Ondrej Holzman "We're done, we've declared bankruptcy." That's how the head of GT Advanced Technologies, the company that was supposed to deliver a large sapphire to Cupertino, surprised Apple on October 6. It seems there are only two ways to be an Apple partner: massive success or total failure.
Apparently, the courtship between Apple and GT went something like this: "Here are the terms that you either accept or you don't produce sapphire for us." In the end, GT got used to the potential billions in profits and agreed to completely disadvantageous terms. But the exact opposite happened before bathing in money - the company's bankruptcy. That's the harsh reality you have to deal with if you partner with Apple.
A perfect illustration is provided by the current case of GT Advanced Technologies, which points to a supply chain that is accurate to the millimeter, albeit very roughly adjusted. Apple whistles in it and, from a position of strength, can force its partners to agree to conditions that are very favorable for it, even if in the end they are often hardly feasible. Then the slightest hesitation is enough and it's over. As soon as the expected results do not come, Tim Cook looks away and looks for another, "more reliable" partner.
Take it or leave it
It was the current executive director of the Californian company, who in previous years, still in the role of operations director, assembled a perfectly functioning chain of manufacturers and suppliers of all kinds of components for apple products, which Apple can then get to the by the hands of customers. It is necessary to make everything work, and in Cupertino they have always kept all contracts and partnership obligations under wraps.
[do action=”citation”]The whole plan was doomed from the start to a tragic end.[/do]
Only a year ago, we were able to have a unique look into the kitchen of this successful business. Apple signs a giant contract with GT Advanced Technologies in November 2013, set to build a giant sapphire factory while creating hundreds of jobs in Arizona. But fast forward just a year: it's October 2014, GT is filing for bankruptcy, hundreds of people are out of a job, and mass sapphire production is nowhere in sight. The quick end to a potentially profitable collaboration for both parties is not so surprising in the final reckoning, as documents released in the bankruptcy proceedings will show.
For Apple, these are more or less just inconveniences. While in Asia, where the vast majority of its suppliers operate, they operate quietly and out of the spotlight, the alliance with New Hampshire-based GT Advanced Technologies has been scrutinized by the media and the public from the start. The two companies have a really bold plan: to build a giant factory right in the United States that will produce 30 times more sapphire than any other factory in the world. At the same time, it is one of the hardest materials on earth, which is produced synthetically in furnaces heated to approximately two thousand degrees Celsius and is five times more expensive than glass. Its subsequent processing is similarly demanding.
But the whole plan was doomed from the start to a tragic end. The conditions that Apple dictated to themselves were practically impossible to fulfill, and it is a great surprise that GT managers could even sign such contracts.
On the other hand, this only confirms Apple's negotiating skills and also its strong position, which it can use to its advantage to the fullest extent. In the case of GT, Apple transferred practically all responsibility to the other party and could only profit from this partnership. Maximum profit, that's all the managers in Cupertino care about. They refuse to debate the fact that their partners are operating on the brink of bankruptcy. In negotiations with GT, they reportedly said that these are standard terms that Apple has with other suppliers, and did not elaborate on the matter further. Take it or leave it.
If GT did not agree to them, Apple would find another supplier. Although the conditions were uncompromising and GT, as it later turned out, brought destruction, the management of the company operating mainly in the field of solar cells until then bet everything on one card - an attractive cooperation with Apple, which, although it brings huge risk, but also potential profits of billions.
A dream on paper, a fiasco in reality
The beginning of the American alliance, with which Apple would also confirm its words about the intention to bring production back to the territory of the United States, did not look so bad - at least not on paper. Among other activities, GT manufactured furnaces for the production of sapphire, and Apple first noticed it in February 2013, when it showed sapphire glass on the iPhone 5 display, which was more durable than Gorilla Glass. At the time, Apple was only using sapphire to cover the Touch ID sensor and camera lens, but it still consumed a full one-quarter of all sapphire created worldwide.
In March of that year, Apple's GT announced that it was developing a furnace that could create sapphire cylinders weighing 262 kilograms. This was twice the size of previously produced volumes. Production in larger sizes would understandably mean more displays and a significant reduction in prices.
