Western Digital 2005 Annual Report Download - page 34

products may have quality problems or other defects in the early stages of introduction that were not anticipated in the
design of those products. If we fail to successfully develop and manufacture new products, customers may decrease the
amount of our products that they purchase, and we may lose business to our competitors who offer these products or who
use their dominance in the enterprise or mobile market to encourage sales of hard disk drives.
If we do not successfully expand into the 2.5-inch and sub-2.5-inch markets, our business may suffer.
We began shipping 2.5-inch form factor hard disk drives for the mobile market during calendar year 2004.
Although many of our customers who purchase 3.5-inch form factor hard disk drives also purchase the 2.5-inch form
factor drives, the markets are characterized by different competitors, different sales channels and different overall
requirements. If we are unable to adapt to these differences, we would have a competitive disadvantage to companies that
are successful in this regard, and our business and financial results could suffer. In addition, if we incur significant costs in
manufacturing and selling the 2.5-inch and sub-2.5-inch form factor hard disk drives, and if we are unable to recover
those costs from sales of the products, then we may not be able to compete successfully in this market and our operating
results may suffer.
Selling to the retail market is an important part of our business, and if we fail to maintain and grow our market
share or gain market acceptance of our retail products, our operating results could suffer.
We sell our retail-packaged products directly to a select group of major retailers such as computer superstores and
CE stores, and authorize sales through distributors to other retailers. Our current retail customer base is primarily in the
United States, Canada and Europe. We are facing increased competition from other companies for shelf space at major
retailers, which could result in lower gross margins. If we fail to successfully maintain our market share in North America,
our operating results may be adversely affected. In certain markets, we are trying to grow market share, and in the process
may face strong competition, which could result in lower gross margins. We will continue to introduce new products in
the retail market that incorporate our disk drives. There can be no assurance that these products gain market acceptance,
and if they do not, our operating results could suffer.
To develop new products, we must maintain effective partner relationships with our major component suppliers.
Under our business model, we do not manufacture any of the component parts used in our hard disk drives, other
than heads. As a result, the success of our products depends on our ability to gain access to and integrate parts that are
""best in class'' from reliable component suppliers. To do so, we must effectively manage our relationships with our major
component suppliers. We must also effectively integrate different products from a variety of suppliers, each of which
employs variations on technology, which can impact, for example, feasible combinations of heads and media components.
In August 2003, we settled litigation we were engaged in with a supplier who previously was the sole source of read
channel devices for our hard disk drives. As a result of the disputes that gave rise to the litigation, our profitability was at
risk until another supplier's read channel devices could be designed into our products. Similar disputes with other
strategic component suppliers could adversely affect our operating results.
Dependence on a limited number of qualified suppliers of components and manufacturing equipment could lead to
delays, lost revenue or increased costs.
Because we depend on a limited number of suppliers for certain hard disk drive components and manufacturing
equipment, an increase in the cost of such components or equipment, an extended shortage of required components or
equipment, failure of a key supplier's business process, or the failure of key suppliers to remain in business, adjust to
market conditions, or to meet our quality, yield or production requirements could significantly harm our operating
results. Our future operating results may also depend substantially on our suppliers' ability to timely qualify their
components in our programs, and their ability to supply us with these components in sufficient volumes to meet our
production requirements. A number of the components that we use are available from only a single or limited number of
qualified outside suppliers, and may be used across multiple product lines. In addition, some of the components (or
component types) used in our products are used in other devices, such as mobile telephones and digital cameras. If there
is a significant simultaneous upswing in demand for such a component (or component type) from several high volume
industries, resulting in a supply reduction, or a component is otherwise in short supply, or if a supplier fails to qualify or
has a quality issue with a component, we may experience delays or increased costs in obtaining that component. For
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