Advertisement

Blog

Component Makers Caught in Apple’s Revolving Door of Suppliers

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.

20 comments on “Component Makers Caught in Apple’s Revolving Door of Suppliers

  1. _hm
    October 27, 2014

    I find that to be usual in business. It is survival of fittest. It can be anyone. If Apple gets better CPU, they will replace Intel, that is that simple.

    Supplier needs to be smart and be prepared for worst.

    Also counter argument can be, when those supplier got big order from Apple, did not they ditch many of their faithful smaller customers? Yes, for sure. So now it is their turn.

  2. Ashu001
    October 28, 2014

    Nicole,

    Great Blog!

    There is an immense lesson for all Componenet Makers in this Article.

    Its basically this-Don't depend on any one (sole/single) customer for all your Business.

    Especially one which is as fickle-minded as Apple.

    I have a strong feeling that the days when Apple took Suppliers for a ride(like has happeend in these and many more cases) is coming to a close as Suppliers rationalize their Supply Chains and demand more cash upfront from Apple to supply to them.

    The GT Sapphir Glass companys Bankruptcy is very-very mysterious as they refused to disclose the terms of theri Deal even in Bankruptcy court(inspite of the fact that many Big-Ticket shareholders like Fidelity) lost over a Billion Dollars in that deal.

    Regards

    Ashish.

     

  3. Daniel
    October 29, 2014

    “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.”

    Nicole, all the agreements are bilateral, so both parties are liable to abide that. In my knowledge based on the agreement and to cater Apple requirement, GT have expanded their facility by accommodating more employees and increased their production facility. Finally Apple pulled the legs, which pushed GT into some troubles. In my opinion Apple is liable to compensate for all such damages.

  4. ITempire
    October 30, 2014

    Nicole, thanks for a very interesting article. Obviously this negatively potrays how Apple treats its suppliers but it also shows how agile Apple is in making big decisions in order to keep its product competitive/market leader. 

  5. ITempire
    October 30, 2014

    _hm

    “Also counter argument can be, when those supplier got big order from Apple, did not they ditch many of their faithful smaller customers? Yes, for sure. So now it is their turn.”

    Yes I agree. It is business as usual. Suppliers must be prepared when dealing with bigger companies specially if they have such a history whether it be Apple or their suppliers. 

  6. ITempire
    October 30, 2014

    Ashish, corporate issues can be such where there is always a thin line between frauds and business decisions. Shareholders must ensure that audit committees and other bodies responsible for oversight function effectively otherwise management enters into deal while keeping the ownership in the dark.

  7. ITempire
    October 30, 2014

    Jacob

    Every contract has exit clauses and compensation is clearly mentioned if either party backs out. It is just that suppliers must ensure that their legal team works really hard in designing contracts with Apple. That can be difficult given Apple's upper hand but it is necessary.

  8. Ashu001
    October 30, 2014

    Waqas,

    Unfortunately as both you and me know;we live in the Real World and here things are not quite so simple.

    Especially all this talk of “Chinese Wall” between Investment Banking and Brokerage Divisions is just not realistic anymore.

    Information gets shared over Multiple Mediums and in real-time today.

    In such a Situation;all Consumers are better served by complete Seperation between Various Entities who are placing Bets on various Decisions today.

    Regards

    Ashish.

  9. Ashu001
    October 30, 2014

    Waqas,

    As the Recent Bankruptcy Proceedings of the Sapphire Glass Maker-GT has clearly demonstrated ;Apple has a lot of Very Powerful friends and Levers in all the Right places.

    Even Media organizations like Reuters were shocked that the Entire Bankruptcy proceedings were sealed and not open to Public Scrutiny(even in Court).

    Tells you a lot does'nt it?

    Regards

    Ashish.

     

  10. Ashu001
    October 30, 2014

    Waqas,

    What you are pointing out may make sense(in the Real World);Unfortunately that is'nt what happened with GT .

    Instead Apple suddenly pulled the Plug on a Deal they had in place(&there is a lot more intrigue there which has'nt been disclosed exactly in the Bankruptcy Findings).

    I would reserve my judgement until I see the Details of the Bankruptcy case myself.

    Regards

    Ashish.

  11. Daniel
    October 31, 2014

    “Every contract has exit clauses and compensation is clearly mentioned if either party backs out. It is just that suppliers must ensure that their legal team works really hard in designing contracts with Apple. That can be difficult given Apple's upper hand but it is necessary.”

    Waqas, I agreed about such exit clauses and compensations. Based on the agreement; by expecting a good business and long term relationship companies/ vendors may invest highly for infrastructure. Normally In none of the clause such investments  will over under damages because infrastructure is with the company/vendor.

  12. Hailey Lynne McKeefry
    October 31, 2014

    Businesses need to hold some balance between making good business decisions based on today and building relationships into the future. I read this, and i think less about Apple and its actions, which seem to be status quo for the industry, and think more about the component makers. It's a cautionary tale about not letting any one customer be the basis for your business. i understand that it would be hard to resist a big contract from Apple, but  at the same time the component maker needs to safeguard the business–by making sure it's customer base is broad enough that no one customer pulling its business can kill its chances.

  13. ITempire
    November 24, 2014

    Ashish, that is where securities and exchange commission comes in. The more stronger and efficient the commission is, the safer the country's shareholders` market is.

  14. VarunRanger
    December 9, 2014

    hey nicole thanks for a very interesting article

  15. Ashu001
    December 26, 2014

    Waqas,

    In the US ,the SEC is a big joke!

    There is a massive revolving door present between Wall Street and SEC at present where the culture that dominates is precisely-You Scratch my back and I scratch yours!

    This kind of mentality has caused a lot of shenaigans on Wall Street(including Frauds) in the  last three-four years.

    The worst part about the whole affair is that they largely go scot-free(because of their connections at the SEC).

     

  16. Ashu001
    December 26, 2014

    Hailey,

    Component makers have a hell raising ride ahead of them after getting burnt with the Apple Experience.

    I don't think they will be able to trust any Large Device Manufacturer automatically from now onwards.

  17. ITempire
    December 28, 2014

    Tech4people, that's sad to see i.e. the state of SEC in US. This will lead to another Enron or God forbid Enrons. We just can't separate SEC staff from society. They are part of us and if we are corrupt, they also can be.

  18. Ashu001
    December 31, 2014

    Waqas,

    Absolutely right!

    This represents the Moral Degradation of American Society more than anything else today.

    There was a time when people in America used to take pride in Hard work and the Efforts they put in everyday.

    Now ,however everyone just wants easy/Quick Money.

    So many productive members of Society have transformed into absolute Moochers[Parasites] today its beyond shocking.

    If you gave someone the choice between earning say $50,000/Year by doing work and earning $30,000 via Benefits;9 out of 10 Americans opt for the Benefit route.

    One out of every 5 Americans depends on Uncle Sam for Food today[Via the Food Stamp Program];which basically means if Uncle Sam shuts down for any reason ;46 million Americans Starve!!!

    Shocking state of Affairs (from Top to Bottom).

  19. ITempire
    December 31, 2014

    Tech4people, I think it is not only US specific issue. Things have worsen globally. People all around the world want quick money and in that case, people are unfortunately willing to compromise morality.

  20. Ashu001
    January 10, 2015

    Waqas,

    That is really a sad state of affairs.

    This Quick Money /Fast Money mindset has spoiled a lot of Relationships everywhere around us in the recent past.

    Not just relationships but also the Balance of Nature as well.

    Morality as a notion barely exists today.

     

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.