Posted on 11/20/2014 2:47:17 AM PST by Swordmaker
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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I presume these “boules” are artificial sapphire?
It's a French term for "ball" and it's used for the artificial crystal ingot grown from a seed crystal under any synthetic means. In this instance it is done by gaseous diffusion deposition under high heat in an electric furnace on a Sapphire seed. Unless the conditions are very carefully controlled, the boule can be compromised, distorted optically, become cloudy, or fracture because of impurities. The ones being made for Apple were far larger than any ever attempted before.
Silicon boules are grown to be made into chips.
The boules would be sawn by diamond blades into large sheets, then cut further into iPhone sized screens. Unfortunately, the production yields never reached the promised quantities to make it economically feasible for the maker. They over promised and under delivered. . . then tried to blame Apple for believing them.
As bad as Apple behaved GTAT acted just as stupid.
How did Apple behave badly? Should they have paid GT Technologies the money when they had NOT produced what they were promising??? Would YOU? That's called good money after bad where I come from. GT was not answering the questions with the right answers. . . and that is NOT allowed in big business. GT Tech made promises they could not keep and then was in a coverup mode and got caught at it. . . Apple had deadlines that had to be met. Those deadlines were why there was a $50 million penalty for GT not meeting THERE promised production schedules. There were other companies who WERE meeting their production schedules whose parts were going to need those sapphire screens. If the screens aren't delivered, then the losses could total BILLIONS.
Had they been under less pressure, I’m certain that those problems could have been beaten. Looks to me like uncontrolled cooling. When they make telescope mirrors (REALLY large pieces of glass), cooling can take weeks to months, a few degrees a day.
Everyone may just as well disregard the article in its entirety due to being a case of massive distortions, misrepresentations, and outright falsehoods. It appears as though the author of the article set out to spin the story to make Apple look good, but ended up botching the whole affair. Take the following statement in the article:
“A day before the talks for that agreement were supposed to take place, GTAT filed for bankruptcy. Later that month[...]Apple responded by telling the supplier to put on its “big boy pants” and accept what happened.”
The article is falsely saying the “big boy pants” comment by Apple occurred in October 2014, after GTAT filed for Chapter 11 bankruptcy protection. According to Court Docket: #0462 Document Name: Supplemental Declaration of Daniel W. Squiller in Support of Chapter 11 Petitions and First-Day Motions, the “big boy pants” comment by Apple was made a year earlier in October 2013 as GTAT attempted in vain to negotiate the terms of the Apple contracts with Apple.
The entire article is infested with these kinds of errors. Accordingly, the article is wholly unreliable and not to be trusted as a source of information.
If you want something made right give it to the Chinese.
I think Steve Jobs was sufficiently detail-oriented that he would have spent some time in their factory before investing $100M+ with them.
You have the whole situation backwards. Apple structured the negotiations and the final agreements in a way that was designed to reduce GTAT to the status of a captured supplier. Apple was also responsible for causing some 3 to 6 months of delay in the 12 month production schedule called for by the contract terms Apple dictated. Apple did so by failing to make the facility available on a timely basis and by failing to make reliable water and electrical power services available as required by the sapphire furnaces.
Apple did not do their due diligence. This company made the furnaces, not the final product. Poor decisions on both sides of the fence.
Apple used to be very very savy with logistics. It was their strongest suit. The very fact they got mixed up with this shows that they’ve lost something. Look at their board of directors. More like a political meeting that manufacturing muscle.
Well, it’s obvious that Apple wants sapphire screens. Do we know if they are working with another supplier for their next gen?
Apple has secured other sources for sufficient Sapphire for current products and Apple Watches, but not for making iPhone screens out of Sapphire.
Sorry, this is not Apple's modus operandi, The last time Apple tried "mentoring" it did not turn out well. It's called Google and Google burned them badly with using that position for industrial espionage to produce Android.
Growing crystals is not Apple's area of expertise so they went to a company who claimed to have that expertise and appeared to prove that capability. GT claimed they could scale their furnaces up to meet Apple's large capacity needs and made promises they could not keep. Apple us used to working with companies that keep those promises. GT discovered that growing boules that were 50% larger than those they had been growing was not as easy as they assumed, but kept on assuring Apple everything was on schedule. When Apple DID visit to inspect the boules, they found only a 10-20% usable output, which was not economical for the 100,000,000 screen units for which Apple had contracted. GT said they needed more time to "Get the bugs out of growing large boules, plus they needed the $186,000,000 payment just as if they were producing the product to specs. Apple said NO. As I said earlier, Apple had hard deadlines to meet, and GT was not meeting them and thought they could have months, if not a year, to work out their kinks. It just does not work that way in the upper stratosphere of business.
There was no "mentor" position here.
