Photo via WSJ
The Wall Street Journal has revealed key details of the failed deal between Apple and sapphire supplier GT Advanced Technologies that show why the agreement collapsed and how GT managed to run itself into bankruptcy while trying to meet Apple’s standards.
A previous report from the Journal revealed that GTAT had been unable to provide the iPhone 6 displays it had promised Apple, but now we have even more information on why that demand was so hard to meet.
Originally Apple intended to buy the massive new sapphire furnaces GTAT had designed, but eventually Apple decided to simply ask GTAT to handle the production entirely. Apple would own the factory, help GTAT finance the furnaces, and then lease the space to the supplier for a measly $100 per year.
Other elements of the agreement eventually came to light, including a $50 million fine that Apple would impose on any supplier that leaked its product details ahead of an official announcement.
According to former employees, hundreds of people were hired to work in GTAT’s sapphire factory without any type of oversight or leadership, and over 100 of them had no idea who they even reported to when they showed up to work each day. These employees were authorized for unlimited overtime and faced no penalty for missing work.
Power outages and construction delays also posed a problem for the factory, which reportedly missed about three months of production due to such issues.
None of these issues, however, posed the largest setback to GTAT’s efforts.
The biggest issue with the agreement between the two companies stemmed from the fact that before being approached by Apple, GTAT had never actually mass-produced sapphire crystal. That inexperience led to a seriously flawed product.
In the images above you can see six different cylinders (called “boules”) of sapphire, all of which suffer from massive cracks and other defects, making them totally useless for Apple’s purposes. Those wasted boules are not made cheaply or quickly. Each one takes about a month and costs around $20,000 to produce. At 578 pounds, they were over twice as large as any boules that had previously been produced.
Those six boules weren’t the only ones that ended up being defective. The Journal’s report says that over half of the sapphire produced by GTAT for Apple ended up in the same position.
This is where the more familiar parts of the story start coming into play. Struggling financially after setbacks and failures, GTAT found out in April that Apple was now unwilling to make a payment of $139 million that GTAT needed to stay afloat.
From there, things only got worse. Two months after Apple withheld the payment, GTAT CEO Thomas Gutierrez met with Apple executives to explain the problems and delays in production. It was then that GTAT finally decided to scrap the massive 578-pound boules it had failed to produce reliably in favor of smaller 363-pound versions.
These were easier to produce and led to fewer issues in the creation of the sapphire, but mismanagement continued to plague the company. At one point, the Journal reports, a manager took 500 iPhone-sized sapphire bricks worth hundreds of thousands of dollars and accidentally threw them away. The bricks were eventually recovered, but the issues that led to the incident were never addressed.
In September, GTAT’s CEO offloaded most of his stock in his own company, gaining over $1.2 million.
At the beginning of October, after the debut of the iPhone 6 and 6 Plus (which shipped without sapphire displays) Apple agreed to pay GTAT $100 million of the $139 million it owed. Apple also tried to help GTAT out by changing some terms of their contract to allow GTAT to bring in additional money by selling furnaces to other companies. The Cupertino company even offered to pay more money for sapphire from GTAT in 2015, despite the latter’s inability to deliver during 2014.
A day before the talks for that agreement were supposed to take place, GTAT filed for bankruptcy. Later that month, GTAT informed over 700 employees that they would be out of work by December. The fallout the followed between the two companies involved a lot of back-and-forth over who was at fault, with GTAT’s CEO calling Apple’s contract a “bait-and-switch strategy,” while Apple responded by telling the supplier to put on its “big boy pants” and accept what happened.
GTAT reached a deal with Apple this month to sell its furnances and pay up to $290,000 per furnance to recoup Apple’s payments for sapphire shipments that never arrived.
Overall, Apple is said to have received only 10% of the total sapphire it ordered.
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This is a sad note. I was buying 1 mm thick, 25 mm diagonal to 75 mm diagonal sapphire from the Chinese ten years ago. They had the process well worked out and could polish up to 50 mm diagonal parallel to lamba over 8. The bigger sapphire I had to ship to Russia for polishing, and then back to China for the 13-layer dielectric, anti-reflective coating. These windows were used for cooled CCD cameras designed for astronomers.
Growing sapphire is difficult, but it is not rocket science. It just requires good technique.
Thank you for explaining what you had to go through to get your finished product. I had no idea what was involved in producing sapphire for optics.
