
GT Bankruptcy Provides Rare Look at Apple’s Relationship with Suppliers - us0r
http://recode.net/2014/11/07/gt-bankruptcy-provides-rare-look-at-apples-relationship-with-suppliers/
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MCRed
I don't see much controversial here. Apple's practice has long been to
underwrite capital equipment for their suppliers, so that the supplier can
afford to manufacture the item that Apple needs. This makes sense because the
supplier is the one with the expertise to make the product. For instance, when
the machining for the iPhone 4 case was not producible with current equipment,
only equipment designed for making prototypes, Apple bought 1,000 of these
very expensive machines for Foxconn.

Apple is not a sapphire manufacturer, but GT is, and this afforded GT the
opportunity to go into this business with minimal capital risk. GT has
expertise that Apple does not.

It sounds like GT thought the new process was ready for production and all
they needed was the furnaces and plant, and then they failed to bring the
plant on line and produce what was needed.... and is now blaming Apple for it.

Since Apple provided the money to build the plant, an exclusivity agreement
doesn't seem "onerous" in the least. The "below market" prices allegation also
seems appropriate-- given that GT purported to have a new technology that
changed the economics making sapphire viable for new uses. The main challenge
with sapphire is that it is expensive, and hard to make large pieces-- such as
you would need for the front display of an iPhone.

The idea that Apple wielded "all the leverage" is silly. GT could simply walk
way. There is no leverage in the case when the other party is not beholden or
forced to do business with you. If GT had such a killer new process as to make
phone faces at reasonable prices, then they could have gone to Motorola,
Samsung or other potential customers. How does Apple have all the leverage
when there's no requirement for GT to sign the deal?

It really sounds like this company bit off more than it could chew, couldn't
meet the obligations it agreed to, and is now having sour grapes.

~~~
shakethemonkey
Bankruptcy isn't "sour grapes", it is the expected result when Apple's
concessions were insufficient to extricate the company from its troubles. From
the reading of this article, it appears that Apple's terms boxed this much-
smaller company in, leaving them with insufficient margin for error. This
sentence is particularly telling: "Apple chose the facility, negotiated all
the contracts to design and build it, and GT had no direct contact with the
Apple subcontractors." Perhaps such a contract should never have been agreed
to, but it is an example of heavy-handedness by the stronger partner in the
relationship.

~~~
ghshephard
Their is nothing so far revealed that indicates any heavy handedness on
Apple's part. So far, all we've seen is a contract that two parties entered
into of their free will, both seeking to profit from said contract.

Now, if it turns out, Apple had threatened GT with financing one of their
Saphire Competitors to allow them to drive GT out of business if GT didn't
enter a contract with Apple - that would be heavy handedness. But there is no
evidence of any such behavior.

~~~
shakethemonkey
If in fact the sentence I highlighted is true, it is very much heavy-
handedness on the part of Apple. From the context, it is unlikely to be false,
though possible.

~~~
ghshephard
"Apple chose the facility, negotiated all the contracts to design and build
it, and GT had no direct contact with the Apple subcontractors."

You do understand the Apple purchased the facility for $113 million dollars of
their own money, right? GT's job was to install furnaces, run them, and
deliver sapphire of a particular size and quality, which they were unable to
do. And, they did so with money loaned to them by Apple.

Effectively, Apple took 100% of the risk, and when things went south, GT
(after their CEO made a few million dollars on the stock), declared bankruptcy
and forced Apple to settle GT's debt.

~~~
shakethemonkey
Not true. If Apple took "100%" of the risk, GT would not be bankrupt. GT was a
viable operating concern prior to these events.

Taking only what's available in the article, GT's job included running the
factory, part of the process pipeline they had _zero_ choice over, even to the
point of selecting or even communicating with subcontractors (the line I
quoted). When those machines in the process pipeline wholly dictated by Apple
proved inadequate -- and I am not saying those are the only problems -- by
necessity _GT_ assumed at least a good portion of that risk.

You are oversimplifying the situation greatly, to the point of being
disingenuous.

~~~
ghshephard
I think we are talking at cross purposes to each other, but I'm hoping that if
I listen to you - we can come to some agreement.

Apple took 100% of the risk of the new facility - it's all on Apple, GT is not
on the hook for it a bit. That's why Apple did not involve GT in its
construction.

GT _did_ take risk in the building of Saphire (a risk, as it turns out, that
they did not succeed on) - though they did it mostly with borrowed money from
Apple (but they had exposure as well).

The Bankruptcy was mostly because GT was unable to pay back apple, and their
cash flow position was such that they were no longer a going concern - but
Apple is going to take a loss there as well - I can't believe that Used
Sapphire furnaces are going to be sold at a premium.

The part that you bring up that is interesting, is whether the elements that
Apple was building (the physical plant) were important components in the
process pipeline for successfully manufacturing Sapphire. If, indeed, they
were important, and if they _in any way_ contributed to the failure of GT in
successfully manufacturing Sapphire, and if, Apple indeed, did not let GT take
a significant role in directing the design and build of those components -
then, I'll grant you that was heavy handed behavior on Apple's part. They
can't hold GT responsible for successfully delivering sapphire, but then
_simultaneously_ prevent them from having any authority over a vital component
in the building of said sapphire.