I believe you are right. However, some larger crystals just can't cool under one G at any temperature without fracturing after they reach a certain size. It could also be a stray vibration that sets up an unequal stress.
Glass is essentially an amorphous solid, similar to a super-cooled liquid, not a crystalline structure. But even some glasses cannot form large massive blocks naturally without cracking. I was studying volcanic glass for a book I am writing and there is a limit on the size an un-cracked piece of Obsidian can exist in nature without a crack, and it isn't very big. Gravity and other ground movement causes it to break under its own weight. Sapphire is a crystal and it needs internal support with such weight as well. This is a technology that is crying out for a zero G environment.
There is something wrong with your date of October 2013. That was the date of the original contract for the Sapphire manufacturing deal. It may be a typo in the court documents. Oh, and Squiller is dancing pretty damn fast to avoid insider trading charges, having dumped GTAT stock just in advance of the bankruptcy filing. He is blowing smoke and blame everywhere he can. Here are some earlier data from the "Insider Selling At GT Advanced Technologies Inc As Participants Request Privacy", October 14, 2014 Value Walk, that demonstrates that 2013 date cannot be a re-negotiation at all, because it's the date of the ORIGINAL CONTRACT, and Apple would not have been talking about "Pulling up your big boy pants" in any "re-negotiation, in October of 2013:
The Journal reports that GT Advanced Technologies Inc (NASDAQ:GTAT)’ chief operating officer Daniel Squiller, the man in charge of the Mesa, AZ sapphire production plant and the one with the most visibility into production problems, sold $1.2 million of stock in May and set up a plan under which he sold another $750,000 of shares months before the company announced its surprise bankruptcy.The Journal reports Squiller’s unloading of GT stock came after production benchmarks were missed and Apple began withholding payments.
Under the initial agreement with Apple, signed almost one year ago (note the date of this writing is October 14, 2014, so the contract had to be after October 14, 2013 and could not be "re-negotiated" in October 2013 as the court document states — Swordmaker), GT was to receive four $144.5 million prepayments that was considered a loan to build the factory. The prepayments were only to be paid after GT reached certain technical and financial milestones. The third payment, of $103 million, was due in February, but Apple did not make it until April, according to GT Advanced Technologies Inc's securities filings. The final installment of $139 million was due in April, according to a GT securities filing. But in August, GT said it expected the payment by October, but this payment was not made because GT did not meet contract requirements, the Journal said, citing people familiar with the matter.
The re-negotiation occurred earlier this year (around April) and was GTAT's attempt to allow the contract terms to slip by months to a year while Apple was to continue paying for product that would not be delivered. . . and for Apple to forgo to $50,000,000 penalty when GTAT failed to meet delivery schedules. This was a BUSINESS CONTRACT that GTAT wanted to be let out of to their advantage and Apple's very costly disadvantage in that Apple and MANY other suppliers were relying on GTAT to deliver on schedule. Apple's business model is built the Just In Time Delivery of component to an assembly plant. Apple pioneered this model and one supplier, GTAT, was throwing a monkey wrench into the works, crying about problems. . . demanding a contract "DO OVER" with new terms allowing higher percentage of failed boules, smaller boules with a far lower production capacity per boule at a higher cost per unit. Sorry, WhiskeyX, that doesn't cut it.
Apple did agree to make the February payment, despite the failure of GTAT to meet deadlines, on their assurances they would be able to catch up and meet schedules. However, they could not. Apple realized this and cancelled the contract and further payments on a product that was slipping farther and farther behind..
Many people were wondering why the iPhone 6 and 6 plus were delayed for two to three months, and what happened to the long expected sapphire screens. . . and the reason was that in less than a year, when it became obvious that GTAT could not deliver no their promises. Apple had to find a suitable alternate screen source from Asian sources and quickly ramp up production. That delay caused by GTAT probably cost BILLIONS in higher short order costs, delays, and revenue lost to competitors.
Oh BS. Apple originally approached GT with the intent to BUY furnaces. GT offered to make the sapphire instead. IF Apple wanted them to be a "captured supplier," they could have made them an offer and BOUGHT THEM. Their Market Cap is chicken feed for Apple. Apple's normal procedure for such is to buy the company they are interested in. . . not play shenanigans to force them into bankruptcy. That was Microsoft's ploy.
The delays came about because of boule failure rates far exceeding expectations when they scaled their furnaces up 50% to get the sizes Apple needed for economy of production. They thought the technology was easily scalable and apparently it is not so easy to get clear boules at the larger size without cracking. They were getting a 80-90% failure rate. Had that not occurred GTAT most likely would have met their schedules.
Thread on Freerepulbic: Apple, GT Advanced Technologies And The Boule Graveyard from SeekingAlpha.
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