Sometimes it's good for an OEM to hold a supplier's feet to the fire to make sure it meets its commitments. Sometimes it's good for a supplier to sacrifice some profit in order to ride the coattails of a huge, name brand OEM customer. But sometimes a big OEM holds a supplier's feet too close to the fire, and the supplier sells its soul to sign the big customer. At that point, it can turn into hell.
That seems to be what happened between Apple and GT Advanced Technologies Inc. (GTAT). In retrospect, it was a risky deal from the start. When it was announced last October that GTAT would supply Apple with synthetic sapphire, no doubt both companies had high hopes. Before the agreement, GTAT produced equipment for synthesizing the sapphire, a hard, scratchproof material Apple wanted to replace glass screens in its mobile devices. GTAT did not make the sapphire material itself, but Apple apparently wanted it to do so. Under the terms of the deal, Apple would provide a factory in Mesa, Ariz., and lend GTAT more than $500 million to develop and manufacture the material.
Then things went horribly wrong. In October 2014, GTAT filed for bankruptcy protection. In an affidavit, GTAT chief operating officer Daniel Squiller painted a distinctly unflattering picture of Apple. He claimed Apple turned GTAT into its captive supplier, embedding itself into GTAT's operations and constantly interfering and changing product specifications without compensating his company. According to Squiller, GTAT was prohibited from selling the material to anyone else, while Apple had no exclusive obligations to GTAT. Apple could cancel a purchase order at any time. GTAT couldn't modify specs or processes without Apple's consent.
Apple has said very little about the matter publicly. But it did tell The Wall Street Journal (subscription required) that Squiller's comments were untrue and defamatory and were intended to “vilify Apple and portray Apple as a coercive bully.”
No one in the electronics supply chain industry would be surprised that Apple played hardball with a potential supplier. GTAT seemed to be. What's more, GTAT executives were mesmerized by the prospect of having Apple as a customer. “Apple's size and prominence make it the ultimate technology client to land,” Squiller said in his affidavit. The management viewed the deal “as a potential game-changer for GTAT.”
Apparently, the managers were so dazzled that they did sign away their soul. The terms to which GTAT agreed were outlandish, in my opinion. Squiller basically admited it was a bad decision. “Even if this business transaction worked exactly as contemplated in the original agreements, GTAT would not earn any income at all unless Apple opted to 'buy' sapphire material in excess of loan 'repayment' obligations,” he said. (The quotes around the words “buy” and “repayment” are his.) And Apple was under no obligation to do so.
It's clear that Apple had all the power, and it threw its weight around. Its attitude was to take it or leave it, telling GTAT not to even try negotiating, according to Squiller, because “Apple doesn't negotiate with its suppliers.”
He claimed that GTAT was cornered into the agreement, but I think the evidence he gives is flimsy. “GTAT was out of options because it had invested months negotiating a sale contract with Apple while being effectively locked out of pursuing other opportunities.” He didn't explain what he means by “locked out.” He went on to say the company initially tried to interest other consumer electronics companies in a deal, but “those alternatives were not pursued by GTAT given Apple's offer of the most significant contract in the company's history.” The negotiations with Apple were so “all-consuming” that the company didn't have time to pursue other deals.
Excuse me, but that's akin to claiming the dog ate your homework. Apple is a tough negotiator. It dazzled, intimidated, and outnegotiated a small supplier. GTAT did not stand up and protect itself as it should have. If it didn't like the terms of the deal, it may not have been able to convince Apple to change them, but it did have at least one option: Say “no” and walk away.
Read the affidavit here. What would you have done if you were in GTAT's shoes?
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