The optical properties of sapphire make it a wonderful material to use as a protective window. Apple, recognized to have impressive supply chain management capability, is known to lock in manufacturers for present or future products. To shore up their desire to include sapphire windows on new generation iPhones and iPads, they signed an exclusive production agreement with GT Advanced Technologies (GTAT) to provide them sapphire windows. However, less than a year after that agreement was announced, GTAT filed for bankruptcy.
The bankruptcy filing surprised many in the industry, including Apple. Although portions of the filing were redacted and led to much speculation, the reason was stated to have to do with a burdensome contract. Eventually a bankruptcy judge ruled the filing could be unsealed and it showed the one-sided deal that proved impossible to keep. Because the contract was overwhelmingly in favor of Apple, people are wondering why GTAT would agree to such a deal in the first place.
On a related note, GTAT CEO Thomas Gutierrez sold a pile of stock one day before the iPhone 6 release announcement where it would be known that the iPhone would not have a sapphire screen. GTAT says the stock sale was part of a pre-arranged deal made back in the spring, but Gutierrez had been dumping stock the whole year.
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Last year GT Advanced Technologies (GTAT) signed an exclusive deal with Apple to supply them with sapphire for their "unscratchable" screens and other electronics components.
This week GTAT filed for bankruptcy protection. Apple had agreed to front GTAT $578M to set up a sapphire production facility which would be paid back starting in 2015. Speculation is that GTAT is finding that the actual costs of setting up and manufacturing the sapphire is much more than anticipated. The bankruptcy filing apparently came as a surprise to Apple as well.
(Score: 4, Interesting) by jcross on Tuesday November 04 2014, @02:35AM
My question is not why GTAT accepted the deal, but why Apple made it so one-sided. How are you going to have a sustainable industrial ecosystem if all risk is pushed out to the suppliers at the margins? Walmart does exactly this sort of thing, using their huge buying power to, for example, force suppliers to ship them an inferior product at a lower price while maintaining exactly the same branding as their full-priced version. This eventually results in the brand image getting tarnished, but that's an externality to Walmart. Or look at what they did to Vlasic with the gallon pickle jars. I've personally seen GE try to do the same with aerospace parts.
I guess they assume there will always be more suppliers out there, but it is possible to kill them all, or all but one. And then once you get down to a sole supplier your negotiating power evaporates, especially if that supplier holds anything hard to clone, like patents, trade secrets, or custom equipment. I think the better strategy is nurturing suppliers. You know, making sure they can profit from the deal. Making sure they have the capital they need (Apple could easily have helped these guys out with a loan, advance, or renegotiation of terms). Making sure they have whatever information they need to deliver the right amount of product at the right time. Otherwise the whole system becomes unsustainable, and eventually the big players might even suffer.
(Score: 3, Interesting) by Arik on Tuesday November 04 2014, @03:01AM
It seems quite possible that the contract was one-sided because it's purpose was merely to pump the stock, so GTAT saw no need to try to negotiate a better contract, either initially or at a later date, since the one Apple offered was fine for their purposes.
If laughter is the best medicine, who are the best doctors?
(Score: 2) by sjames on Tuesday November 04 2014, @05:28AM
It might be a varient on pump and dump, or ity might be that they fell in to a trap and the execs realized it too late to escape but early enough to quietly bail and leave other holding the bag.
It wouldn't surprise me at all to find out that in negotiations, Apple boiled the frog. Slowly added more risk on the supplier side while holding the carrot just out of reach. Eventually the deal closed and GTAT realized to their horror that if Apple so much as sneezed they were screwed. Management started selling quickly and quietly (because like most rats, they know when to leave)Then Apple sneezed...
(Score: 3, Insightful) by bzipitidoo on Tuesday November 04 2014, @12:43PM
People want simple answers. People seem especially to want that on failures. Want to find one bad decision, one wrong assumption, one lying scumbag or idiot. The captain of the Titanic steamed straight into an iceberg field. O-rings brought down the Challenger. And Apple murdered GTAT?
