Western Digital 2007 Annual Report Download - page 23

In addition, although we receive forecasts from our customers, they are not obligated to purchase the forecasted
amounts. In particular, sales volumes in the distribution channel are volatile and harder to predict than sales to our OEM
or ODM customers. We consider these forecasts in determining our component needs and our inventory requirements. If
we fail to accurately forecast our customers’ product demands, we may have inadequate or excess inventory of our products
or components, which could adversely affect our operating results.
Increases in areal density may outpace customers’ demand for storage capacity, which may lower the prices our customers are
willing to pay for new products.
Historically, the industry has experienced periods of variable areal density growth rates. When the rate of areal
density growth increases, the rate of increase may exceed the increase in our customers’ demand for aggregate storage
capacity. Furthermore, our customers’ demand for storage capacity may not continue to grow at current industry
estimates as a result of developments in the regulation and enforcement of digital rights management or otherwise. These
factors could lead to our customers’ storage capacity needs being satisfied with lower capacity hard drives at lower prices,
thereby decreasing our revenue. As a result, even with increasing aggregate demand for storage capacity, our ASPs could
decline, which could adversely affect our results of operations.
A low cost structure is critical to our operating results and increased costs may adversely affect our operating margin.
A low cost structure for our products, including critical components, labor and overhead, is critical to the success of
our business and our operating results depend on our ability to maintain competitive cost structures on new and
established products. If our competitors are able to achieve a lower cost structure for manufacturing hard drives, and we
are unable to match their cost structure, we could be at a competitive disadvantage to those competitors.
Shortages of commodity materials, or use by other industries of materials used in the hard drive industry, may increase our cost
structure.
There are costs for certain commodity materials, an increase in which increases our costs of manufacturing and
transporting hard drives and key components. For example, shortages of materials such as steel, aluminum and precious
metals increase our costs and may result in lower operating margins if we are unable to find ways to mitigate these
increased costs. The variability in the cost of oil also affects our costs and may result in lower operating margins if we are
unable to pass increased costs through to our customers.
Additionally, there are certain limited supply materials, such as raw materials like nickel and steel as well as metals
like neodymium and ruthenium, which are used in the manufacturing of hard drive components. If other high volume
industry demands for any of these materials increase, our costs may increase which could have an adverse affect on our
operating margins.
Changes in product life cycles could adversely affect our financial results.
Product life cycles lengthened over the four years beginning in calendar year 2002 due in large part to a decrease in
the rate of hard drive areal density growth. However, with the use of perpendicular recording in hard drives beginning in
calendar year 2006, we anticipate that the life cycle of these products may shorten. If product life cycles lengthen, we may
need to develop new technologies or programs to reduce our costs on any particular product to maintain competitive
pricing for that product. This may result in an increase in our overall expenses and a decrease in our gross margins, both of
which could adversely affect our operating results. If product life cycles shorten, it may be more difficult to recover the
cost of product development before the product becomes obsolete. Our failure to recover the cost of product development
in the future could adversely affect our operating results.
If we fail to make the technical innovations necessary to continue to increase areal density, we may fail to remain competitive.
New products in the hard drive market typically require higher areal densities than previous product generations,
posing formidable technical and manufacturing challenges. Higher areal densities require existing head and media
technology to be improved or new technology developed to accommodate more data on a single disk. In addition, our
introduction of new products during a technology transition increases the likelihood of unexpected quality concerns. Our
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