Western Digital 2015 Annual Report Download - page 29

Contractual commitments with component suppliers may result in us paying increased charges and cash advances for such
components or may cause us to have inadequate or excess component inventory.
To reduce the risk of component shortages, we attempt to provide significant lead times when buying compo-
nents, which may subject us to cancellation charges if we cancel orders as a result of technology transitions or changes
in our component needs. In addition, we may from time to time enter into contractual commitments with component
suppliers in an effort to increase and stabilize the supply of those components and enable us to purchase such compo-
nents at favorable prices. Some of these commitments may require us to buy a substantial number of components from
the supplier or make significant cash advances to the supplier; however, these commitments may not result in a sat-
isfactory increase or stabilization of the supply of such components. Furthermore, as a result of uncertain global eco-
nomic conditions, our ability to forecast our requirements for these components has become increasingly difficult,
therefore increasing the risk that our contractual commitments may not meet our actual supply requirements, which
could cause us to have inadequate or excess component inventory and adversely affect our operating results and
increase our operating costs.
Changes in product life cycles could adversely affect our financial results.
If product life cycles lengthen, we may need to develop new technologies or programs to reduce our costs on any
particular product to maintain competitive pricing for that product. Longer product life cycles could also restrict our
ability to transition customers to our newer products in a timely manner, or at all, negatively impacting our ability to
recoup our significant research and development investments to improve our existing technology and develop new
technologies. If product life cycles shorten, it may result in an increase in our overall expenses and a decrease in our
gross margins, both of which could adversely affect our operating results. In addition, shortening of product life cycles
also makes it more difficult to recover the cost of product development before the product becomes obsolete. Our fail-
ure to recover the cost of product development in the future could adversely affect our operating results.
A fundamental change in storage technologies could result in significant increases in our costs and could put us at a competitive
disadvantage.
Historically, when the industry experiences a fundamental change in storage technologies, any manufacturer that
fails to successfully and timely adjust its designs and processes to accommodate the new technology fails to remain
competitive. There are some revolutionary technologies, such as current-perpendicular-to-plane giant magneto-
resistance, shingle magnetic recording, heat-assisted magnetic recording, patterned magnetic media and advanced
signal processing that if implemented by a competitor on a commercially viable basis ahead of the industry, could put
us at a competitive disadvantage. As a result of these technology shifts, we could incur substantial costs in developing
new technologies, such as heads, magnetic media, and tools to remain competitive. If we fail to successfully imple-
ment these new technologies, or if we are significantly slower than our competitors at implementing new tech-
nologies, we may not be able to offer products with capacities that our customers desire, which could harm our
operating results.
The difficulty of introducing hard drives with higher levels of areal density and the challenges of reducing other costs may impact
our ability to achieve historical levels of cost reduction.
Storage capacity of the hard drive, as manufactured by us, is determined by the number of disks and each disk’s
areal density. Areal density is a measure of the amount of magnetic bits that can be stored on the recording surface of
the disk. Generally, the higher the areal density, the more information can be stored on a single platter. Higher areal
densities require existing head and magnetic media technology to be improved or new technologies developed to
accommodate more data on a single disk. Historically, we have been able to achieve a large percentage of cost reduc-
tion through increases in areal density. Increases in areal density mean that the average drive we sell has fewer heads
and disks for the same capacity and, therefore, may result in a lower component cost. However, increasing areal den-
sity has become more difficult in the storage industry. If we are not able to increase areal density at the same rate as
our competitors or at a rate that is expected by our customers, we may be required to include more components in our
drives to meet demand without corresponding incremental revenue, which could negatively impact our operating
margins and make achieving historical levels of cost reduction difficult or unlikely. Additionally, increases in areal
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