Western Digital 2008 Annual Report Download - page 30

A fundamental change in recording technology could result in significant increases in our operating expenses and could put us
at a competitive disadvantage.
Historically, when the industry experiences a fundamental change in technology, any manufacturer that fails to
successfully and timely adjust its designs and processes to accommodate the new technology fails to remain competitive.
There are some technologies, such as current-perpendicular-to-plane (“CPP”) and heat assisted magnetic recording
(“HAMR”), discrete track recording (“DTR”) and other similar potentially break through technology, that will represent
revolutionary recording technologies if they can be implemented by a competitor on a commercially viable basis ahead of
the industry, which could put us at a competitive disadvantage. As a result of these technology shifts, we could incur
substantial costs in developing new technologies, such as heads, media, and tools to remain competitive. If we fail to
successfully implement these new technologies, or if we are significantly slower than our competitors at implementing
new technologies, we may not be able to offer products with capacities that our customers desire. For example, new
recording technology requires changes in the manufacturing process of heads and media, which may cause longer
production times and reduce the overall availability of media in the industry. Additionally, the new technology requires a
greater degree of integration between heads and media which may lengthen our time of development of hard drives using
this technology. Furthermore, as we attempt to develop and implement new technologies, we may become more
dependent on suppliers to ensure our access to components that accommodate the new technology. These results would
increase our operating costs, which may negatively impact our operating results.
The difficulty of introducing hard drives with higher levels of areal density and the challenges of reducing other costs may
impact our ability to achieve historical levels of cost reduction.
Storage capacity of the hard drive, as manufactured by us, is determined by the number of disks and each disk’s areal
density. Areal density is a measure of the amount of magnetic bits that can be stored on the recording surface of the disk.
Generally, the higher the areal density, the more information can be stored on a single platter. Historically, we have been
able to achieve a large percentage of cost reduction through increases in areal density. Increases in areal density mean that
the average drive we sell has fewer heads and disks for the same capacity and, therefore, may result in a lower component
cost. However, because increasing areal density has become more difficult in the hard drive industry, such increases may
require increases in component costs, and other opportunities to reduce costs may not continue at historical rates.
Additionally, increases in areal density may require us to make further capital expenditures on items such as new testing
equipment needed as a result of an increased number of GB per platter. Our inability to achieve cost reductions could
adversely affect our operating results.
If we do not properly manage the technology transitions of our products, our operating results may be negatively affected.
Many of the markets in which we offer our products are undergoing technology transitions. For example, in order to
handle higher data transfer rates, the PC and enterprise markets are transitioning from parallel interfaces, such as PATA
and SCSI, to serial interfaces, such as SATA and SAS, respectively. We must effectively manage the transition of the
features of our products to serial interfaces in order to remain competitive and cost effective. In the PC market, we
currently offer PATA and SATA products and must timely and efficiently manage both our manufacture of PATA
products through their end of life and our ramp of SATA products and features. If we fail to successfully manage the
transition from parallel interfaces to serial interfaces, our operating results may suffer.
Our high-volume hard drive and media manufacturing facilities, and the manufacturing facilities of many of our suppliers,
are concentrated in Asia, which subjects us to the risk of damage or loss of any of these facilities and localized risks to
employees in these locations.
Our high-volume hard drive and media manufacturing facilities are in Malaysia and Thailand and the manufac-
turing facilities of many of our suppliers are in Asia. A condition or event such as political instability, civil unrest or a
power outage, or a fire, flood, earthquake or other disaster that adversely affects any of these facilities or our ability to
manufacture could limit the total volume of hard drives we are able to manufacture and result in a loss of sales and revenue
and harm our operating results. Similarly, a localized health risk affecting our employees or the staff of our suppliers, such
as a new pandemic influenza in Asia, could impair the total volume of hard drives that we are able to manufacture.
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