Western Digital 2005 Annual Report Download - page 37

The Thai Baht is a free floating currency while the Malaysian Ringgit exchange rate policy recently defined by the
Malaysian government is one of a managed float. We have attempted to manage the impact of foreign currency exchange
rate changes by, among other things, entering into short-term, forward contracts. However, these contracts do not cover
our full exposure and can be canceled by the issuer if currency controls are put in place. Currently, we hedge the Thai
Baht, Euro and British Pound Sterling with forward contracts.
There has been a trend toward a weakening U.S. dollar relative to most foreign currencies. If this trend continues,
the U.S. dollar equivalents of unhedged manufacturing costs could increase because a significant portion of our
production costs are foreign-currency denominated. Conversely, there would not be an offsetting impact to revenues since
revenues are substantially U.S. dollar denominated.
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. To be considered for qualification, we must
be among the leaders in time-to-market with our new products. 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 computer manufacturers, most of which continue to consolidate their share of the PC market. If product life
cycles continue to be extended due to a decrease in the rate of areal density growth, 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.
The hard disk drive industry is highly competitive and can be characterized by rapid shifts in market share among the
major competitors.
The price of hard disk drives has fallen over time due to increases in supply, cost reductions, technological advances
and price reductions by competitors seeking to liquidate excess inventories or attempting to gain market share. In
addition, rapid technological changes often reduce the volume and profitability of sales of existing products and increase
the risk of inventory obsolescence. We also face competition from other companies that produce alternative storage
technologies like flash memory. These factors, taken together, may result in significant and rapid shifts in market share
among the industry's major participants. In addition, product recalls can lead to a loss of market share, which could
adversely affect our operating results.
Our current competitors or a future competitor may gain a technology advantage or an advantageous cost structure that
we cannot match.
It may be possible for our current or future competitors to gain an advantage in product technology, manufacturing
technology, or process technology, which may allow them to offer products or services that have a significant advantage
over the products and services that we offer. Advantages could be in capacity, performance, reliability, serviceability, or
other attributes. If we are unable to match these technology advantages due to the proprietary nature of the technology,
limitations on process capability or other factors, we could be at a competitive disadvantage to those competitors.
Advances in magnetic, optical, semiconductor or other data storage technologies also could result in competitive
products that have better performance or lower cost per unit of capacity than our products. High-speed semiconductor
memory could compete with the Company's hard disk drive products in the future. Semiconductor memory is much
faster than magnetic hard disk drives, but currently is not competitive from a cost standpoint. Flash memory, a non-
volatile semiconductor memory, is currently much more costly and, while it has higher ""read'' performance than hard
disk drives, it has lower ""write'' performance. Flash memory could become competitive in the near future for applications
requiring less storage capacity than that provided by hard disk drives. If these products prove to be superior in
performance or cost per unit of capacity, we could be at a competitive disadvantage to the companies offering those
products.
In addition, if our competitors are able to achieve a lower cost structure for manufacturing hard disk drives by
moving manufacturing facilities to advantageous locations or through other restructuring activities, and we are unable to
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