GT Advanced Reveals One-Sided Story of Failed Sapphire Deal with Apple

Sapphire stress test

When GT Advanced filed for bankruptcy on October 6, investors were shocked to find that the reason behind the filing was “burdensome” contract terms. But no one knew the exact terms, and both Apple and GT Advanced quickly asked the court to seal the documents. Well, today the curtain has fallen, and the Wall Street Journal had the chance to look at the unsealed documents.

As it turns out, GT Advanced is accusing Apple of using the “classic bait-and-switch” strategy. The two inked a contract about a year ago and agreed that GT Advanced would supply material for Apple’s smartphones.

The contract, however, was “one-sided,” according GT Advanced COO Daniel Squiller, whose report on the circumstances that led the company to bankruptcy was unveiled today. We have previously reported that trouble began as early as February, as had a couple of missteps involving the Arizona plant and power supply.

But there is much more than that, according to GT Advanced’s COO. You may recall that GT Advanced ended the second quarter with $333 million in cash and cash equivalents and said in August that the company was on track to end the year with about $400 million in cash.

The fact is, the company’s chief financial officer Raja Bal said during a conference call that the Q2 expenses were greater than anticipated, but they reflected the complexity and challenges the company faced while ramping the operation. GT Advanced CEO Tom Gutierrez highlighted the slow speed at which things were moving forward, citing the same reasons.

Well, you know what happened: the company finished the third quarter with about $85 million and filed for bankruptcy to “protect the company from bleeding.”

The sapphire maker’s COO sheds light on their point of view: Apple is to blame for cost overruns and additional expenses that made the business of manufacturing sapphire unprofitable.

“Apple embedded itself into the operations of GTAT at the Mesa (Arizona) facility in a manner that has forced GTAT to divert an inordinate amount of its cash and corporate resources to its operations at the Mesa facility, and affected GTAT’s viability,” Squiller wrote.

Apple also embedded itself in GTAT’s facility in Salem, Massachusetts, that took the function of an experimental research and development center for the Apple project. Consequently, GTAT has been unable to use that facility for other revenue streams.

GTAT’s fabrication cost of the sapphire material grown in the Mesa facility and Salem facility furnaces are higher than envisioned, largely because the majority of the fabrication equipment (in contrast to “growth equipment”, i.e. the furnaces) selected by Apple for sapphire material could not economically produce a product that Apple would accept. Moreover, GTAT was required to obtain Apple’s consent before it could make changes to equipment or processes, and Apple, at least initially, was not willing to permit fabrication equipment changes that would economically produce acceptable product.

[…] To date, GTAT has incurred approximately $900 million in costs in connection with the Apple project, and, at Apple’s dictated pricing, GTAT would never realize a profit.

When GTAT’s management expressed obvious concerns to Apple regarding the deal terms during the contract negotiations, Apple responded that similar terms are required for other Apple suppliers and that GTAT should: “Put on your big boy pants and accept the agreement.”

So in the end, from GT Advanced’s perspective, it’s Apple to blame, as the sapphire manufacturer tried to meet continually changing product specifications. But it ultimately failed, as the iPhone 6 and iPhone 6 Plus show.

We are certainly looking forward to reading Apple’s stance on the matter.