If you're a component supplier to Apple Inc., you'll probably have noticed by now that a troubling trend is emerging between Apple and those companies that supply critical parts to iPhones.
The latest evidence of strain between the consumer electronics giant and one of its component suppliers came earlier this month when GT Advanced Technologies Inc. announced that it has filed for Chapter 11 bankruptcy, will cut 890 jobs, and close an Arizona plant where it was expected to make scratch resistant screens for Apple.
Tom Gutierrez, president and chief executive officer of GT, said in a statement:
We are convinced that the rehabilitative process of Chapter 11 is the best way to reorganize, protect our company and provide a path to our future success. We remain committed to our roots in innovation and our diversification strategy. We plan to continue to operate as a technology leader across our core set of businesses.
Last year, GT, a company that makes electronics manufacturing equipment and materials, signed an agreement with Apple to supply sapphire material. At the time of the multiyear supply agreement Apple earmarked approximately $578 million to build a facility in Mesa, Ariz. The arrangement also called for GT to reimburse Apple over five years, beginning in 2015. That was then.
The arrangement began to crumble in September, when it became evident that Apple would not use sapphire material in its iPhone 6, replacing it with rival Gorilla Glass instead. Indications are that GT intends to pursue legal claims against Apple as the company reorganizes its business under bankruptcy.
If we are to believe recent published documents, GT officials were blindsided by Apple. In its corporate overview report released last June, under the heading, Investment Highlights, GT predicted that: “Newly expanded sapphire materials business with Apple is expected to add recurring revenue base to business.”
Other companies have won and lost contracts with Apple over the years, and the pattern shows how volatile business can be as Apple constantly changes product designs and component suppliers for its iPhones.
TPK Holding, a Taipei-based touchscreen maker, once supplied touch controls in the first iPhones. Based on that business TPK's revenues soared and an initial public offering was announced in 2010. Two years later Apple changed the design of its iPhone screens and dropped TPK in favor of touch screen rivals like LG.
Audience Inc., a company that provides voice and audio solutions for mobile devices, experienced a similar fate. When the company's parts weren't included in the iPhone 5 in 2012, the company's stock plummeted below $6 from a high of $22.
Interestingly, in a Bloomberg Businessweek article, Peter Santos, chief executive officer of Audience, spoke about the travails that beset his company's supply chain.
Santos says he scrambled to replace lost orders with business from other phone makers because he had no notice. Apple didn't tell him his company was cut out, and he only knew for sure when his engineers bought an iPhone 5 and took it apart. “Getting through this was harder than doing the IPO,” said Santos, who now sells mostly to Apple archrival Samsung.”
Apple has been in the high tech manufacturing business for more than three decades. Surely it's not unreasonable to ask Apple's to give greater consideration to their suppliers, especially since many of these companies derive more than 50% of their business from the sale of Apple products.
Given the mounting evidence that suggests that component suppliers are unable to detect when Apple's executives will change their minds and drop their products, it will be interesting to see how far GT's reported threat to pursue legal claims against Apple will play out in court.
I'm sure Apple's legal team has an answer that will address GT's legal claims and we will anxiously wait to hear Apple's side of the story. Whatever the explanation is, however, it may shed some light and provide critical guidance on the way in which Apple intends to treat its suppliers in the future.