According to documents released in the bankruptcy proceedings, Apple was originally interested in buying 2 furnaces in which to produce sapphire. But at the beginning of the summer, there was a major reversal, because Apple could not find a company that would produce sapphire. He approached several of them, but the representative of one of them stated that under the conditions dictated by Apple, his company would not be able to make a profit on sapphire production.
Apple therefore approached GT directly to manufacture the sapphire itself in addition to the furnaces, and since it allegedly also had a problem with the 40% margin that GT demanded for the furnaces, it decided to change tactics. GT recently offered a $578 million loan that would see the New Hampshire firm build 2 furnaces and operate a factory in Mesa, Arizona. Although there were many unfavorable terms in the contracts for GT, such as not being allowed to sell sapphire to anyone other than Apple, the company accepted the offer.
In favor of Apple
GT was experiencing a decline in its solar cell business in particular, so sapphire production seemed like an interesting option to continue making money. The result was a contract signed on the last day of October 2013. Since the deal with Apple, GT promised to more than double its revenue in 2014, with sapphire accounting for roughly 80 percent of its annual revenue, up from a fraction of that. But problems appeared right from the start.
[do action=”citation”]A single large cylinder of sapphire took 30 days to make and cost around 20 thousand dollars.[/do]
Apple offered less than GT had planned for the sapphire and refused to budge, leaving GT to sell the sapphire to him at a loss. In addition, the contracts just signed indicated that he would be fined $650 if he let another company use one of the $200 furnaces, a $640 fine if he sold the 262-kilogram crystal to a competitor, and a $320 fine for each late delivery of the crystal ( or $77 per millimeter of sapphire). At the same time, Apple could cancel its order at any time.
GT faced an additional $50 million fine for each breach of confidentiality, i.e. disclosure of contractual relationships between the two parties. Again, Apple had no such ban. To GT's numerous questions regarding the points clearly in favor of Apple, the Californian company replied that these are similar conditions to those of its other suppliers.
The contract was signed just days after the 262-kilogram single crystal sapphire first came out of the GT furnace. However, this cylinder was so cracked that it could not be used at all. However, GT claimed to Apple that the quality would increase.
For mass production of the sapphire, GT immediately hired 700 employees, which happened so quickly that by the end of this spring, more than a hundred of the newest members of the team did not really know who to answer to, as the former manager revealed. Two other former workers said attendance was not monitored in any way, so many took time off arbitrarily.
In the spring, GT managers approved unlimited overtime to fill the furnaces with sapphire-making material, but at that point, not enough furnaces had been built yet again, resulting in chaos. According to two former employees, many people didn't know what to do and just walked around the factory. But in the end, a much bigger problem was the very seed of the whole collaboration – the production of sapphire.
A single large cylinder of sapphire took 30 days to make and cost about 20 dollars (over 440 crowns). In addition, more than half of the sapphire cylinders were unusable, according to sources familiar with Apple's operations. In the factory in Mesa, a special "graveyard" was allegedly even created for them, where unusable crystals accumulated.
GT COO Daniel Squiller said in the bankruptcy filing that his company lost three months of production due to power outages and delays in factory construction. Apple was supposed to provide electricity and build the factory, but Apple told GT's creditors that the company went bankrupt because of mismanagement, not power outages. GT responded to this statement that these were deliberately misleading or inaccurate comments.
Sapphire production is failing
But something other than just power outages or bad management led GT to bankruptcy. In late April, Apple suspended the last part of its $139 million loan because it said GT did not meet the sapphire output quality. In the bankruptcy proceedings, GT explained that Apple constantly changed the specification of the material and that it had to spend 900 million dollars of its own money to operate the factory, i.e. more than twice the amount borrowed from Apple so far.
In addition, GT officials say Apple and the city of Mesa are also responsible for the end of the Arizona factory. The first phase of the construction was only completed in December 2013, which left only six months for full operation. At the same time, the already mentioned power outages, when Apple allegedly refused to provide backup power sources, should have caused a major three-month outage.
