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Apple to sapphire supplier: “Put on your big boy pants and accept the agreement”

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Since GT Advanced Technologies declared bankruptcy in early October, the vast majority of documents detailing its deal with Apple to supply sapphire crystal have been under seal.

On Tuesday, Judge Henry Boroff issued an order unsealing a statement signed by GTAT COO Daniel Squiller as well as its attached documents, which include details on the reasons GTAT filed for bankruptcy and its business relationship with Apple, its largest creditor. On Friday, the Squiller statement entered the public record.

The statement includes several documents that are rarely seen, including a complete Apple confidentiality agreement as well as a “master development and supply agreement.” Squiller pointed to those documents as evidence that GTAT’s deal with Apple was unsustainable and the primary reason that the company declared bankruptcy.

Even if you’re uninterested in GT Advanced Technologies, there are a number of details about how much power Apple exercises over its suppliers.

Squiller says that Apple did not ever really enter into negotiations, warning that GTAT’s managers should “not waste their time” negotiating because Apple does not negotiate with its suppliers. According to GTAT, after the company balked, Apple told GTAT that its terms are standard for other Apple suppliers and that GTAT should “put on your big boy pants and accept the agreement.”

Because most of Apple’s hardware suppliers are based in Asia, it’s hard to tell whether the details described in the GTAT contracts with Apple are standard, but it’s not hard to believe that Apple has a lot of power over its suppliers and largely gets to dictate its terms.

Some of the terms include:

  • A $50 million penalty for breach of confidentiality per occurrence.
  • No manufacturing processes could be modified by GTAT without Apple’s prior consent but GTAT must immediately implement Apple’s suggestions.
  • GTAT must fulfill any purchase order placed by Apple on the date selected by Apple or purchase substitute goods at GTAT’s expense.

In addition, because of the way the loan was structured, the famous Mesa, Arizona plant was allegedly built without GTAT’s input, which resulted in the decision to forgo essential backup power generators because they were too expensive. Apple also embedded its own employees at the Mesa plant who “assumed a level of authority” and had to be reminded not to order GTAT employees around.

Squiller said that initially [company]Apple[/company] wanted to purchase sapphire furnaces from GTAT, but ended up offering a different deal: A new structure where GTAT borrowed money from Apple to purchase sapphire furnace components in order to supply Apple with sapphire crystal. Apple also prohibited GTAT from doing business with other manufacturers or suppliers working in consumer electronics.

In his statement, Squiller called Apple’s tactics a “classic bait-and-switch strategy” and described the final agreement as “onerous and massively one-sided.” Making things worse for GTAT, if Apple decided not to use sapphire crystal in upcoming products — GTAT sapphire is not used in the iPhone 6 — GTAT would be required to fully repay the loan in cash.

Apple ultimately withheld a final prepayment to GTAT of $139 million.

The unsealed documents are unlikely to be used by either side for leverage. Last month, Apple and GTAT reached a new agreement that was described as “an amicable parting of the ways” by a GTAT attorney. In that agreement, GTAT will repay $439 million to Apple over four years interest-free.

GTAT and Apple agreed earlier this week that the newly unsealed information will not affect their new deal. In October, GTAT requested the documents that went public today remain sealed or it could face a $50 million penalty for violating disclosure agreements with Apple.

An unredacted version of a document called “Statement of Work #1 to the Master Development and Supply Agreement” remained under seal because it contained trade secrets, including how much sapphire Apple wanted to purchase and the amount it would pay.

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32 Responses to “Apple to sapphire supplier: “Put on your big boy pants and accept the agreement””

  1. Stu kellerma

    Apple should acquire,GTAT, and stop,screwing shareholders of,GTAT. Typical bullying tactics of large corporations, not allowing suppliers to make margins. Kind of reminds me of the big three auto makers !!!!!

  2. Glenn Turner

    Maybe we should get our little boy pants out, repeal all our child labor laws, end foster care programs, close the orphanages and juvenile detention centers, gather up all those pesky Latino kids that keep sneaking across the border, build one giant Foxconn type labor camp, lease it to Apple for $1 a year, and bring all those great Apple contracts back to America.

  3. Enrico Caruso

    Oh, boo-freaking-hoo. What GTAT, did you get distracted by a bumblebee when you were signing the agreement? If the terms of the contract were so onerous, then you could have, oh, I don’t know, NOT SIGNED THE CONTRACT.

  4. gsrintec

    There is still more to this strange tale than has been told so far. It strikes me that Apple didn’t vet this company as carefully as they might have. It would also be interesting to know how close GTAT got to actually producing sapphire crystals that would meet Apple specs (presumably for Iphone 6, 6+). If Apple employees were embedded into the operation as the article claims, why wouldn’t some of the issues been resolved or the agreement reworked prior to GTAT declaring bankruptcy (to Apple’s surprise apparently). And finally, if Apple was so deeply involved in this effort why didn’t they simply buy out the company or the sapphire production part of it and carry on, perhaps to spin it off later.

