GT Advanced's Failure Reveals the High Stakes Risk of Becoming an Apple Supplier

[IJ Reilly]

I'll take GTAT's contentions with a grain of salt if you promise to take Apples reply to GTAT's contention with an equal amount of salt. Deal?

I have to promise? Okay then, cross my heart and hope to die. Happy?

I've read a number of statements on these threads echoing that same sentiment. I always feel like they're a bit of a false argument.

I never said that Apple wanted GT to fail.

I never said that Apple intended for GT to fail.

I do think that if GT was put into a bad enough situation by a "bait and switch"contract, it did lead them into bankruptcy.

I'm not try to get into a semantic argument here. If I shoot you, I intend for you to die. If I get drunk and accidentally run over you, even if it was never my intention nor my wish for you to die, your death is still on my hands. No?

The problem with this reasoning is the lack of reasoning. Apple put hundreds of millions of their own dollars on the line towards manufacturing a product they clearly wanted. The concept that they made it virtually impossible for GT to fulfill this desire simply makes no sense. I suppose it might if you believe that Apple is totally reckless or stupid. Is that your explanation?

 

[z chamber]

I have to promise? Okay then, cross my heart and hope to die. Happy?

For now. But don't leave the state.

The problem with this reasoning is the lack of reasoning. Apple put hundreds of millions of their own dollars on the line towards manufacturing a product they clearly wanted. The concept that they made it virtually impossible for GT to fulfill this desire simply makes no sense. I suppose it might if you believe that Apple is totally reckless or stupid. Is that your explanation?

Millions of their own dollars towards manufacturing a product they wanted, made on the equipment Apple chose, made the way Apple wanted. With Apple occupying nearly a third of the staff's time.

"nearly a third of the staff’s time was spent interacting with a delegation from Apple from its supply chain, manufacturing and quality engineering team.

Like GT doesn't even have any other customers.

Then Apple tweaked the deal: GTAT would buy 2,036 furnaces, borrowing the money from Apple; in return it would only supply Apple, and nobody else in the consumer electronics market.

I'll loan you the money to finish your work, in return you will allow me to monopolize your products. You signed on to this deal in part to be recognized by future clients, but you can't capitalize on it because your locked into Apples fold. Your welcome.

Daniel Squiller, GTAT’s chief operating officer, said that when GTAT queried the many terms in the contract - and their clear tilt in Apple’s favour - it was told “similar terms are required for other Apple suppliers”.

Foxconn's okay with it. So Big boy pants.

Quote source:
http://www.theguardian.com/technology/2014/nov/14/sapphire-gt-advanced--brutal-apple-supply-chain

I know you want me to take Gt's comments with salt, but Squiller was there when all this went down. Please feel free to add Tim Cook or Phil Schiller's rebuttal.

Not stupid. Maybe reckless. Certainly tone deaf.

 

[IJ Reilly]

Millions of their own dollars towards manufacturing a product they wanted, made on the equipment Apple chose, made the way Apple wanted. With Apple occupying nearly a third of the staff's time.

Hundreds of millions, to be precise. I don't know what we're supposed to make of the other statements, lacking as they are in any context beyond what GT wants us to think, or believe. This is obviously an exercise in corporate politics. We don't know the compete story, and we may never know, so to me it seems foolish to take sides on the basis of obvious tactical maneuvering by both parties, and woefully incomplete information. As for "tone deaf," I don't see how this concept applies at all.

 

[SPUY767]

Even if they can make enough products that satisfies Apple, there is no guarantee that Apple would buy from them. They could still go broke even if thy have met Apple's standard. The risk they taken is too high.

You can argue that Apple do the same thing to other supplier, but suppliers like Samsung and Foxcoon are large enough to handle the risk. I think GT Advance is not big enough to absorb all the risks

I have negotiated business deals before. It is fairly common practice to goad your opposite into taking a deal by suggesting that he is cowardly. If Apple's terms were as onerous as GT has suggested, then they should have backed away from the table. It sounds to me like they wanted to play in the majors so badly that they let it all hang out and lost.

Hindsight is 20/20.

 

[z chamber]

Hundreds of millions, to be precise. I don't know what we're supposed to make of the other statements, lacking as they are in any context beyond what GT wants us to think, or believe. This is obviously an exercise in corporate politics. We don't know the compete story, and we may never know, so to me it seems foolish to take sides on the basis of obvious tactical maneuvering by both parties, and woefully incomplete information. As for "tone deaf," I don't see how this concept applies at all.

Considering how much money Apple spent on beats audio and the U2 album, I'm unmoved by how much money they spent on the sapphire screens. Also I believe most of the money were loans with strings attached and not grants.

The story is incomplete, but that doesn't invalidate GTs side of it and I look forward to Cook or Shillers affidavit. Assuming they want to talk.

