Contents - AL-Tax

102 7 Performance of Intercompany Services7.1 Summary of Key FactsUSS engages in the following principal activities: Product and process developmentservices, product prototyping services and customer relationship management services.USS’ research facilities are located in close proximity to its customers’ designcenters. Broadly stated, the objective of the Group’s research is to increase areal (orstorage) density. Over the past two decades, storage density has increased at a rateof approximately 40% per annum. Storage density is determined jointly by:1. Flying height (the minimum distance at which read/write heads can reliably passover the surface of a disk to detect a change in magnetic polarity when readingfrom the disk);2. Signal-to-noise ratio (the ability of the head to discriminate a signal from backgroundmedia noise); and,3. Coercivity (the strength of the magnetic field required to change the polarity ofa bit of data on the magnetic layer of a disk when writing).USS’ research team of approximately 300 individuals works on projects in eachof these areas. As the above determinants indicate, increases in storage density areaccomplished through technological improvements in both disks and heads, and thetwo components must remain “in sync.” As such, one-sided improvements in heads(or disks) generally have to be accompanied by corresponding changes in disks(or heads). Additionally, independent suppliers’ disks must work in conjunctionwith the relatively wide range of heads used by their customers. For these reasons,research activities are highly collaborative, involving thin film disk suppliers, headsuppliers and disk drive suppliers.Given the structure of the market for magnetic disks (described below), andthe fact that FP supplies disks to only three principal customers, there is a limitedrole for sales and marketing in the traditional sense. Instead, USS is engaged predominantlyin maintaining already-established customer relationships. Its accountmanagers and customer service specialists collectively deal with order placement,delivery scheduling and addressing customers’ day-to-day concerns. They are alsoresponsible for sales forecasting on a Group-wide basis. Individual staff membersare dedicated to individual customers.FP has volume purchase agreements in place with all three of its customers,although the latter do not make binding commitments through these vehicles. Twoof these customers have internal disk manufacturing capacity, and look to the Groupas a secondary supplier. Therefore, these suppliers’ volume “commitments” to FPare honored only insofar as their own disk manufacturing capacity falls short of theirrequirements by the full amount of such commitments. Customers are not penalizedfor the cancellation of orders, and only individual purchase orders are regarded asfirm for production planning purposes.FP owns all of the Group’s manufacturing facilities and intangible assets,performs all manufacturing functions, acts as the principal in transactions withcustomers, bears all associated risks and engages in extensive process andequipment development and testing. More concretely, FP enters and processes