Western Digital 2007 Annual Report Download - page 30

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addition, if these competitors can increase sales of non-hard drive products to the same customers, they may benefit from
selling their hard drives at low prices. Our results of operations may be adversely affected if we can not successfully
compete with the pricing by these companies.
If we do not successfully expand into new hard drive markets and manage the issues associated with new products and new
markets, our business may suffer.
To remain a significant supplier of hard drives, we will need to offer a broad range of hard drive products to our
customers. We currently offer a variety of 3.5-inch hard drives for the desktop, enterprise, CE and external storage
markets, and we also offer 2.5-inch form factor hard drives for the mobile, CE and external storage markets. However,
demand for hard drives may shift to products in smaller form factors, which our competitors may already offer. Expansion
into other hard drive markets and resulting increases in volume capacity requirements may require us to make substantial
additional capital investments due in part because our operations are vertically integrated.
While we continue to develop new products and look to expand into other hard drive markets, the success of our new
product introductions is dependent on a number of factors, including our ability to anticipate and manage a variety of
issues associated with these new products and new markets, such as difficulties faced in manufacturing ramp, market
acceptance, effective management of inventory levels in line with anticipated product demand, quality problems or other
defects in the early stages of new product introduction that were not anticipated in the design of those products, and
higher return rates of external storage products due to more lenient return policies in the retail market. Further, we need
to identify how any of the hard drive markets that we are expanding into may have different characteristics from the
markets in which we currently exist, such as, demand volume growth rates, demand seasonality, product generations
development rates, customer concentrations, and cost and performance requirements, and we must properly address these
differences. If we fail to successfully develop and manufacture new products and expand into new hard drive markets,
customers may decrease the amount of our products that they purchase, and we may lose business to our competitors who
offer these products.
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.
Expanding into new hard drive markets exposes our business to different seasonal demand cycles, which in turn could adversely
affect our operating results.
The CE and retail markets have different seasonal pricing and volume demand cycles as compared to the PC market.
By expanding into these markets, we became exposed to seasonal fluctuations that are different from, and in addition to,
those of the PC market. For example, because the primary customer for products such as our branded products are
individual consumers, these markets experience a dramatic increase in demand during the winter holiday season. If we do
not properly adjust our supply to new demand cycles such as this, we risk having excess inventory during periods of low
demand and insufficient inventory during periods of high demand, therefore adversely affecting our operating results.
If we do not successfully continue to expand into the mobile market, or if we do not accurately predict the growth and demands
of the mobile market, our business may suffer.
We began shipping 2.5-inch form factor hard drives for the mobile market during calendar year 2004. If we are
unable to successfully continue to expand into the mobile market, we would have a competitive disadvantage to
companies that are successful in this regard, and our business and financial results could suffer. To increase the sale of our
products in the mobile market, we must adapt to the differences between the desktop and mobile markets, such as
different requirements, features and competitors. In addition, if we continue to incur significant costs in manufacturing
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