Okay forget tone deaf. How about ignorant or oblivious to the fact that you can only squeeze a thing so much before it pops.

 

[IJ Reilly]

Considering how much money Apple spent on beats audio and the U2 album, I'm unmoved by how much money they spent on the sapphire screens. Also I believe most of the money were loans with strings attached and not grants.

The story is incomplete but that doesn't invalidate GT side of it and I look forward to Cook or Shillers affidavit. Assuming they want to talk.

Okay forget tone deaf. How about ignorant or oblivious to the fact that you can only squeeze a thing so much before it pops.

Yes, obviously Apple is run by a bunch of blithering idiots. It's the only possible explanation.

 

[z chamber]

Yes, obviously Apple is run by a bunch of blithering idiots. It's the only possible explanation.

Not at all. They are run by a bunch of loving saints who look for stray homeless companies to love, nurture and care for. Didn't I make that clear?

 

[a0me]

Here's a moral of this story: Don't sign a contract with an industry giant unless you are absolutely 100% certain you can fulfill it, especially if it contains terms that are onerous and one sided and has severe penalties for failure.

You can be almost 100% certain that contracts with industry giants will be onerous and one sided.

 

[TimelessOne]

The entire GT Advance mess just is more another repeat of what Apple was doing and chances are still doing in the Flash memory department in years pass.
That is push for deals where the memory suppilers would agree to be able to make and many of them would make for Apple a lot of flash memory. Apple would then after wards no we do not need all that to cause the market to get flooded with flash memory which Apple would turn around and buy up the same flash memory at a lower price as manufactures were force to start dumping it.

This made worse by Apple would cause the same manufactures to get the memory tied up where they could not sell it making it harder for apple competitors get what they needed locked down. Basically in that market Apple abused its size got manufactures to tie up a large chunk of their resources on the verbal promise they will buy X amount so other deals turned down. Then turn around and say na and handle the fact that the supplies have to be dumped at pennies on the dollar.

It looks like a repeat of the NAND memory of the pass.

 

[MacSince1990]

Because they were blinded by greed. That greed caused them to go out of business. There was no risk because THEY COULD HAVE BACKED OUT of signing the contract.

This isn't really a logical thought process. Most business ventures involve some (usually moderate) degree of risk. This happened to be high risk. It happens. It isn't ALWAYS the company's fault. And it certainly wasn't the fault of the bottom 98-99% of the company's employees who weren't making the calls but are affected by this the most.

 

[ForkHandles]

In my business I always pay my suppliers on production of the goods. In my experience soon after I lose the good will of suppliers, I start to lose the loyalty of my customers.

This fiasco isn't Apple's fault, however they certainly could have done more to prevent the situation from happening. I think that they should carry some of the guilt for the fine men and women who lost their jobs over this.

No business can survive long term if their 'purpose' is to make money. Apples purpose is to design, build and distribute fantastic products that their customers feel love for. If they all keep this dear to their hearts I am sure they will remain at the top for some considerable years to come.

However I think the negotiators on this deal went off 'purpose' and subsequently created the image of a company who are primarily interested in squeezing their suppliers too hard for money. Hence this part of the business failed them.

Apple will continue to offer great opportunities to small / medium sized businesses because of their market share. I hope this fiasco will help them to see the bigger picture, especially when dealing with home grown jobs.

 

[hNicolas]

Guys, I'm an Apple supporter too, but the fact is that there aren't any American companies or any Western companies that can deal with Apple on a large scale.

Apple and others have become accustomed to dealing with suppliers that can increase their work force by thousands overnight. Very strict quality control, production schedules, etc., can also be enforced. Even though Apple has tried to improve working conditions in their contractors facilities, Foxconn and other suppliers in Asia can run a pretty tight ship. You will be hard pressed to find any Western manufacturer or workforce that will tolerate such conditions.

The end result of the above equals high quality and very high production rates at low cost. Under such conditions no American manufacturer can thrive, let alone survive without some kind of relief from Apple. To expect any American or other Western company to fulfill contractual obligations (as stated in the story) on par with a Chinese facility is absurd. GT Technologies just happened to be in the wrong place at the wrong time.

 

[cjmillsnun]

Respectfully, contracts that businesses sign -- particularly contracts that affect a business entity's core operation -- are quite different and treated quite differently from contracts between corporations and individuals. As a corporate lawyer, a big part of my job is making sure to advise my client on the worst-case scenario that could follow from a particular contract. On a contract of material significant to the client, that review will be clause-by-clause, and will spell out exactly what the contract allows the counterparty to do. It therefore is almost inconceivable that GT didn't understand what it was agreeing to do, and what power it was handing over to Apple. The situation GT finds itself in right now was because it chose to accept onerous contract terms in the hope of fabulous success if things worked out a certain way. Put differently, it knew or should have known that it was bargaining for a high-risk, high-reward scenario. None of that is Apple's fault.

