Western Digital 2010 Annual Report Download - page 29

opportunity to qualify a new product with a customer, which could reduce our profits because we expect declining gross
margins on our current generation products as a result of competitive pressures.
We are subject to risks related to product defects, which could result in product recalls or epidemic failures and could subject
us to warranty claims in excess of our warranty provisions or which are greater than anticipated.
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
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. Moreover, there is a risk that product defects may trigger an epidemic failure clause in a
customer agreement. If an epidemic failure occurs, we may be required to replace or refund the value of the defective
product and to cover certain other costs associated with the consequences of the epidemic failure. In addition, a product
recall or epidemic failure may damage our reputation or customer relationships, and may cause us to 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,
whether as a result of a product recall, epidemic failure or otherwise. 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 or commodity components, price volatility, or use by other industries of materials and compo-
nents used in the hard drive industry, may negatively impact our operating results.
Increases in the cost for certain commodity materials or commodity components may increase our costs of
manufacturing and transporting hard drives and key components. Shortages of commodity components such as DRAM
and NAND flash, or commodity materials such as glass substrates, stainless steel, aluminum, nickel, neodymium,
ruthenium or platinum, may increase our costs and may result in lower operating margins if we are unable to find ways to
mitigate these increased costs. Furthermore, if other high volume industries increase their demand for materials or
components such as these, our costs may further increase, which could have an adverse effect on our operating margins. In
addition, shortages in other commodity components and materials used in our customers’ products could result in a
decrease in demand for our products, which would negatively impact our operating results. 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.
While we make most of our own heads and magnetic media for some of our product families, we do, according to our
sourcing strategy, purchase some percentage of our required heads and magnetic media from our external supply base. In
addition, we purchase a majority of our other components, including all mechanical and electronic components, from our
external supply base. For certain components, we use multiple suppliers that deploy different technology or processes,
and we must successfully integrate components from these suppliers in our products. Accordingly, we must maintain
effective relationships with our supply base to source our component needs, develop compatible technology, and maintain
continuity of supply at reasonable costs. If we fail to maintain effective relationships with our supply base, or if we fail to
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