Western Digital 2006 Annual Report Download - page 16

quickly achieve volume production of each new generation of high quality and reliable hard drives, requiring access to
flexible, high-capacity, high-quality manufacturing capabilities.
Many of our OEM customers utilize just-in-time inventory management processes or supply chain business models
that combine “build-to-order,” in which the OEM does not build until there is a firm order, and “contract manufac-
turing,” in which the OEM contracts assembly work to a contract manufacturer who purchases components and
assembles the computer based on the OEM’s instructions. For certain OEMs, we maintain a base stock of finished goods
inventory in facilities located near or adjacent to the OEM’s operations.
For an additional discussion of risks related to our need to adapt to our customers’ business models and maintain
customer satisfaction, refer to Item 1A of this Annual Report on Form 10-K.
Distributors
We use a select group of distributors to sell our products to non-direct customers such as small computer and
CE manufacturers, dealers, systems integrators, online retailers and other resellers. Distributors accounted for approx-
imately 39%, 36% and 42% of our revenue for 2006, 2005 and 2004, respectively. Distributors generally enter into non-
exclusive agreements for specific territories with us for purchase and redistribution of product. We grant our distributors
limited price protection rights.
Retailers
We sell our branded products directly to a select group of major retailers such as computer superstores, warehouse
clubs and computer electronics stores, and authorize sales through distributors to smaller retailers. Retailers accounted
for approximately 7%, 6% and 7% of our revenue for 2006, 2005 and 2004, respectively. Our current retail customer
base is primarily in the United States, Canada and Europe. The retail channel complements our other sales channels while
helping to build brand awareness for WD and our products. Retailers supply end-users with products to upgrade their
computers and externally store their data for backup purposes. We grant our retailers price protection and limited rights
to return product on an inventory rotation basis. We also sell our branded products through the Internet, at our web site.
Sales and Marketing
We maintain sales offices in selected parts of the world including the major geographies of the Americas, Asia Pacific,
Japan, Europe and the Middle East. Our international sales, which include sales to foreign subsidiaries of U.S. companies but
do not include sales to U.S. subsidiaries of foreign companies, represented 68%, 65% and 63% of our revenue for 2006,
2005 and 2004, respectively. Sales to international customers may be subject to certain risks not normally encountered in
domestic operations, including exposure to tariffs and various trade regulations. For further discussion regarding the risks
related to sales to international customers, see Item 1A of this Annual Report on Form 10-K.
For additional information concerning revenue recognition, sales by geographic region and significant customer
information, see Part II, Item 8 — Notes 1 and 10 of the Notes to Consolidated Financial Statements.
We perform our marketing and advertising functions internally and through outside firms. We target advertising,
worldwide packaging and marketing materials to various reseller and end-user categories. We utilize both consumer
media and, to a lesser extent, trade publications. We have programs under which we reimburse qualified distributors and
retailers for certain marketing expenditures. We also maintain customer relationships by communicating with our
resellers and providing end-users with information and support through our web site.
Competition
We compete primarily with manufacturers of hard drives for desktop, mobile, enterprise and CE products. Our
competitors in the hard drive market include Fujitsu Limited, Hitachi Global Storage Technologies, Samsung
Electronics Incorporated, Seagate Technology and Toshiba Corporation. In 2006, Seagate completed the acquisition
of Maxtor Corporation which, at the time of the acquisition, was one of the hard drive industry’s four largest suppliers.
The hard drive industry is intensely competitive, with hard drive suppliers competing for sales to a limited number
of major customers. Hard drives manufactured by different competitors are highly substitutable due to the industry
mandate of technical form, fit and function standards. Hard drive manufacturers compete on the basis of product quality
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