The article is pretty favorable to GTAT. I think it's GTAT's business to research the risks and decide whether to take them. GTAT management really blew it there. They're big boys, they should take responsibility. If Apple asked them to walk off a cliff, and they did it, whose fault is that? If Apple pushed them towards a cliff, did they just passively take the pushing? Push back, guys, push back.
Management is always pushing for more, it's just a question of how extreme they get about it. Did they ask for the Moon, and threaten to fire everyone if they don't deliver? Or did they only ask for one more small step, dangling a bonus in front of everyone if it was achieved? I shouldn't be that surprised if GTAT's management puts employees in impossible situations. Hearing a little about Job's management style, I'm sure Apple did and still does. Well, now it's the turn of GTAT's management to feel inadequate, pressured to meet extreme expectations. Let them have the fun experience of having no one heed or care about their whines over the unfair treatment, and indeed being told to stop being such crybabies. Stiff upper lip, chaps!
If they dumped stock when they saw how things were going, I have zero sympathy for them. That's blatant insider trading. That money should be clawed back, and damaged investors and employees made as whole as possible. Let's hope the bankruptcy court can sort out the mess.
(Score: 1) by PartTimeZombie on Tuesday November 04 2014, @03:03AM
You asked a good question, then answered it. As you indicated Walmart and other businesses do this.
The reason for this sort of short sightedness would be because Wall Street is looking at this quarter's profit, and don't really care about next year's.
(Score: 2) by Non Sequor on Tuesday November 04 2014, @03:17AM
This particular supplier kind of sounds like a money pit. Apple threw some money in the money pit but they held them at arm's length to avoid getting pulled in.
Write your congressman. Tell him he sucks.
(Score: 1) by khallow on Tuesday November 04 2014, @03:42AM
My question is not why GTAT accepted the deal, but why Apple made it so one-sided.
Obviously, they thought GTAT could do that. It would be a really wonderful deal if GTAT could deliver on that particular contract.
(Score: 1) by Whoever on Tuesday November 04 2014, @04:23AM
Apple has deep knowledge of its suppliers financials and processes. My guess is that Apple thought someone else would invest in the money-losing prospect of supplying parts to Apple below cost.
(Score: 2) by FatPhil on Tuesday November 04 2014, @09:36AM
"""
In document #0324 presented in the case, Squiller states under pain of perjury that the key to making the sapphire deal profitable for both sides was to mass-produce 262 kg boules of sapphire crystal meeting the specifications required by Apple.
...
However, none of those furnaces had been designed to produce boules any greater than 115 kg in weight, while most producers using non-GTAT furnaces grow boules weighing less than 100 kg.
"""
The marketing department sold something which was impossible. That's the bottom line. Marketing killed GTAT, not Apple.
It's been said many times in the past, and it will be said many times again - if you're in marketing, kill yourself. www.youtube.com/watch?v=gDW_Hj2K0wo
For balance: fuck Apple.
Great minds discuss ideas; average minds discuss events; small minds discuss people; the smallest discuss themselves
(Score: 2) by hubie on Tuesday November 04 2014, @12:42PM
What I found perplexing about this story is that I don't agree with your assessment of marketing screwing them over. GTAT manufactured and sold sapphire growing machines, but they were never a sapphire producer. Both sides knew this going in. At some level I can see how it looked like a good idea that you build a bunch of furnaces, cut out the middle guy, and produce them yourself. From the optics.org article: Having raised the issue of what looked like a pretty one-sided agreement with “the ultimate technology client”, GTAT’s management was simply told that this was what other Apple suppliers had signed up to, and fell into line. I think GTAT saw a golden opportunity to grow their business by hitching onto Apple and they made a Faustian bargain to get there, and that Apple didn't fully appreciate the technical challenges and simply foisted their usual "no risk" contract onto them. It looks like Apple screwed themselves over forcing these terms, so I wonder if there wasn't much input from any technical people at Apple because although their one-sided contract protects them financially, I don't see how it doesn't hurt them entering into a deal that is impossible to achieve.
The deal was signed in (I think) December, and it looks like Gutierrez started selling large chunks of his stock in February, so I think it became pretty clear to him early on that they couldn't keep up their end of the contract.
Apparently a potential silver lining here for the broader tech industry, if the settlement agreement is accepted, is the agreement now allows GTAT to sell their furnaces to others besides Apple to recoup costs, which will lead to a ramp up in sapphire production that will become widely available.