And finally we have a valid answer, from a qualified professional.

----------

Guys, I'm an Apple supporter too, but the fact is that there aren't any American companies or any Western companies that can deal with Apple on a large scale.

Apple and others have become accustomed to dealing with suppliers that can increase their work force by thousands overnight. Very strict quality control, production schedules, etc., can also be enforced. Even though Apple has tried to improve working conditions in their contractors facilities, Foxconn and other suppliers in Asia can run a pretty tight ship. You will be hard pressed to find any Western manufacturer or workforce that will tolerate such conditions.

The end result of the above equals high quality and very high production rates at low cost. Under such conditions no American manufacturer can thrive, let alone survive without some kind of relief from Apple. To expect any American or other Western company to fulfill contractual obligations (as stated in the story) on par with a Chinese facility is absurd. GT Technologies just happened to be in the wrong place at the wrong time.

I can give you an example of an American manufacturer that supplies Apple very successfully. Corning. So US manufacturers CAN do it.

 

[egdiroh]

GTAT fraud.

The company (and/or some of it's top execs) is currently under investigation, because the top execs knew they had failed, but scheduled a stock sale for when the stock would be the highest before their failure would become public.

Once they had this exit strategy in place did they bust their humps trying to get the ship back in order? Why would it have been worthwhile for them to do that, especially when they could cast Apple as the bad guys and go hide in bankruptcy?

So these guys headed down a course in which they have no real incentive to fix the issues they are having with a scape goat to blame for the failure. Which leaves one question? Was this the plan from the beginning or did they ever really believe that they could achieve their objectives?

 

[IJ Reilly]

Not at all. They are run by a bunch of loving saints who look for stray homeless companies to love, nurture and care for. Didn't I make that clear?

Oblivious pretty much covered it.

 

[hNicolas]

And finally we have a valid answer, from a qualified professional.

----------



I can give you an example of an American manufacturer that supplies Apple very successfully. Corning. So US manufacturers CAN do it.

There is no comparison there. You are talking about a company that was bigger than Apple at the time and definitely didn't need Apple to start up or survive. I'm also pretty sure that Corning had more bargaining power than Apple. Heck, at the time Apple couldn't even get carriers on board. So, yeah, Apple would have taken any crap Corning threw at them to produce the iPhones.

 

[diipii]

Apple's black sub text.

 

[Bobby Corwen]

I dont understand why all this happened without being able to tell if you're gonna succeed or not.

Each furnace and machine makes a certain amount at a certain quality and consistency.

Wasn't it possible to just do the math?

I mean make a few chunks of sapphire and test them out as screens. If it doesn't work as it should, don't go forth with the deals, plans and contracts.

Why did they sign the contracts and do the negotiations before they were sure it could all happen?

You know you have this many furnaces x this amount of time and you can make x amount of panels!!

What was the inconsistency? I don't get it. Either you know you can or you can't do it, or you don't start the ball rolling then until you figure it out...

 

[Keirasplace]

I dont understand why all this happened without being able to tell if you're gonna succeed or not.

Each furnace and machine makes a certain amount at a certain quality and consistency.

Wasn't it possible to just do the math?

I mean make a few chunks of sapphire and test them out as screens. If it doesn't work as it should, don't go forth with the deals, plans and contracts.

Why did they sign the contracts and do the negotiations before they were sure it could all happen?

You know you have this many furnaces x this amount of time and you can make x amount of panels!!

What was the inconsistency? I don't get it. Either you know you can or you can't do it, or you don't start the ball rolling then until you figure it out...

I'm guessing entrants to the furnace, the quality of the furnaces themselves and the process itself isn't so foolproof they can put an idiot on it, use any furnace, and get a good result. GTAT have had problems with their furnaces in 2013 with other clients... So, that may be part of the issue...

They certainly had smaller batches done as a proof of concept in 2013 before Apple signed the contract; or Apple would not have signed.

But, small batches usually can be babied with the best personnel, the best entrants, the best equipment, the best support equipment. This is harder to get when you have 1000 furnaces of questionable reliability.

----------

There is no comparison there. You are talking about a company that was bigger than Apple at the time and definitely didn't need Apple to start up or survive. I'm also pretty sure that Corning had more bargaining power than Apple. Heck, at the time Apple couldn't even get carriers on board. So, yeah, Apple would have taken any crap Corning threw at them to produce the iPhones.

Or maybe Corning didn't make crap and that's why Apple went there . Guessing Apple wouldn't have put crap out in their first product; that's doesn't seem something they would do.

Also, when your the buyer, usually you have more power by default no matter what the size of your company is. You're paying money to get something delivered with quality X. If you don't deliver you are in breach of this contract and the buyer can easily go to court and win. That wouldn't give you your product, but at least your not out of a bunch of money.

