Western Digital 2015 Annual Report Download - page 27

Some of our competitors with diversified business units outside of storage products, may, over extended periods of time, sell storage
products at prices that we cannot profitably match.
Some of our competitors earn a significant portion of their revenue from business units outside of storage prod-
ucts. Because they do not depend solely on sales of storage products to achieve profitability, they may sell storage
products at lower prices and operate their storage business unit at a loss over an extended period of time while still
remaining profitable overall. In addition, if these competitors can increase sales of non-storage products to the same
customers, they may benefit from selling their storage products at lower prices. Our operating results may be
adversely affected if we cannot successfully compete with the pricing by these companies.
If we fail to qualify our products with our customers, it may have a significant adverse impact on our sales and margins.
We regularly engage in new product qualification with our customers. Once a product is accepted for qual-
ification testing, failures or delays in the qualification process can result in delayed or reduced product sales, reduced
product margins caused by having to continue to offer a more costly current generation product, or lost sales to that
customer until the next generation of products is introduced. The effect of missing a product qualification oppor-
tunity is magnified by the limited number of high volume OEMs, which continue to consolidate their share of the
storage markets. Likewise, if product life cycles lengthen, we may have a significantly longer period to wait before we
have an 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 or the unintended use of our products, 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 products in our manufactur-
ing facilities through a variety of means. However, our testing may fail to reveal defects in our products that may not
become apparent until after the products have been sold into the market. In addition, our products may be used in a
manner that is not intended or anticipated by us, resulting in potential liability. Accordingly, there is a risk that
product defects will occur, which could require a product recall. Product recalls can be expensive to implement. As
part of a product recall, we may be required or choose 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
expenses if our warranty provision do 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.
In addition, third-party components or applications that we incorporate or use in our products may contain
defects in design or manufacturing that could unexpectedly result in epidemic failures and subject us to liability.
Because we are dependent on a limited number of qualified suppliers for components, sub-assemblies, equipment, consumables, raw
materials, and logistics, a supplier’s inability, unwillingness, or failure to support us in a timely manner with goods or services at
a quality level and cost acceptable to us can adversely affect our margins, revenues and operating results.
We depend on an external supply base for technologies, software (including firmware), components, equipment
and materials for use in our product design and manufacturing. We also depend on service suppliers for providing
technical support for our products. In addition, we use logistics partners to manage our just-in-time hubs, dis-
tribution centers and freight from suppliers to our factories and from our factories to our customers throughout the
world. Many of these components and much of this equipment must be specifically designed to be compatible for use
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