(Score: 1) by khallow on Tuesday November 04 2014, @01:42PM
"If" is a big word. It permits any absurdity to appear in a true statement. ("If [something false] then [something absurd]" - a provably correct statement, no matter how absurd the absurd thing is.)
it's an absurdity in hindsight to us. What value was this impossible contract really to Apple? Having an exclusive contract to a high quality, cutting edge substance was extremely valuable. But having the supplier go bankrupt inside of a year more than outweighed that advantage, especially if Apple loses control of the IP as a result. As to GTAT, it allowed the CEO to sell his stock at somewhat inflated prices. That may have been the real driver for the contract.
(Score: 0) by Anonymous Coward on Tuesday November 04 2014, @09:56AM
[conspiracy theory]
Or maybe they didn't really intent to make Sapphire displays, but feared that another company might get this idea and act on it, and then have a competitive edge against Apple. The best way to prevent another company from getting the necessary supply is to make an exclusive contract with the supplier before the other company even thinks about it. And the best excuse for not delivering is that the supplier went bankrupt (at the same time making even more sure that the competition won't get it, since there's no one left who could supply it to them).
[/conspiracy theory]
(Score: 2) by jcross on Tuesday November 04 2014, @03:12PM
Apparently a potential silver lining here for the broader tech industry, if the settlement agreement is accepted, is the agreement now allows GTAT to sell their furnaces to others besides Apple to recoup costs, which will lead to a ramp up in sapphire production that will become widely available.
(Score: 2) by jelizondo on Tuesday November 04 2014, @06:16AM
Many companies are following the footsteps of WalMart and it is destroying the smaller companies.
I have a friend who, years ago, was celebrating getting a contract to sell his products at WalMart; about a year later, he was broke. WalMart had sucked him dry and spat him out once he had nothing more to give.
Yes, it is capitalism but a stupid brand of capitalism.
(Score: 2) by geb on Tuesday November 04 2014, @02:05PM
The simple answer is competition.
In relatively relaxed markets, where there are lots of established players already, nobody cares too much about one more company trying to join in. There is competition, but it's rare for anybody to feel under threat from the actions of others. You can afford to play the long game, treating both suppliers and customers fairly, safe in the knowledge that you're building up a reputation as a decent company and it will pay off for you eventually.
The mobile phone market isn't like that. Competition is very aggressive. Every year is a new land grab, trying to claim as much of the market as you can get your hands on, and everybody knows that dirty tricks are part of the game. In an environment like that you have to take risks to stay in the game, and sometimes they don't pay off. You can't play fair in every deal, because if you do, you'll be beaten to market by somebody who didn't, or they'll beat you on price, or on features.
(Score: 0) by Anonymous Coward on Tuesday November 04 2014, @05:04AM
s/t
(Score: 2) by aristarchus on Tuesday November 04 2014, @05:50AM
What can we expect from A$pple? It is all, in fact, about the Benjamins, not the Pentiums [youtube.com], which is why capitalism sucks. Convergent greed results in declining productivity, and Marx predicted Capital Intensification, and the decline in marginal profit ratios, in a system were sapphire is just glass, and not Aluminum Oxide.
(Score: 3, Informative) by Marand on Tuesday November 04 2014, @08:32AM
What can we expect from A$pple?
Oh come on, you can do better than that. You can't just go adding symbols willy-nilly like that; it has to be a substitution!
You have to call them them App£e, Appl€, or something else (is there anything else? Not a lot of good currency substitutions for Apple) to express your disdain for their greedy capitalistic pig-dog ways.
(Score: 1, Funny) by Anonymous Coward on Tuesday November 04 2014, @10:02AM
Well, given that Apple pays (or rather, avoids) its taxes in Ireland, the Euro symbol seems most appropriate.
(Score: 1) by Zappy on Tuesday November 04 2014, @10:21AM
Or A₱₱£€.
Sorry couldn't find a suitable currency for the A
(Score: 2) by AnythingGoes on Thursday November 06 2014, @06:55AM
Actually, A$ is correct, if you are living in Australia :)