Western Digital 2008 Annual Report Download - page 26

Some of our competitors with diversified business units outside the hard drive industry periodically sell hard drives at prices
that we cannot profitably match.
Some of our competitors earn a significant portion of their revenue from business units outside the hard drive
industry. Because they do not depend solely on sales of hard drives to achieve profitability, they periodically sell hard
drives at lower prices and operate their hard drive business unit at a loss while still remaining profitable overall. In
addition, if these competitors can increase sales of non-hard drive products to the same customers, they may benefit from
selling their hard drives at low prices. Our operating results may be adversely affected if we cannot successfully compete
with the pricing by these companies.
If we fail to qualify our products with our customers, they may not purchase any units of a particular product line, which
would have a significant adverse impact on our sales.
We regularly engage in new product qualification with our customers. Once a product is accepted for qualification
testing, failures or delays in the qualification process can result in our losing sales to that customer until the next
generation of products is introduced. The effect of missing a product qualification opportunity is magnified by the
limited number of high volume OEMs, which continue to consolidate their share of the PC and CE markets. If product
life cycles lengthen, we may have a significantly longer period to wait before we have an opportunity to qualify a new
product with a customer, which could harm our competitive position. These risks are increased because we expect cost
improvements and competitive pressures to result in declining gross margins on our current generation products.
We are subject to risks related to product defects, which could result in product recalls and could subject us to warranty claims
in excess of our warranty provisions or which are greater than anticipated due to the unenforceability of liability limitations.
We warrant the majority of our products for periods of one to five years. We test our hard drives in our
manufacturing facilities through a variety of means. However, there can be no assurance that our testing will reveal latent
defects in our products, which may not become apparent until after the products have been sold into the market.
Accordingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be
expensive to implement and, if a product recall occurs during the product’s warranty period, we may be required to
replace the defective product. In addition, a product recall may damage our relationship with our customers, and we may
lose market share with our customers, including our OEM and ODM customers.
Our standard warranties contain limits on damages and exclusions of liability for consequential damages and for
misuse, improper installation, alteration, accident or mishandling while in the possession of someone other than us. We
record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional operating
expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our products. If
these additional expenses are significant, it could adversely affect our business, financial condition and operating results.
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, price volatility, 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 of which increases our costs of manufacturing and
transporting hard drives and key components. Shortages of materials such as stainless steel, aluminum, nickel,
neodymium, ruthenium or platinum increase our costs and may result in lower operating margins if we are unable
to find ways to mitigate these increased costs. For example, in advance of the 2008 Beijing Summer Olympics, in seeking
to minimize pollution, the People’s Republic of China shut down factories within a specified radius of Beijing. These
factory shut-downs may cause a future shortage in materials we use in nickel plating of magnetic media, causing prices to
increase and adversely affecting our nickel plating costs. Additionally, perpendicular recording technology requires
increased usage of precious metals such as ruthenium and platinum, the price of which may continue to be volatile, which
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