Western Digital 2014 Annual Report Download - page 26

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.
We develop and manufacture a substantial portion of the heads and magnetic media used in the hard drive prod-
ucts we produce. Consequently, we are more dependent upon our own development 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 production of heads and magnetic media.
There can be no assurance, however, that we will be successful in timely and cost-effectively developing and manu-
facturing 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 materi-
ally 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
our overall level of production decreases for any reason, and we are unable to reduce our fixed costs to match sales, our
head or magnetic media manufacturing assets may face underutilization that may impact our operating results. We
are therefore subject to additional risks related to overall asset utilization, including the need to operate at high levels
of utilization to drive competitive costs and the need for assured supply of components that we do not manufacture
ourselves. In addition, as a result of adverse labor rates or availability, we may be required to increase investments in
automation, which may cause our capital expenditures to increase. If we do not adequately address the challenges
related to our head or magnetic media manufacturing operations, our ongoing operations could be disrupted, resulting
in a decrease in our revenue or profit margins and negatively impacting our operating results.
We make significant investments in research and development to improve our technology and develop new technologies, and
unsuccessful investments could materially adversely affect our business, financial condition and results of operations.
As a leading supplier of hard drives and a major supplier of enterprise solid state drives, we make significant
investments to maintain our existing products and to lead innovation and development of new technologies. This
strategy requires us to make significant investments in research and development and, in order to remain competitive,
we may increase our capital expenditures and expenses above our historical run-rate model. There can be no assurance
that these investments will result in viable technologies or products, or if these investments do result in viable tech-
nologies or products, that they will be profitable or accepted by the market. Significant investments in unsuccessful
research and development efforts could materially adversely affect our business, financial condition and results of oper-
ations. In addition, increased investments in technology could cause our cost structure to fall out of alignment with
demand for our products, which would have a negative impact on our financial results.
Current or future competitors may gain a technology advantage or develop an advantageous cost structure that we cannot match.
It may be possible for our current or future competitors to gain an advantage in product technology, manufactur-
ing technology, or process technology, which may allow them to offer products or services that have a significant
advantage over the products and services that we offer. Advantages could be in capacity, performance, reliability, serv-
iceability, or other attributes. A competitive cost structure for our products, including critical components, labor and
overhead, is also critical to the success of our business. We may be at a competitive disadvantage to any companies
that are able to gain a technological or cost structure advantage.
Consolidation within the data storage industry could provide competitive advantages to our competitors.
The data storage industry as a whole has experienced consolidation over the past several years through acquis-
itions, consolidations and decisions by industry players to exit the industry. Consolidation across the industry, includ-
ing by our competitors, may enhance their capacity, abilities and resources and lower their cost structure, causing us
to be at a competitive disadvantage.
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