Western Digital 2010 Annual Report Download - page 31

Contractual commitments with component suppliers may result in us paying increased charges and cash advances for such com-
ponents or may cause us to have inadequate or excess component inventory.
To reduce the risk of component shortages, we attempt to provide significant lead times when buying components,
which may subject us to cancellation charges if we cancel orders as a result of technology transitions or changes in our
component needs. In addition, we may from time to time enter into contractual commitments with 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 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. Furthermore, as a result of the current global economic
conditions, our ability to forecast our requirements for these components has become increasingly difficult, therefore
increasing the risk that our contractual commitments may not meet our actual supply requirements, which could cause us
to have inadequate or excess component inventory and adversely affect our operating results and increase our operating
costs.
Failure by certain suppliers to effectively and efficiently develop and manufacture components, technology or production equip-
ment for our products may adversely affect our operations.
We rely on suppliers for various component parts that we integrate into our hard drives but do not manufacture
ourselves, such as semiconductors, motors, flex circuits and suspensions. Likewise, we rely on suppliers for certain
technology and equipment necessary for advanced development technology for future products. Some of these com-
ponents, and most of this technology and production equipment, must be specifically designed to be compatible for use
in our products or for developing and manufacturing our future products, and are only available from a limited number of
suppliers, some of with whom we are sole sourced. We are therefore dependent on these suppliers to be able and willing to
dedicate adequate engineering resources to develop components that can be successfully integrated with our products,
and technology and production equipment that can be used to develop and manufacture our next-generation products
efficiently. The failure of these suppliers to effectively and efficiently develop and manufacture components that can be
integrated into our products or technology and production equipment that can be used to develop or manufacture next
generation products may cause us to experience inability or delay in our manufacturing and shipment of hard drive
products, our expansion into new technology and markets, or our ability to remain competitive with alternative storage
technologies, therefore adversely affecting our business and financial results.
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 and magnetic media manufacturing resulted in a fundamental change in our
operating structure, as we now manufacture heads and magnetic media for use in many of the hard drives we manufacture.
Consequently, we make more capital investments and carry a higher percentage of fixed costs than we would if we were
not vertically integrated. 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 magnetic media manufacturing assets may face under-utilization that may impact our
operating results. 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:
• failure to continue to leverage the integration of our magnetic media technology with our head technology;
• insufficient third party sources to satisfy our needs if we are unable to manufacture a sufficient supply of heads or
magnetic media;
• third party head or magnetic 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 magnetic media may infringe certain intellectual property rights of
other companies; and
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