Seagate 2010 Annual Report Download - page 54

Table of Contents
materialize, price erosion may become more pronounced. Conversely, during periods where demand exceeds supply, price erosion is generally
muted. For the first half of fiscal year 2011, our industry experienced a period of relative balance between supply and demand. While we believe
there was unmet demand in the last quarter of fiscal year 2011 due to a reaction to possible supply chain disruptions stemming from the
earthquake and tsunami in Japan, the industry returned to a relatively balanced supply environment at the end of the fiscal year.
Suppliers of Components and Industry Constraints
Due to industry consolidation, there are a limited number of independent suppliers of components, such as recording heads and media,
available to disk drive manufacturers. Vertically integrated disk drive manufacturers, who manufacture their own components, are less
dependent on external component suppliers than less vertically integrated disk drive manufacturers. We believe the supply chain was generally
tight for the industry during most of fiscal year 2011.
Commodity and Other Manufacturing Costs
The production of disk drives requires rare earth elements, precious metals, scarce alloys and other industrial commodities, which are
subject to fluctuations in prices, and the supply of which has at times been constrained. During the latter part of fiscal year 2011, the industry
experienced significant increases in the costs of rare earth elements, which are used in magnets as well as in the process for polishing glass
substrates. In addition to increased costs of components and commodities, volatility in fuel costs may also increase our costs related to
commodities, manufacturing and freight. As a result, we may increase our use of ocean shipments to help offset any increase in freight costs.
Price Erosion
Our industry has been characterized by price declines for disk drive products with comparable capacity, performance and feature sets ("like-
for-like products"). Price declines for like-for-like products ("price erosion") are more pronounced during periods of:
• economic contraction or industry consolidation in which competitors may use discounted pricing to attempt to maintain or gain
market share;
•
few new product introductions when multiple competitors have comparable or alternative product offerings;
•
temporary imbalances between industry supply and demand; and
• seasonally weaker demand, which may cause excess supply.
Disk drive manufacturers typically attempt to offset price erosion with an improved mix of disk drive products characterized by higher
capacity, better performance and additional feature sets and/or product cost reductions.
We expect price erosion in our industry to continue. To remain competitive, we believe it is necessary for industry participants to continue
to introduce new product offerings that utilize advanced technologies ahead of the competition in order to take advantage of potentially higher
initial profit margins and reduced cost structures on these new products.
Product Life Cycles and Changing Technology
Our industry has been characterized by significant advances in technology, which have contributed to rapid product life cycles. As a result,
success in our industry has been dependent to a large extent on the ability to be the first-to-market with new products, allowing those disk drive
manufacturers who introduce new products first to benefit from improved mix, favorable profit margins and less pricing pressure until
comparable products are introduced. Also, because our industry is characterized by continuous price
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