Western Digital 2014 Annual Report Download - page 28

this equipment must be specifically designed to be compatible for use in our products or for developing and manufactur-
ing our future products, and are only available from a limited number of suppliers, some of whom are our sole-source
suppliers. 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 into our products, technology and equipment that
can be used to develop and manufacture our next-generation products efficiently. However, many of the risks that affect
us also affect our supply base, including, but not limited to, having single site manufacturing locations based in high risk
regions of the world, macro and local economic conditions, shortages of commodity materials, proper management of
technology transitions, natural disasters, geo-political risks, compliance with legal requirements, financial instability and
exposure to intellectual property and other litigation, including an injunction or other action that could delay shipping.
If any of these risks were to affect our suppliers, we could also be adversely affected, especially in the case of products,
components or services that are single-sourced. For example, if suppliers are facing increased costs due to the above risks,
they may require us to enter into long-term volume agreements to shift the burden of fixed costs to us. Further, we work
closely with many of our suppliers to develop new technologies and, as a result, we may become subject to litigation from
our suppliers or third parties.
Without a capable and financially stable supply base that has established appropriate relationships within the
supply chain and has implemented business processes, strategies and risk management safeguards, we would be unable
to develop our products, manufacture them in high volumes, and distribute them to our customers to execute our
business plans effectively. As PC demand slows, competition increases from NAND and other consumer devices, the
total available market for hard disk drives decreases and costs increase, these suppliers may reevaluate their business
models. Our suppliers may be acquired by our competitors, consolidate, or decide to exit the industry, redirect their
investments and increase costs to us, each of which may have an adverse effect on our business and operations. In addi-
tion, moving to new technologies may require us to align to, and build, a new supply base, such as NAND flash. In
the case of NAND suppliers, many of which are involved in developing storage products such as SSD that, in some
cases, compete with our products. Our success in these new product areas may be dependent on our ability and their
willingness to develop close relationships, with preferential agreements. Where this cannot be done, our business and
operations may be adversely affected.
In addition to an external supply base, we also rely on an internal supply chain of heads, media and media sub-
strate. Please see the risk factors entitled, “A fundamental change in recording technology could result in significant increases in
our costs and could put us at a competitive disadvantage” and “If we do not properly manage technology transitions, our competitive-
ness and operating results may be negatively affected” for a review of some of the risks related to our internal supply.
Price volatility, shortages of critical materials or components, or use by other industries of materials and components used in the
storage industry, may negatively impact our operating results.
Increases in the cost for certain critical materials and components and oil may increase our costs of manufacturing
and transporting our products and key components and may result in lower operating margins if we are unable to pass
these increased costs on to our customers. Shortages of critical components such as DRAM and NAND flash, or
materials such as glass substrates, stainless steel, aluminum, nickel, neodymium, ruthenium, platinum or cerium, may
increase our costs and may result in lower operating margins if we are unable to find ways to mitigate these increased
costs. We or our suppliers acquire certain precious metals and rare earth metals like ruthenium, platinum, neo-
dymium and cerium, which are critical to the manufacture of components in our products from a number of countries,
including the People’s Republic of China. The government of China or any other nation may impose regulations,
quotas or embargoes upon these metals that would restrict the worldwide supply of such metals or increase their cost,
both of which could negatively impact our operating results until alternative suppliers are sourced. Furthermore, if
other high volume industries increase their demand for materials or components used in our products, our costs may
further increase, which could have an adverse effect on our operating margins. In addition, shortages in other compo-
nents and materials used in our customers’ products could result in a decrease in demand for our products, which
would negatively impact our operating results.
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