Dear valued customer:

As you may have seen from our earnings report recently, WD has made substantial progress in our recovery from October’s floods that inundated our Thailand factories and stopped our production there. We still have a long way to go, but now have a clearer picture of the timeframe for our return to pre-flood production capability. On behalf of our collective team, I want to reiterate our appreciation of your patience and support these past few months.

We are maximizing availability of our drives through effective component utilization, and are allocating product to our many channels as fairly as possible, taking into consideration respective inventory conditions of each customer segment. Minimizing disruption to your business is our goal.

On January 22, we restarted production of sliders in our Bang Pa-in facility and we are working through qualification. We expect to have a meaningful quantity of internally produced sliders shipping in our HDD products by the end of the current quarter. While this is a significant milestone, availability of sliders and other components remains a constraint to our output. Our ability to assemble and test drives is not a constraint. Supplier recovery is progressing well and we expect that suppliers will be substantially back to pre-flood run-rate levels by the June quarter. We are targeting WD hard drive throughput to approach 60 percent, 80 percent and 100 percent of pre-flood production volumes in the March, June and September quarters, respectively.

This better-than-expected progress has come at a cost. Our aggressive response to recovery required $199 million of charges and expenses related to the floods in the December 2011 quarter. The total amount of capital spending we will incur during calendar 2012 to restore our capacity to pre-flood levels and increase the robustness of our supply chain is approximately $650 million.

We seek to strengthen our supply chain by encouraging our Thailand suppliers to geographically disperse their manufacturing locations. We also are enhancing our infrastructure by extending slider production capability into Malaysia in order to mitigate risk. This adjustment to our model will have a long-term impact on our costs and, ultimately, the price for our products.

We have made progress in our risk mitigation strategy, as well. In addition to working with the Thai government and industrial estate management teams on flood prevention plans, we are erecting flood barriers at our factories and re-configuring our production-line layout within our factories to higher floors

Keeping all Thailand employees on WD’s payroll throughout the crisis, thousands worked to remove, decontaminate and recondition or replace equipment affected by the floodwater. In some cases, to remove equipment or establish new work flow, we tore out walls and reconfigured manufacturing rooms. These processes are extensive, meticulous work and require extreme care and expertise to restore our factories back to pre-flood conditions – a restoration still in process.

As you know, hard drives are highly sophisticated devices, designed employing very advanced science and operating on tiny tolerances as small as just a few nanometers. Our manufacturing facilities therefore must be extremely clean. We operate clean rooms with less than 100 particles per cubic feet of air. By comparison, a typical office building contains as many as one million particles per cubic feet.

The precise nature of our products and our high quality standards require vendors whose facilities were flooded to re-qualify many components. This process includes audits, tooling and testing and extends weeks and sometimes months. I want to again assure you that no corner has been cut and no sacrifices of quality made to speed our recovery.

Additionally, as president and CEO John Coyne noted in our earnings report conference call, during the flood recovery period we have maintained our focus and investment in development to ensure that we will be in a position to offer new products with advanced technology to sustain our leadership as we ramp our post-flood production.

WD has become the world’s most preferred hard drive brand in part due to our continued, sharp focus on achieving and maintaining the highest quality and reliability as our No. 1 deliverable to you. The same people who have worked hard to win your trust these past few years are executing WD’s recovery and ensuring you receive hard drives that you and your customers can count on, just as you did prior to the floods.

Please contact us anytime with questions or comments.

Sincerely,

Phay Y. Lam
Senior Director, Marketing – Worldwide Channel