Western Digital 2013 Annual Report Download - page 25

demands on product pricing and on contractual terms, often resulting in the allocation of risk to us as the supplier.
Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we
lose a key customer, if any of our key customers reduce their orders of our products or require us to reduce our prices
before we are able to reduce costs, if a customer is acquired by one of our competitors or if a key customer suffers
financial hardship, our operating results would likely be harmed.
Additionally, if there is consolidation among our customer base, our customers may be able to command
increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addi-
tion, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross mar-
gins are diminished, we could decide not to sell our products to a particular customer, which could result in a decrease
in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replace-
ment of our products by the combined entity with those of our competitors and cancellations of orders, each of which
could harm our operating results.
Our entry into additional markets increases the complexity of our business, and if we are unable to successfully adapt our business
processes and product offerings as required by these new markets, we will be at a competitive disadvantage and our ability to grow
will be adversely affected.
As we expand our product line to sell into additional markets, the overall complexity of our business increases at
an accelerated rate and we become subject to different market dynamics. The new markets into which we are expand-
ing, or may expand, may have different characteristics from the markets we currently serve. These different character-
istics may include, among other things, demand volume requirements, demand seasonality, product generation
development rates, customer concentrations, warranty and product return policies and performance and compatibility
requirements. Our failure to make the necessary adaptations to our business model and product offerings to address
these different characteristics, complexities and new market dynamics could adversely affect our operating results.
Expansion into new markets may cause our capital expenditures to increase, and if we do not successfully expand into new
markets, our business may suffer.
To remain a significant supplier in the storage industry, we will need to offer a broad range of storage products
to our customers. We currently offer a variety of 3.5-inch or 2.5-inch hard drives for the PC and non-PC storage
markets, as well as a variety of solid state drives. However, demand for storage devices may shift to products in form
factors or with interfaces that our competitors offer but which we do not. Expansion into other markets and resulting
increases in manufacturing capacity requirements may require us to make substantial additional investments in part
because our operations are largely vertically integrated. If we fail to successfully expand into new markets with prod-
ucts that we do not currently offer, we may lose business to our competitors who offer these products.
Our vertical integration of head and magnetic media manufacturing makes us dependent on our ability to timely and cost-
effectively develop heads and magnetic media with leading technology and overall quality, increasing capital expenditure costs
and asset utilization risks for our business.
Under our business plan, we are developing and manufacturing a substantial portion of the heads and magnetic
media used in the hard drive products we manufacture. Consequently, we are more dependent upon our own develop-
ment and execution efforts and less able to take advantage of head and magnetic media technologies developed by other
manufacturers. Technology transition for head and magnetic media designs is critical to increasing our volume pro-
duction of heads and magnetic media. There can be no assurance, however, that we will be successful in timely and cost-
effectively developing and manufacturing heads or magnetic media for products using future technologies. We also may
not effectively transition our head or magnetic 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 or magnetic media we manufacture. If we are unable to timely and cost-effectively develop heads and magnetic
media 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.
In addition, as a result of our vertical integration of head and magnetic media manufacturing, we make more
capital investments and carry a higher percentage of fixed costs than we would if we were not vertically integrated. If
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