  5. eswinson

    It’s not in Apple’s best interest to run their suppliers into the ground finacially. But it is in their best interest to force them to run lean and efficiently. I’m sure, unless Apple performed some massive miscalculations, the contract would have proven to be beneficial to both companies. Strict and unforgiving but beneficial. Unfortunately, GTAT was mismanaged and probably made promises they could not honor in order to close the deal. For GTAT to come back and complain about the terms now and cite the fact that the sapphire boules Apple required had never been made before ignores the fact that at some point they not only agreed, but contractually obligated themselves to those terms and deliverables. It’s not like they didn’t know their costs structure and production capabilities. It’s their business to know these things.

    • James Katt

      GTAT COULD NOT MAKE ENOUGH SAPPHIRE in time for Apple’s needs. It needed to make 250 pound Sapphire Boules for Apple which is twice as large as what everyone else makes in the world. GTAT did not realize these could not be made in the time frame and mass quantities Apple needed. GTAT needed larger furnaces than it got. GTAT did not realize it needed more diamond saws to cut these boules. GTAT ultimately needed more than $1 Billion to do what Apple needed. Instead GTAT badly underestimated the budget it needed. It settled for $500 million from Apple.

    • Glenn Turner

      Chapter 11…If the business is insolvent the bankruptcy restructuring may result in the company’s owners being left with nothing; instead, the owners’ rights and interests are ended and the company’s creditors are left with ownership of the newly reorganized company.

  6. The points are all from GTAT.

    Worth noting:
    1) GTAT was on the verge of bankruptcy when they signed.
    2) Maybe that is why they agreed to onerous terms.
    3) Maybe that is why Apple insisted in so much control.
    Worth considering:
    1) Why don’t other Apple suppliers go bankrupt 12 months into a contract with Apple?
    2) Maybe Apple and GTAT took risk to something great: Biggest sapphire boules in the world, made in the USA, rescue a failing company, save US jobs. Risk means you might fail.
    3) Considering GTAT was nearly bankrupt when Apple stepped, maybe their management is not so great. Maybe it was not just bad luck.
    4) Maybe both are a fault.

    • Glenn Turner

      Maybe we should get our little boy pants on, repeal child labor laws, build Foxconn type labor camps, close the orphanages, end foster care programs, and bring all those great Apple contracts and jobs back to America.

  7. billricksteve

    Funny that so many believe this executive from GTAT, which is being investigated by the SEC for insider trading amd market manipulation. This guy sold millions of dollars of stock in the days and months leading up to the bankruptcy, including in late August, when he gave a talk pumping up GTAT, saying it was in great financial shape – just a few weeks later the company was bankrupt.

    It’s also funny that this story doesn’t give Apple’s side, in the papers that Apple filed. For one thing, Apple put $2 billion dollars at risk in the deal, and had to have some control over GTAT. As it turned out, GTAT was a sham that made promises and couldn’t fulfill them – promises of being able to manufacture quality sapphire, while at the same time their executives were using the Aple deal to boost the stock price, and selling millions of dollars worth of shares. It’s clear that Apple shouldn’t have done business with such people at all, but if they did, they neeed to keep a tight reign on them.

  8. Fridolin Groenemeyer

    Shows that negotiating without any concern for the business partner is not always the best strategy. Sure GTAT is ruined now, but Apple doesn’t get the glass they wanted either. Hopefully they will learn something from that.

  9. bill smith

    Why would someone be so dumb as to sign an agreement that they considered to be onerous and massively one-sided?

    Sounds to me like Squiller needs to be replaced, maybe several years ago.

  10. If AAPL was run like the US Government they’d have shoveled money at GTAT to get the process going then let them fold. I’m guessing that GTAT didn’t realize that AAPL is not the US Government and they actually expect their suppliers to do what is specified in a contract. Might explain why my AAPL stock is doing reasonably well over the past several decades.

  11. greenbelt2csp

    If you don’t like the terms, don’t sign it. It doesn’t matter what Apple’s terms were, if they weren’t good for GTAT, then they shouldn’t have signed it. It’s not like the terms were changed after the papers were signed.

  12. stanluca

    It’s really shocking to me that GTAT, a publicly traded company, would enter into the agreement and then later complain about it. It’s a free country and they have every right to turn down the offer. It is also disgusting how GTAT management sold their own stocks taking in millions and no one has file criminal charges. APPL is doing what every smart business does and protecting their own interests. As an APPL share holder, I am quite impressed with their business decisions.

  13. If the media helps by spreading this story about Apple’s abusive tactics, it will be Apple looking for a fresh pair of pants. Smart suppliers will refuse Apple’s onerous terms and conditions, and consumers should boycott the brand until this is appropriately settled.

    • Smart suppliers will refuse Apple’s onerous terms and conditions…”

      Uh, they always could, including GTAT. It’s not like these were secret terms that the vendor got to see only after they signed. All businesses tell vendors what they are looking for and establish contractural financial penalties for non-compliance. It’s then the vendor’s responsibility to decide whether they can meet those terms, or tell the business in question to go pound sand.

      The way I hear it, GTAT’s business (mostly for solar cells and the like) was in trouble before Apple ever knocked on their door. Management signed on the dotted line, and when it became clear (to them) they couldn’t deliver, they sold their GTAT stock before the inevitable crash-and-burn resulted. And since then they’ve been hoping to get away with that bit of chutzpah by pointing fingers at everyone but themselves.

      Frankly, they belong in jail for ripping off their stockholders. But we’ll let the SEC sort that out.