Behind Apple's Sapphire Screen Debacle

Frankie70 (803801) writes Apple invested more than $1 billion in an effort to make sapphire one of iPhone 6's selling point. But the iPhone 6 was released without the sapphire screen. GT Advanced Technologies, the small company chosen to supply Apple with enormous quantities of cheap sapphire, declared bankruptcy a month later. Recent documents from GT's bankruptcy proceedings, and conversations with people familiar with operations at Apple and GT, provide several clues as to what went wrong. GT said that to save costs, Apple decided not to install backup power supplies, and multiple outages ruined whole batches of sapphire. The terms Apple negotiated committed GT to supplying a huge amount of sapphire, but put Apple under no obligation to buy it. In its bankruptcy documents, GT would later accuse Apple of using "bait-and-switch" tactics, and said the terms of the deal were "onerous and massively one-sided."

Comments

Than don't sign the contract

[MarcNicholas]

Agreed. Plus I believe Apple merely lent money and secured loans for GT -- they didn't invest in them and push them around; they're a public company.

Jack Tramiel

[Neo-Rio-101]

Sounds an awful lot like Jack Tramiel's questionable business practices while at Commodore:

1. Make a large order to a supplier for parts
2. Supplier runs up costs and works to complete the order
3. Fail to pay the supplier in a timely manner
4. Let the supplier go bankrupt
5. Buy the supplier at liquidated prices
6. Profit!

Re:Jack Tramiel

[Bogtha]

That doesn't sound like this situation at all.

Apple loaned GT more than half a billion dollars to build the plant. When GT failed to deliver, Apple stopped giving them money. When GT ran into financial difficulties, Apple offered to give them more money and defer repayments to keep them afloat.

What did you expect Apple to do? Just keep on giving them more money indefinitely without getting anything in return?

Re:Then don't sign the contract

[Dogtanian]

it would take an extremely good businessman to [terminate] at that point, most would already be counting the money Apple would make them. But if a deal is wrong you need to walk away. They're hardly the first company to fail because they made a bad decision to take on a contract they weren't ready for.

The Register ran an opinion piece when the details on this story were first appearing a couple of weeks back. It noted an almost unbelievable point others have commented on elsewhere in this thread:-

[The usual form of the contract is that companies agree] to build whatever to [the agreed] standard and by that time. Excellent. If we do so then you have to either take them and pay for them or if you don't take them you've still got to pay for them. If we don't make them to standard or in time then here's the damages we'll pay. But if we hit the spot then you're committed to pay for them.

But here's what it actually did sign up to:

Those agreements, said Daniel Squiller, GTAT's chief operating officer, were almost entirely one-sided. By the time Cupertino's lawyers were done, he said, GTAT was presented with an deal that, among other terms, required it to: commit to producing millions of units of sapphire, even though Apple was not obligated to buy any of them.

Something the author describes as "sheer lunacy". Either they were utterly, *utterly* struck blind or there is something strange and dubious going on. Oddly, the "struck blind" explanation isn't as improbable going by a comment in the letters section (from "Edwin"):-

The sexiness of having Apple (or some other A-list brand) as a major customer is extremely seductive to many 'executives'. Not only because it's great advertising, but the bolstering of the supplier's individual executive ego.

Re:Then don't sign the contract

[Dogtanian]

Eventually they dropped Disney when it was realized the bragging rights were not worth the abuse.

The problem is that- depending upon the contract- the smaller company being screwed over is now in a position where they *can't* pull out of the contract because their large customer has them over a barrel. They've expanded and/or dedicated significant resources to supplying and pleasing that customer they thought would be a cash cow- possibly dropping other markets- and if the large company was to terminate the contract as threatened, they'd then have a massive production operation to fund with no-one to buy the end result.

It's either that quick death, or the slow death of having your margins ruthlessly squeezed beyond a sustainable point.

From another letter in the comments section of that article (from "Mugs"):-

I was once stuck on a train with a colleague ranting about a similar contract. The contract was in the 40s between Woolworth and his grandfather who ran a broom factory. Woolies started off with a small order, gradually increased until they took all the output then drove the price down until the factory went bust.

This was behaviour I was already familiar with relating to Wal-Mart, but it shows you it happened even back then. You can bet your life that in every case, the large customer knew exactly how this was going to play out in advance.

See this:- The Wal-Mart you don't know
And this:- The Man Who Said "No" to Wal-Mart