Western Digital 2009 Annual Report Download - page 29

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
record an accrual for estimated warranty costs at the time revenue is recognized. We may incur additional operating
expenses if our warranty provision does not reflect the actual cost of resolving issues related to defects in our products. If
these additional expenses are significant, it could adversely affect our business, financial condition and operating results.
A competitive cost structure is critical to our operating results, and increased costs may adversely affect our operating margin.
A competitive cost structure for our products, including critical components, labor and overhead, is critical to the
success of our business, and our operating results depend on our ability to maintain competitive cost structures on new
and established products. If our competitors are able to achieve a lower cost structure that we are unable to match, we
could be at a competitive disadvantage to those competitors.
Shortages of commodity materials, price volatility, or use by other industries of materials used in the hard drive industry, may
increase our cost structure.
Increases in the cost for certain commodity materials may increase our costs of manufacturing and transporting hard
drives and key components. Shortages of materials such as stainless steel, aluminum, nickel, neodymium, ruthenium or
platinum increase our costs and may result in lower operating margins if we are unable to find ways to mitigate these
increased costs. For example, perpendicular recording technology requires increased usage of precious metals such as
ruthenium and platinum, the price of which may continue to be volatile, which could adversely affect our operating
margins. Furthermore, if other high volume industries increase their demand for materials such as these, our costs may
further increase, which could have an adverse effect on our operating margins. The volatility in the cost of oil also affects
our transportation costs and may result in lower operating margins if we are unable to pass these increased costs through
to our customers.
If we fail to maintain effective relationships with our major component suppliers, our supply of critical components may be at
risk and our profitability could suffer.
We make most of our own heads and magnetic media for some of our product families; however, we do not
manufacture many of the component parts used in our hard drives. As a result, the success of our products depends on our
ability to gain access to and integrate parts 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 magnetic media components. For example, in August 2003, we settled litigation with a supplier who previously was
the sole source of read channel devices for our hard 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.
Violation of labor or environmental laws and practices by our suppliers or sub-suppliers could harm our business.
We expect our suppliers to operate in compliance with applicable laws and regulations, including labor and
environmental laws, and to otherwise meet our required supplier standards of conduct. While our internal operating
guidelines promote ethical business practices, we do not control our suppliers or sub-suppliers or their labor or
environmental practices. The violation of labor, environmental or other laws by any of our suppliers or sub-suppliers, or
divergence of a supplier’s or sub-supplier’s labor or environmental practices from those generally accepted as ethical in the
U.S., could harm our business by:
• interrupting or otherwise disrupting the shipment of our product components;
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