Western Digital 2007 Annual Report Download - page 28

If we are unable to timely and cost-effectively develop heads and media, following our planned acquisition of Komag, with
leading technology and overall quality, our ability to sell our products may be significantly diminished, which could
materially and adversely affect our business and financial results.
Under our business plan, we are developing and manufacturing a substantial portion of the heads used in some of the
hard drives products we manufacture and, following our planned acquisition of Komag, we intend to develop and
manufacture a substantial portion of the media used in some of the hard drive products we manufacture. Consequently,
we are more dependent upon our own development and execution efforts and less able to take advantage of head
technologies, and will be less able to take advantage of media technologies, developed by other manufacturers.
Technology transition for head and media designs is critical to increasing our volume production of heads and media.
There can be no assurance, however, that we will be successful in timely and cost-effectively developing and manu-
facturing heads or media for products using future technologies. We also may not effectively transition our head or
planned media design and technology to achieve acceptable manufacturing yields using the technologies necessary to
satisfy our customers’ product needs, or we may encounter quality problems with the heads we manufacture or media we
plan to manufacture. In addition, we may not have access to external sources of supply without incurring substantial
costs. For example, we recently began using perpendicular recording heads in certain of our products. We face various
challenges in ramping the manufacturing volume of these products and if we do not adequately address these challenges,
or if we encounter quality problems with the heads we manufacture or media we plan to manufacture for these products,
our continued shipment of these products may be delayed, impairing our ability to realize revenue from these products.
Failure by certain suppliers to effectively and efficiently develop and manufacture components for our products may adversely
affect our operations.
We rely on suppliers for various component parts that we integrate into our hard drives but do not manufacture
ourselves, such as semiconductors, motors, flex circuits and suspensions. We are dependent on the suppliers of these
various components to be able and willing to dedicate adequate engineering resources to develop technology that can be
successfully integrated with our products, and to manufacture these components efficiently. The failure of component
suppliers to effectively and efficiently develop and manufacture technology that can be integrated into our products may
cause us to experience inability or delay in our manufacturing and shipment of hard drive products, or our expansion into
new technology and markets, therefore adversely affecting our business and financial results.
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
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