Therefore, on June 6, GT CEO Thomas Gutierrez met with two Apple vice presidents to inform them that there were major difficulties in sapphire production. He presented a document called "What Happened", which listed 17 problems such as improper handling of furnaces. Apple's letter to creditors goes on to say that Gutierrez has practically come to Cupertino to accept his own defeat. After this meeting, GT stopped producing the 262 kilogram crystals and focused on the 165 kilogram ones to make the process successful.
When the production of such a sapphire cylinder was successful, a diamond saw was used to cut 14-inch-thick bricks in the shape of two new phones, the iPhone 6 and iPhone 6 Plus. The bricks would then be cut lengthwise to create a display. Neither GT nor Apple have ever confirmed whether sapphire was actually intended to be used in the latest generation of iPhones, but given the volumes of sapphire Apple was asking for on short notice, it's highly likely.
But to make matters worse, in August, according to one former employee, another big problem appeared in addition to the production itself, because 500 sapphire ingots suddenly went missing. A few hours later, employees learned that the manager had sent the bricks to be recycled instead of being cleared, and if GT hadn't been able to get them back, hundreds of thousands of dollars would have been lost. Even at that moment, however, it was clear that sapphire would not make it onto the displays of the new "six" iPhones, which went on sale on September 19.
However, Apple still did not give up on sapphire and wanted to continue to get as much of it as possible from the ovens in Mesa. In a letter to creditors, he later stated that he had received only 10 percent of the promised volume from GT. However, people close to GT's operation report that Apple has behaved very inconsistently as a customer. Sometimes he accepted bricks that he had rejected a few days before due to low quality and so on.
We're done, we're broke
In the first week of September this year, GT informed Apple that it had a major cash-flow problem and asked its partner to pay the last 139 million loan. At the same time, GT reportedly wanted Apple to start paying more money for sapphire supplies from 2015. On October 1, Apple was supposed to offer GT $100 million of the original $139 million and postpone the payment schedule. At the same time, he was supposed to offer a higher price for sapphire this year and discuss a price increase for 2015, in which GT could also open the door to selling sapphire to other companies.
[do action=”citation”]GT managers were afraid of Apple, so they did not tell him about the bankruptcy.[/do]
Both sides agreed to discuss everything in person on October 7 in Cupertino. Shortly after seven o'clock in the morning on October 6, however, the Apple vice president's phone rang. On the other end was GT CEO Thomas Gutierrez, who broke the bad news: his company had filed for bankruptcy 20 minutes earlier. At that moment, Apple apparently heard for the first time about the plan to declare bankruptcy, which GT had already managed to carry out. According to sources from GT, his managers were afraid that Apple would try to thwart their plan, so they did not tell him ahead of time.
Chief operating officer Squiller claims that declaring bankruptcy and seeking protection from creditors was the only way for GT to get out of its contracts with Apple and have a chance to save itself. It is with Squiller, together with the executive director Gutierrez, that it is also being discussed whether this scenario was planned for a long time.
The innermost management certainly knew about the financial difficulties, and it was the two mentioned GT officials who began to systematically sell their shares a few months before the bankruptcy was announced. Gutierrez sold shares in early May, June and July each, Squiller then disposed of shares for more than a million dollars after Apple refused to pay the last part of the loan. However, GT maintains that these were planned sales and not rash, impulsive moves. Nevertheless, the actions of GT managers are at least debatable.
After the announcement of bankruptcy, GT's shares rocketed to the bottom, which practically wiped the company worth almost one and a half billion dollars from the market at that time. Apple has announced that it intends to continue to deal with sapphire, but it is not yet clear when it will resort to its mass production again, and if it will even happen in the coming years. The published documents from the GT Advanced Technologies case may make him uncomfortable and make it difficult to negotiate with other potential partners, who will now be much more cautious after the tragic end of the sapphire producer. After all, this was also the reason why Apple fought strongly in court to make the smallest possible number of secret documents public.
Nice article, thank you for it.