Sound Fair?

~~~
shakethemonkey
> They can't hold GT responsible for successfully delivering sapphire, but
> then simultaneously prevent them from having any authority over a vital
> component in the building of said sapphire.

Yes, we agree. And exactly what you describe is what appears to have happened.

(disclaimer: I have no involvement with this controversy at all)

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fidotron
This sounds like they accidentally walked into a joint venture when actually
there needed to be an intermediary party (a sapphire manufacturer) or Apple to
take on more risk.

If you haven't been involved in negotiations like this you probably
underestimate what an easy trap this is to walk into, and very hard to remove
yourself from once it occurs.

It does reflect poorly on management, but it takes two to tango, and Apple
should have been aware that such a one sided arrangement would inevitably
backfire in this fashion. Good business works when the incentives for both
parties are aligned, and you may extract short term benefit from screwing a
supplier, but if what they supply is in short supply then you're going to end
up screwing yourself.

~~~
waps
My faith in management just keep strengthening over time. Apparently it's not
considered ridiculous to agree with someone who says :

> Apple said GT should, “Put on your big boy pants and accept the agreement,”
> he said.

But the cynic in me fully understands what happened here. GT management, who
have massive amounts of stock knew that an agreement with Apple would be seen
by the invester community as a ridiculously positive development ( e.g.
[http://www.cnbc.com/id/101573666](http://www.cnbc.com/id/101573666) chosen
for effect, not because I think this guy is a good stock picker, btw : please
note that Cramer was right on all timeframes < 7 months ), and they were
right. Then they proceed to unload their shares, making 32 million dollars
between 6 people (
[https://finance.yahoo.com/q/it?s=GTAT+Insider+Transactions](https://finance.yahoo.com/q/it?s=GTAT+Insider+Transactions)
). They would have known the terms of the Apple deal, and would have known
that it'd be a breakeven deal at best, probably already in March.

TLDR:
[https://www.tradingview.com/e/qTWS9Zzq/](https://www.tradingview.com/e/qTWS9Zzq/)

------
Johnie
"Squiller called GT’s contract with Apple “onerous and massively one-sided.”
It would allow Apple to buy sapphire — a durable, scratch-resistant substance
that already is used to cover the camera lens and touch ID sensor on some
iPhones — at below market prices, he said."

I find these types of lawsuits to reflect poorly on the management team of the
company filing the lawsuit. Their underlying argument is that we voluntarily
agreed to a poor contract and now we're upset about it.

~~~
PeterisP
Well, a bankruptcy suit pretty much always reflects poorly on the management
team, no matter what the stated reasons are.

------
Animats
GT agreed to some awful terms:

 _" Whenever Apple modifies the Specification for a Good, and notwithstanding
any disagreement over the cost to implement such specification modification,
GTAT will charge Authorized Purchasers, and Authorized Purchasers will pay,
(1) the applicable price for a Good set forth in the Statement of Work (ii) in
the absence of a SOW, the last price Authorized Purchasers paid for the
applicable Good, or (iii) if Authorized Purchasers have not yet purchased the
Applicable Good, a mutually agreed price for the applicable Good."_

So Apple could change the specs on GT, and pay the old price until any
disputes were resolved. Apple did in fact change the specs, which caused some
of the problems.

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us0r
List of Documents:
[https://www.kccllc.net/gtat/document/list/3940](https://www.kccllc.net/gtat/document/list/3940)

Some of the Agreements:
[https://www.kccllc.net/gtat/document/14119161411070000000000...](https://www.kccllc.net/gtat/document/1411916141107000000000004)

------
wycx
Someone may pick up a large-scale sapphire manufacturing facility at pennies
on the dollar. Perhaps we will see sapphire screens on non-Apple phones as a
result, using equipment funded by Apple. The irony...

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beloch
It would be quite the glowing recommendation for a young, growing company to
list Apple as one of their clients. It's not difficult to understand why a
company like GT might underbid much bigger rivals on a competitive contract
just for the impact it would have on their future business. It is therefore
very possible that Apple acted in good faith but GT was simply unable to honor
the contract they agreed to. It's not dissimilar to young engineers, IT
professionals, etc. who are willing to work for Cupertino at wages well below
industry standard just to pad their resumes. Such people often burn out very
quickly.

GT's bankruptcy may cause problems in Apple's supply chain that wind up
costing Apple a pretty penny. Likewise staff who burn out just as they're
trained up to a productive level suck resources out of Apple as well. Apple
would do well to carefully examine bids and make sure their suppliers can
comfortably do what they promis to do, just as they should avoid taking
advantage of new employees willing to work long hours at low wages. Reaping
the benefits of fame at the expense of the star-struck sounds great at first,
but doing so can cost substantially more in the long run.

