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GT Advanced Bankruptcy Offers Warning to Apple Suppliers

GT Advanced Bankruptcy Offers Warning to Apple Suppliers

By Reuters | Updated: 9 October 2014 09:40 IST

The financial implosion of Apple Inc supplier GT Advanced Technologies Inc this week offers a dramatic illustration of how the iPhone maker can put the screws to suppliers willing to take a short-term risk for future riches.

GT Advanced has offered little explanation as to what prompted its surprise bankruptcy filing on Monday. The company declined to comment for this story

Analysts and industry insiders cited terms of GT Advanced's deal with Apple that involved building an Arizona factory to make scratch-resistant sapphire glass exclusively for Apple, but which the Cupertino-based company was under no obligation to buy.

Apple said on Wednesday it was surprised by GT's bankruptcy filing and is considering its next steps.

"We are focused on preserving jobs in Arizona following GT's surprising decision and we will continue to work with state and local officials as we consider our next steps," Apple spokesman Chris Gaither said in an email.

Companies vying to supply components for hundreds of millions of iPhones and iPads have often struck seemingly lopsided deals with Apple. Being tapped by Apple can multiply a supplier's revenues and help it win other customers.

But the risks can eclipse the rewards.

Looking to potentially switch from Corning's Gorilla glass to sapphire covers on its iPhones, Apple spoke with several manufacturers who balked at the terms it was offering, according to a person familiar with the matter, who declined to be named.

One manufacturer that met with Apple walked away, concerned that Apple might insist on lower prices in the future, which would squeeze margins, the person said.

Under terms of the deal struck with GT Advanced in November, Apple said it would provide a prepayment of about $578 million to help install furnaces and other gear in the Arizona factory, which is owned by Apple and slated to employ more than 700. Apple would then be paid back over five years starting 2015.

The lump sum would be paid in instalments contingent on GT meeting unspecified operational targets.

Apple's arrangement to help finance GT Advanced's new factory is not unusual. In 2011, Apple invested around $1 billion in an LCD factory operated by Japan's Sharp Corp to make panels for the iPhone 4. Sales of the phone were slower than predicted, and Sharp was forced to temporarily halt production.

"Having an exclusive factory for one customer means you don't have the same reassurance as producing parts in response to demand," said a person familiar with Sharp's plans.

"The volume (produced by Apple) is very high so it can bring the factory to 99 percent of capacity, but if there are no orders then the factory will lie idle," the person said.

Relying on Apple
A person familiar with Apple's involvement said GT Advanced said Apple had worked to help the supplier meet operational targets. Several analysts said Apple probably made a decision that burned its supplier.

Kevin Starke, analyst at CRT Capital, speculated that Apple, in forgoing sapphire glass in the iPhone 6, had effectively dealt a financial blow to GT.

"We could speculate that some milestone or other requirement laid out in the operative documents has been broken or become the topic of a dispute between the parties," Starke wrote in a note to clients on Monday.

Industry executives and analysts said GT's bankruptcy should serve as a warning to other companies.

"You swallow the Apple order, but it may not taste sweet," said a person whose company supplies Apple.

"It is like using Apple to build your resume. Once you supply for Apple, you use that to find more customers and you can diversify."

Les Santiago, an analyst at IT consultancy IDC, said the strategy adopted by chipmakers Dialog Semiconductor, and Cirrus Logic, which get close to 80 percent of their revenue from Apple, offers an alternative to the GT story.

Both firms have used their windfall from Apple to expand their product lines and expand their customer base, he said.

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