Ondrej Holzman For over three weeks, Apple managed to keep most of the agreements and terms it made with the sapphire supplier, GT Advanced Technologies, under wraps. She announced bankruptcy at the beginning of October and she asked for protection from creditors. It was the sapphire production that was to blame. However, now the testimony of GT Advanced's director of operations has become public, revealing the most classified information so far.
Daniel Squiller, chief operating officer of GT Advanced, attached an affidavit to documents informing the court of the company's bankruptcy, which were filed in early October. However, Squiller's statement was sealed, and according to GT's lawyers, it was done so because it contained details of contracts with Apple that, due to non-disclosure agreements, GT would have to pay $50 million for each breach.
On Tuesday, however, Squiller submitted after legal wrangling revised statement, which has reached the public, and offers a unique insight into a situation that has so far been very confusing for the public. Squiller summarizes the situation as follows:
The key to making the transaction profitable for both parties was to produce enough 262kg sapphire single crystals to meet Apple's requirements. GTAT has sold over 500 sapphire furnaces to Asian customers producing 115kg single crystals. Most sapphire producers using furnaces other than GTAT produce less than 100kg size. The 262 kilogram sapphire production, if achieved, would be profitable for both Apple and GTAT. Unfortunately, the production of 262kg of sapphire single crystals could not be completed within the time frames agreed upon by both parties and was also more expensive than expected. These problems and difficulties resulted in GTAT's financial crisis, which led to the filing for Chapter 11 protection from creditors.
In a total of 21 pages of testimony, Squiller describes in relative detail how the cooperation between GT Advanced and Apple was set up and what it is actually like for such a small manufacturer to produce sapphire for such a giant. Squiller divides his remarks into two categories: firstly, they were contractual obligations that favored Apple and, on the contrary, complained about GT's position, and secondly, they were matters over which GT had no control.
Squiller listed a total of 20 examples (a few of them below) of terms dictated by Apple that transferred all responsibility and risk to GT:
- GTAT has committed to supply millions of units of sapphire material. However, Apple had no obligation to buy back this sapphire material.
- GTAT was prohibited from modifying any equipment, specifications, manufacturing process or materials without Apple's prior consent. Apple could change these terms at any time, and GTAT had to respond immediately in such a case.
- GTAT had to accept and fulfill any order from Apple by the date set by Apple. In the event of any delay, GTAT had to either ensure faster delivery or purchase replacement goods at its own expense. Should GTAT's delivery be delayed, GTAT must pay $320 for each sapphire single crystal (and $77 per millimeter of sapphire material) as damages to Apple. For an idea, one single crystal cost less than 20 thousand dollars. However, Apple had the right to cancel its order, either in whole or in part, and to change the delivery date at any time without any compensation to GTAT.
Also at the Mese factory, things were difficult for GT Advanced under the dictates of Apple, according to Squiller:
- Apple selected the Mesa factory and negotiated all energy and construction contracts with third parties to design and build the facility. The first part of the Mesa plant was not operational until December 2013, just six months before GTAT was due to begin operating at full capacity. In addition, there were other unplanned delays as the Mesa factory required a significant amount of repairs, including the reconstruction of floors the size of several football fields.
- After much discussion, it was decided that the construction of an electrical depot was too expensive, i.e. not necessarily necessary. This decision was not made by the GTAT. In at least three cases, there were power outages, which led to major delays in production and total losses.
- Many of the processes involved in cutting, polishing and shaping sapphire were new to the unprecedented volume of sapphire production. GTAT did not choose which tools to use and which manufacturing processes to implement. GTAT had no direct connection with suppliers of cutting and polishing equipment to modify and in some cases develop such tools.
- GTAT believes it was unable to achieve planned production prices and targets because the performance and reliability of many tools did not meet specifications. Ultimately, most of the selected production tools had to be replaced with alternative tools, resulting in additional capital investment and operating costs for GTAT, as well as months of lost production. Production was roughly 30% more expensive than planned, requiring the employment of nearly 350 additional workers, as well as consuming far more additional materials. GTAT had to deal with these additional costs.
By the time GT Advanced filed for creditor protection, the situation was already unsustainable, with the company losing $1,5 million a day, according to court documents.
Although Apple has not yet commented on the published statement, COO Squiller managed to transform himself into his role and presented to the court several variants of how Apple could argue in the GTAT case:
Based on my discussions with Apple executives (or Apple's recent press statements), I would expect Apple to, among other things, convincingly argue that (a) failure of the sapphire project is due to GTAT's inability to produce sapphire under mutually agreed terms ; that (b) GTAT could have walked away from the negotiating table at any time in 2013, but nevertheless ultimately knowingly entered the deal after extensive negotiations because the connection with Apple represented a huge growth opportunity; that (c) Apple assumed a substantial risk in entering into the business; that (d) any specifications that GTAT has failed to meet have been mutually agreed upon; that (e) Apple has not in any way tortiously interfered with the operation of GTAT; that (f) Apple cooperated with GTAT in good faith and that (g) Apple was not aware of the damages (or extent of damages) caused by GTAT in the course of business. Since Apple and GTAT have agreed to a settlement, there is no reason for me to describe the individual parts in more detail at this time.