Dealing with a solid established company like Corning (and not a fly by your seat company) and buying something that was not some huge gambling coup for Corning (it didn't require a huge investment and was up its alley already), means the risk for Apple and Corning itself was rather low.

 

[hNicolas]

I'm guessing entrants to the furnace, the quality of the furnaces themselves and the process itself isn't so foolproof they can put an idiot on it, use any furnace, and get a good result. GTAT have had problems with their furnaces in 2013 with other clients... So, that may be part of the issue...

They certainly had smaller batches done as a proof of concept in 2013 before Apple signed the contract; or Apple would not have signed.

But, small batches usually can be babied with the best personnel, the best entrants, the best equipment, the best support equipment. This is harder to get when you have 1000 furnaces of questionable reliability.

----------



Or maybe Corning didn't make crap and that's why Apple went there . Guessing Apple wouldn't have put crap out in their first product; that's doesn't seem something they would do.

Also, when your the buyer, usually you have more power by default no matter what the size of your company is. You're paying money to get something delivered with quality X. If you don't deliver you are in breach of this contract and the buyer can easily go to court and win. That wouldn't give you your product, but at least your not out of a bunch of money.

Dealing with a solid established company like Corning (and not a fly by your seat company) and buying something that was not some huge gambling coup for Corning (it didn't require a huge investment and was up its alley already), means the risk for Apple and Corning itself was rather low.

Steve Jobs had to practically beg Corning to manufacture what he needed and to try and meet his demands. Don't think he had bargaining power when there wasn't much choice. Corning was not producing an untested product, and I'm sure they would not sign a deal which would give the buyer final say regarding product quality approval. Such deals are usually done under independently approved standards. So, if you produce a product within approved guidelines the buyer must accept delivery of the goods. It is almost unheard of where the buyer has total control over final approval. We don't know all the contract details, but it seems like GT signed a deal that many well established companies would not have. The only way we will know the full story is if this is not hushed up, and legal analysis is done. Apple would not have put up a half billion dollars blindly. I believe that both sides may have screwed up a little.

 

[Flight Plan]

...Like GT doesn't even have any other customers...

I read your comment as facetiousness, and would like to make a correction:

The contract with GT said that GT had to service Apple first. If you can't keep your commitments to "secondary" customers, then you'll often miss out on those contracts.

So in a way...it's possible that no, they didn't "really" have other customers.

 

[mtneer]

Apple has many suppliers, some of whom are also struggling to meet Apple's demands - take Intel as an example. The article does not touch upon on how these other companies are able to survive and stave off disaster. Maybe there was something inherent with GTAT; not something to do with being an "Apple supplier".

 

[TimelessOne]

Apple has many suppliers, some of whom are also struggling to meet Apple's demands - take Intel as an example. The article does not touch upon on how these other companies are able to survive and stave off disaster. Maybe there was something inherent with GTAT; not something to do with being an "Apple supplier".

Well I would not call Intel a good example. Apple needs Intel more than Intel needs apple. Chances are Intel holds most of the cards.

 

[blue22]

clarification...

You're kidding, right?

They aren't coming. Not any time soon. The best hope for this is that someone buys up some of these furnaces -- they should be relatively cheap now that the market is flooded with them -- and figures out how to do what GTAT couldn't: Make screen-quality sapphire at scale for a reasonable price. Since this presumably won't be Apple it can be a niche phone so the scale won't need to be nearly as big, the price can be higher and probably the quality doesn't have to be great. And the cheap price of the furnaces should help.

As a matter of fact I was kidding. But in hindsight I could've made that a tad more obvious though, maybe with this emoticon: . Thanks for not pouncing on me and providing a genuinely constructive reply to a question that I'm sure plenty of others were actually wondering themselves.

And I agree with the earlier post you remarked on: the GTAT decision makers did make out like bandits with this entire debacle.

 

[Tycho24]

Some people here don't want to hear that but regardless of GT Advanced having gambled to high, Apple's department responsible for the deal really screwed up.

Since Apple was in the more powerful position, they should have done something to prevent GTA from going down. Now it's just a huge mess with a lot of finger-pointing, let alone the negative media coverage.

All this seems very unprofessional to me. However, we do not know the whole story.

Lol....
That is preposterous. Obviously, Apple has made MANY similar deals... yet this is the first & only time we have heard of a company being so completely torn apart by such a deal.
Makes it fairly obvious who was the point of failure.
But besides ponying up the money to buy their equipment, hire their employees, and create their entire new businesses plan moving forward and single handedly make it possible, you think they should've ALSO made a safety net in case they couldn't deliver on their promises?? Hahahaha!!!!
Exactly how much more coddling should they do??
Both companies deserved to bear SOME risk, despite what you might think.