Why on earth did they open a sapphire factory with no experience and still agree to a disadvantageous contract? I don't like the conditions, I won't accept them. Dot. The fact that Apple also collected garbage and did not the second time is quite understandable. As soon as they are short of the sapphire they are supposed to receive according to the contract, they will try to use what they can.
Super written. Even for a financial illiterate like me, understandable. Keep going, Ondřej :-)
BTW Apple suddenly doesn't seem like a sunny company full of tech enthusiasts and philanthropists (red) (green) (rainbow). In the end, it's always about business..
You were really naive.
Rather messy..
So let's sum it up: I will sign someone to produce something that I can't do in a quantity that I don't have people for.... And the one with whom I will sign the contract after I can't do it is the evil dictator who is to blame?
On the other hand - I have to ensure the production of something I want and I see that the partner I am dealing with may not be very solid. (As evidenced, for example, by management's stock sale before the crash) I fully understand Apple's approach.
The most important question - we don't have sapphire on iPhones because GT didn't have time to produce it or because Apple didn't want it in the end?
This "we will go to death" and "profit will be ours" principle will sooner or later get into huge problems.
1) the supplier will reduce quality to be able to produce at the price dictated by Apple (shown by the huge scrap rate of the iPhone 6 and other Apple products)
2) when the capacities are full, the supplier will choose partners (customers) who will let them earn and will have an equal relationship. Apple will not have to produce it
3) a few bad PRs and all the charm and fandom will start to disappear and sales will drop by tens of %
What is this huge waste rate? How much %?
it's hard to answer that, because APPLE doesn't publish these numbers, as far as I know, but just look at ipPone.forum.cz where repeated complaints about iP6 are not an exception - even 3-4 times !!!
That's my argument... It's probably not even worth commenting on.
I see it as the truth is somewhere in the middle and each side portrays it in a better light for themselves, but:
1/ similar conditions exist everywhere...
2/ Apple invested / provided money for the development and production of something that no one has yet produced with the specified parameters, so why should they agree to the fact that GT would potentially sell sapphire to e.g. Samsung?
3/ the quality was agreed and the volume was agreed, which could not be fulfilled, so as I understand it, Apple started taking at least half the volume of sapphire
4/ everyone scolds Apple for not being innovative and revolutionizing. I see it as another revolution has risen and fallen on sapphire, at least in the use of this material on large surfaces, I guess that Apple has to do something with it at least in the case of the Watch, if it didn't work maybe on the iPhone 6...
Unfortunately, the article does not contain additional information, such as Apple's interference in the production process, tools and other parts of the entire process. I don't know if it was written here in another article or on another server, but if only half of it is true, it's quite strange behavior. That is, if someone tells me to make a product with certain parameters and in a certain time, and then he tells me that I have to make it according to a specific procedure, and I tell him that if I do as he says, the product will not be of such quality and I will not deliver him on time and the customer still insists on his position, something is wrong. Personally, I find it suspicious and somehow it makes me feel like maybe it wasn't a sapphire after all, or just a sapphire. It's just all terribly extreme and I get the feeling that Apple didn't have much interest in making it go well. He wanted to test something and not at his own expense, in addition to the participation of the City/State itself. Well, that's just speculation.
The question is who loaned GT AT that money. If Apple, it's a double disaster for Apple. Not only for the money, but also because everyone now knows how Apple negotiates. GT managers made a profit on the sale, and Apple was left with a factory with employees it does not need. I just don't understand why they first built over 2000 ovens when they didn't have the production technology mastered. Maybe within a year I will be able to produce that glass in sufficient quantity and at reasonable costs, and the next generation of iPhones will have sapphire glass.
Apple will not lose any money, GTAT has to pay it all back. To pay off the debt, he will sell ovens that were never owned by Apple. Not even the Apple employees now remained, everything was under the administration of GTAT, which fired them.
Well, if GTAT declares bankruptcy, it's because it has higher debts than its entire assets. Furnaces can only be sold by whoever buys them, if they do not know how to make sapphire glass in them. And they also have quite a lot of these ovens. Who would ever need that much sapphire?
I read somewhere that the employees were not fired and Apple took over the factory with the employees.
Here I am looking at the analyst herself..