While lawyers for bankrupt sapphire supplier GT Advanced confirmed previously that it had reached an agreement to repay Apple approximately $439 million, many details regarding what exactly went wrong in the partnership had not been disclosed publicly. Today we get what might be the clearest explanation yet of what happened between the two companies leading up to GTAT filing for Chapter 11 bankruptcy last month. In a declaration filed by COO of GT Advanced Daniel Squiller with the courts yesterday (via Fortune), the company outlines previously sealed info regarding its deal with Apple and terms of the deal that lead to GT’s bankruptcy filing.
When GTAT initially entered into negotiations to sell sapphire furnaces to Apple, it had no sense that, having borrowed hundreds of millions of dollars to pay for the components of more than 2,036 sapphire furnaces, it would end up being unable to meet its cost and production targets for reasons that it believes were beyond its control as well as unforeseen difficulties in scaling its technology to 262kg boules to meet evolving product specifications.
While noting that the deal was “an ambitious transaction for the production of sapphire in quantities, size and quality never before achieved,” the document reveals a number of strict terms Apple imposed in the deal that the company describes as limiting its ability to achieve Apple’s requirements for sapphire production. Here’s a few of the more interesting bits:
– the production of 262kg boules of sapphire could not be accomplished within the time frames the parties had agreed, and was more expensive than anticipated. These problems and difficulties resulted in a liquidity crisis at GTAT, which led to the commencement of these chapter 11 cases
– Because GTAT’s facility in Salem Massachusetts (the “Salem Facility”) was exclusively dedicated to the sapphire growth project with Apple, GTAT was unable to use that facility for other revenue streams
-GTAT did not select the fabrication equipment. GTAT was unable to negotiate changes to the pricing regime set forth in the Apple Agreements, and, therefore, GTAT was selling sapphire material at a substantial loss. GTAT’s losses would have increased substantially in 2015 when the price for finished sapphire material was scheduled to decrease under the agreements with Apple.
– To date, GTAT has incurred approximately $900 million in costs in connection with the Apple project (of which $439 million was funded by the Apple prepayment), and, if the pricing set forth in the Apple Agreements could not be renegotiated, GTAT would never realize a profit.
The report also notes that GTAT executives reached out to Apple prior to filing for bankruptcy to request pricing changes and revised terms to avoid going broke. Apple, according to the document, didn’t respond with a proposal that would meet the company’s needs: “While Apple responded with various proposals, after intense negotiations, none of Apple’s proposals solved the economic issues in an effective manner, and GTAT believed that acceptance of such proposals would have exposed GTAT to further risk.”
Following announcements from lawyers that Apple and GT Advanced would be parting ways, Apple issued a statement saying it put a lot of effort into an ambitious new sapphire manufacturing process with GTAT which is not ready for production.” It also said it would “help the GT Advanced employees who will be impacted by this find new jobs” and continue evaluating the company’s sapphire production.
The full document is embedded below:
[scribd id=244902464 key=key-nR86vGpvHhJNqiqLfXyT mode=scroll]
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So basically, even though the terms made fulfilling the contract impossible, they still agreed to do it?
it seems like it. I was trying to understand it all, but sounds like lofty ambitions on GTA’s part. and sounds like they needed one whole plant dedicated for Apple and couldn’t make what Apple wanted/they agreed to and then complained about not having the plant to use for other ventures.
Perhaps they thought they could do everything Apple wanted, figuring a deal with Apple was a golden ticket. but then cracked under pressure of completing the tasks/contract.
I agree that technically, GTA seems to be the authors of their own destruction by signing this contract, but philosophically, I think this is a huge mistake by Apple as well.
What is the point in creating such a hardball, “we (always) win, you (always) lose” kind of contract like this when it’s clear that it would never work? Just because this guy was foolish enough, and trusting enough to sign such a piece of poo contract, doesn’t mean that it makes any sense for Apple to offer such a crap deal in the first place.
I mean presumably they still need sapphire. Presumably, Apple is still interested in larger boules. But by playing hardball, everyone (except the top executives at each company of course) has now lost. No sapphire, no plant, no larger boules, and no jobs.
Seems pretty stupid of Apple to me.
Mr. Grey – Not sure why you place any blame on Apple here. Apple solicits for a sapphire producer. Here are our needs, can you supply this many for this price? It’s not up to anybody else to cover GTA’s fanny when they can’t produce. It was a hail mary play and like many before GTA, they failed. Suppliers pull this shit all the time when trying to get in with a new company. Low ball the bid to win the contract, then renegotiate later when they think they’re hooked. Unfortunately for GTA, Corning Glass – one of the most innovative companies in the world with the chops to back their shit up, stepped in and produced. That’s how business is done.
Why would someone do this if it was near impossible?
Unrealistic expectations and overestimating their ability to produce what had never been produced before.
In other words – GREED!
To lowball a contract, win it, renegotiate later. It’s done all the time, trick #1 in the supplier hand book.
No, basically they underestimated how difficult it would be to meet the terms (or overestimated their ability to accomplish what had never been done before) and Apple was unwilling to let them re-negotiate to terms they could meet.
Looking through the documents, it appears Apple did not deliver (The Mesa Facility Construction was months behind which Apple managed). GTAT should have at that time left the deal, since Apple failed on their promises to GTAT (on 2 parts, construction being behind and also not tooling the building according to GTAT specs), but they didn’t. After that GTAT had to spend a significant amount of capital retooling the facility, and rebuilding the furnaces because Apple used parts that didn’t meet GTAT’s specifications. Now GTAT wants to get out of the relationship with Apple and they’re planning on doing that by declaring Chapter 11 bankruptcy(restructuring). Of course this is just based on GTAT’s statements and nothing from Apple.
They should have never signed a contract if they could not deliver. This is why you have someone on the team that CAN foresee the cost, production, potential issues, and have a plan B. This all comes down to an issue of mismanagement.
GT was hungry and that Apple money and basically signed without reading,
They believed in their product, couldn’t achieve the product yield/unit cost they’d hoped they could, and couldn’t get Apple to allow for an undisclosed price increase that would have made GT profitable. They failed in their mission and nobody wanted to pay for their mistake. I almost lost a lot of money on GTAT. I’m glad I got out with a net profit when I did.
But the executives still made off like bandits selling off their stock just in time!
Did they? The CEO will probably be going to jail. Other officers that sold stock prior to the announcement might also. But cases aren’t built over night and it will take time to investigate. The lawyers will easily gobble up any cash they have left in their pockets.
They signed impossible to meet contracts because they knew a deal with Apple would make their company take off… But they did find the time to cash in right before the speculated sapphire product launches knowing full well those products had no sapphire in them.
Con men? Criminals? They went through hundreds of millions of other peoples money but always had time to add a few more to their personal piles. Wonder how they will try to blame Apple for their insider info.
WooHoo! I dodged that bullet! These guys offered me a sweet job and I almost took it… KARMA!