations, our
ongoing operations could be disrupted, resulting in a decrease in our revenue or profit margins and negatively impacting
our operating results.
Our operating results will be adversely affected if we fail to optimize the overall quality, time-to-market and time-to-volume
of new and established products.
To achieve consistent success with our customers, we must balance several key attributes such as time-to-market,
time-to-volume, quality, cost, service, price and a broad product portfolio. If we fail to:
• maintain overall quality of products on new and established programs;
• produce sufficient quantities of products at the capacities our customers demand while managing the integration
of new and established technologies;
• develop and qualify new products that have changes in overall specifications or features that our customers may
require for their business needs;
• obtain commitments from our customers to qualify new products, redesigns of current products, or new
components in our existing products;
• qualify these products with key customers on a timely basis by meeting all of our customers’ needs for
performance, quality and features;
• maintain an adequate supply of components required to manufacture our products;
• maintain the manufacturing capability to quickly change our product mix between different capacities, form
factors and spin speeds in response to changes in customers’ product demands; or
• consistently meet stated quality requirements on delivered products,
our operating results will be adversely affected.
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