When Squiller so succinctly described what Apple will be able to flaunt and under what difficult conditions for GTAT the whole deal was created, the question arises why GT Advanced went into sapphire production for Apple at all. However, Squiller himself will probably have some explaining to do with regard to the sale of his own shares in the company. In May 2014, after the first signs of problems at the Mesa factory, he sold $1,2 million in GTAT shares and created a plan to sell additional shares worth a total of $750 over the following months.
GT Advanced executive director Thomas Gutierrez also sold shares in bulk, he created a sales plan in March of this year and on September 8, the day before the introduction of new iPhones that did not use sapphire glass from GT, he sold shares worth $160.
You can find complete coverage of the Apple & GTAT case <a href="https://cdn.shopify.com/s/files/1/1932/8043/files/200721_ODSTOUPENI_BEZ_UDANI_DUVODU__EN.pdf?v=1595428404" data-gt-href-en="https://en.notsofunnyany.com/">here</a>.
I don't understand this business... This is a file of stork from the Czech lakes and haju than from the USA...:)
Only a fool could sign such a deal and it only confirms the gigantic arrogance of Apple towards its suppliers….something like you have to do everything according to us and in the quantity and quality that we want and if not, you will pay for it all :(. I really don't like I'm writing against Apple, but recently their arrogance and hypocrisy has surfaced more and more, so no one will want to work with them.
What is arrogant about the process of negotiating the best possible contract terms for my company? On the contrary, this is the duty of every competent representative of the company! After all, the other party could decide for themselves whether to take a big risk with the prospect of a big profit or whether to continue their own production for their smaller customers according to their own rules.
They took a risk, and we can only guess why, and failed. Bad luck for them and Apple. If Apple turned to someone who could live up to their commitments, everyone, including end customers, could profit.
Well, Apple dictated quite decent terms. Of course, the director of GTAT should never have signed this.
But no one forced them to enter into such a contract. Apple has created a strong position during its existence and is now using it. When they almost disappeared in the crash, they again had to fulfill the dictated conditions. Every now and then pull a saw
Action tunnel, nothing more…. They must have known from the beginning that it couldn't be done, or they must have been completely stupid...
Apple needs hundreds of suppliers for its production, who will deliver their parts and components absolutely precisely, without the slightest delay and in perfect quality. If Apple eased up on these tough conditions, its "network" of manufacturers, suppliers and sales would soon crumble. Would it start, for example, with a month late delivery of glasses, which would mean that customers from all over the world and suppliers of other hundreds of parts, for example for the iPhone, would wait for one manufacturer to produce glasses, albeit for objective reasons, but still a month later?
In a way, we criticize Apple's harsh and extortionate conditions towards its suppliers, on the other hand, we demand flawless, faultless, perfect and timely delivered products from Apple. Thanks to this procedure, Apple is able to deliver tens of millions of iPhones to the market within a few days. By the way… And yet it is not enough…. Just try to buy a gold iPhone 6 64GB in the Czech Republic today.
I don't agree. What you describe in the first paragraph, at least in my opinion, has nothing to do with what is described in the article (now I am not deciding whether it will be true in the end or not). From what is described in the article, it seems to me that Apple could actually do everything itself, since the supplier in this case was dependent on his whims. It's like my client is now dictating to me exactly how to do work for them. This could end up reducing my ability to deliver the ordered quality and on time, because I do it differently and I know that if I do it the way I do it, I will deliver what he wants and when he wants it. But if I start to change my experienced processes that I have mastered, even if by chance the customer knows what is better in my field, it could mean lower efficiency. Not to mention what tools and technologies I will use.
I can see the second paragraph better now. Yes, we want what you describe, sorry, we are not getting it. Deadlines a problem, quality a problem.
You see - even you as a layman (I assume a layman) are able to recognize the disadvantages of the GTAT manufacturer's contract, but why was its management unable to do so?
I doubt that Apple would force them to sign.
That's a different matter, and alas, I can think of various reasons here, but none reasonable. The planned share tunnel, as someone wrote here, probably won't happen, in stores worth billions and with such potential, earning a few million on shares seems ridiculous to me. Likewise, for example, Apple's attempt to acquire GTA, or anything else "intentional". The most likely thing seems to me to be a bad estimate by the GTA management and such "blindness" that Apple would not allow it to turn out badly. This certainly happens to us mere mortals, that we simply don't see the signs or the evidence, even when they are right under our noses, because we are "horny".
To put it in Czech – they took too big a bite.