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.
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.
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.
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.
"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.
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.
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.
> 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)
This is true, but it must of had aspirations of being a supplier or they would have said, "sorry production is beyond our area of competency, but we're happy to sell a supplier these furnaces".
I think that GT likely saw this as a low risk way to grow their business gambled and lost. Further, what does apple have to gain by GT filing bankruptcy? Looks like they pretty much got screwed too and are out hundreds of millions here.
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.
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 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 ). 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.
"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.
"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.
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...
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.
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.