It would appear that the cost and quantity Apple is looking for is what is special. Apple would likely want 10 million or more units within 6 months for under $2 each, and would likely want to greatly scale up the quantity and lower the price in subsequent years.
They didn’t run into bankruptcy trying to meet Apple’s terms, they actually did it to AVOID meeting Apple’s terms, the new information seems to infer.
I still don’t see anything damning for Apple. Sounds 100% like GT was completely negligent and even misled Apple to believe that it was capable of accomplishing the task. The fact that it produced those furnaces for other companies, who also expected them to work, is pretty awful.
And as far as the onerous contract goes, the should have put on their big boy pants and told Apple NO. Or maybe just read the whole thing before signing it. Like any normal human being is expected to do, let alone the CFO of a multi million dollar corporation.
Why tell someone no is they are who going to give you money to do something you’ve never done before?
Apple didn’t do its research.
Judging from how quickly they were able to put a contingency plan into place, it’s pretty hard to say that Apple got caught flat footed in this deal. If GT had succeeded, win for Apple, and they wrote the contract in such a way (the one that should never have been signed by GT) that they lost almost nothing in the case of GT’s failure. Sounds like a more than adequate amount of due diligence to me. Almost a suspicious amount. They were completely prepared to get hosed by GT.
I’m sure herb the trolling tird makes more sapphire from their butt in one week than GT did in 2014
Sounds like Apple didn’t do its due diligence on the deal.
And, from the guy who cashed out and made a bunch or money, it probably worked out well.
That’s capitalism!
It’s also illegal… Cashing out with inside information! You can call it Capitalism if you wish… But miisrepresenting yourself, then making a profits from inside knowledge is a good way to find yourself in a prison cell!!
Actually Apple was smart in this one. They had a cocky, risky provider promising that they could do amazing things. Apple took the bait – but also mitigated the risk but putting in strong contract terms. The supplier was ballsy and took it. And failed. And then the supplier CEO seemed to cash out before bankruptcy – which is clearly going to lead to a shareholder lawsuit.
In all, Apple lost some money, but not lot. It was still easily able to produce iPhones this year on target.
A prudent risk taking venture. Kudos to Apple on this bold attempt forward without risking much at all. Boo to GT management, who took on way too much risk and totally botched it at every turn.
So they didn’t know what they were getting into and they had $$ in their eyes.
well man use corning gorilla glass…….
The true story :)
Why would any of that be Apple’s responsibility? They gave a small company a huge opportunity but they didn’t take it seriously enough and totally blew it.
Usually an opportunity is granted after the vendor proves beyond a reasonable doubt that they can do what they say they can do. Not many companies blindly offer multi-hundred million dollar contracts without seeing a product.
As another poster pointed-out, it now makes sense why the contract was so strict and one-sided in Apple’s favor. They basically took a calculated risk to see if they could win the day with epic scaling and delivery from someone that had never done it before. If it worked, great. If not, we’ll just go back to gorilla glass – which is what they did.
Pretty amazing story, really.
Sounds like the management of GT Advanced saw only the upside of an exclusive deal with Apple – without realizing or caring about the fact that they had NEVER taken on a job of this magnitude – and decided that the deal would work itself out.
Poor on-site management; lack of quality controls; no leadership within the factory; no production planning; certainly no fallback plan (other than walking away under the protection of bankruptcy) – and then the illegal / immoral cashing out of the company for personal gain.
I can only hope that the executives (in name only) are hunted down and prosecuted to the full extent of the law. And this is why the “Made in America” label has disappeared from the goods we buy.
At least we are finding out what went wrong!
Had Apple intended to build market advantage through supply chain integration it would have grown a supply chain vendor, joint funded technology development and thoroughly QA the production on development scale versus production scale. iPhone was the elephant in the deal, no one wants to question.
Instead, what Apple did was take a sub-supplier, self-funded an unproven new process and proceeded to impose market delivery constraints that drove that technology to failure – and it succeeded. That destroyed a market advantage technology. Apple got exactly what it wanted.
When the brains behind the GT deal got wise to the outcome, witness the move to liquidate stock as the one-finger salute in Apple’s face. Hence there’s a reason for Apple’s now infamous parting ” Big Boy” words. We won – you lost. Braggadocio…all glory-speak.
SO if there were a bait and switch as claimed by GT, predatory practices, monopoly and market manipulation statutes may come into force. This deal is not done, yet.
Apple are not a good company to deal with unless you are sure you can supply the product at the price they specify, at the required quantity and quality you will lose big time. It’s a big boys game, the little guys should not play.