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GT Bankruptcy Provides Rare Look at Apple's Relationship With Suppliers

A New Hampshire company's bankruptcy filing affords a rare glimpse into the Cupertino tech giant's relationship with its suppliers.

GT Advanced Technologies

Apple is known for its incredibly tough contract terms, but the chance to work with the Cupertino-based tech giant hasn’t deterred thousands of companies around the world from trying to win its business.

That was part of the thinking behind how GT Advanced Technologies, a little-known New Hampshire company, landed a potentially lucrative contract in 2013 to supply Apple with sapphire materials for its sought-after devices. The prospective game-changing deal nonetheless ended disastrously for the small supplier.

Within a year of announcing the partnership, GT filed for bankruptcy, and the two companies reached a settlement. The incident highlights how one supplier came to view an Apple partnership as a liability, and the court filings afford a rare glimpse into the tech giant’s business dealings.

In newly released court documents, GT’s Chief Operating Officer Daniel Squiller blames Apple for the company’s financial crisis. He alleges a long list of grievances — from lopsided deal terms stacked in Apple’s favor to continuous meddling in the manufacturing process and constantly shifting material specifications — that caused GT’s losses to mount. The New Hampshire company ultimately sought the shelter of bankruptcy to sever its ties to Apple.

“GTAT’s business relationship with Apple has become unsustainable without Apple taking responsibility for cost overruns and additional expenses caused by Apple,” Squiller said in a declaration supporting the company’s Chapter 11 bankruptcy filing. He was referring to the name of the company as GTAT.

Apple, which sought to block the public release of the document, declined to comment on the allegations. But in court filings, it argued that Squiller’s comments were “untrue, irrelevant and defamatory” and mischaracterized the tenor of the negotiations.

“Apple bent over backwards to work with [GT] — including making payments to the company notwithstanding the company’s failure to meet performance milestones — in the hope of obtaining usable, economically viable sapphire,” Apple said in its filing.

The fresh bankruptcy court disclosures come as GT reported that the SEC is looking into its trading activity and seeking information about its sapphire business. It’s unclear if the inquiry will examine GT Chief Executive Officer Thomas Gutierrez’s sale of more than 9,000 shares of the company’s stock for $160,000 a month before the bankruptcy filing which set the company’s stock plummeting.

GT also faces a shareholder lawsuit, filed on behalf of investors who purchased the company’s stock after the high-profile Apple deal was announced.

The court documents portray a fraught relationship from the onset. GT claims Apple employed a “classic bait-and-switch strategy,” enticing the company in 2013 with the prospect of landing its largest sale order — 2,600 furnaces used to grow synthetic sapphire.

But after months of negotiations over price and terms, GT said it became clear Apple had no plans to buy the furnaces. Instead, Apple wanted GT to supply sapphire material, rather than sell them the equipment. That would require a major investment on the part of GT, which is essentially an equipment manufacturer, not a materials supplier.

GT would have to borrow up to $578 million from Apple to build furnaces in the new plant in Mesa, Ariz., and grow the sapphire for the technology giant.

Squiller called GT’s contract with Apple “onerous and massively one-sided.” It would allow Apple to buy sapphire — a durable, scratch-resistant substance that already is used to cover the camera lens and touch ID sensor on some iPhones — at below market prices, he said.

GT would only make money if Apple’s sapphire orders exceeded the amount Apple already advanced under the loan, Squiller said.

Apple objected to Squiller’s characterizations that it strong-armed its suppliers, saying the allegations were intentionally inflammatory.

“These statements are intended to vilify Apple and portray Apple as a coercive bully,” Apple said in its filing. “In addition to being untrue and harmful to Apple, these statements are not necessary to understand [GT’s] current financial condition.”

The New Hampshire company balked at some of the contract conditions during the negotiations, Squiller said, such as one that would lock the supplier into an exclusivity arrangement that prohibited it from selling sapphire to any other manufacturer or supplier in the consumer electronics space. To do so would leave GT vulnerable to penalties of $640,000 or more.

But Apple wielded all the leverage in the discussions, Squiller alleged. Apple said GT should, “Put on your big boy pants and accept the agreement,” he said.

Apple noted that GT could have walked away from negotiations, but chose to enter into an agreement because it saw the opportunity to become an Apple supplier as transformative for its business. It wasn’t “tricked” into entering into an agreement.

“The transaction did not work out well for either party,” Apple said in court documents. “Apple spent a significant amount to build the factory and advanced $439 million to GTAT — and does not have the sapphire for use in its products.”

Squiller acknowledged, in subsequent filings, that GT struggled to produce the quantities of high-quality synthetic sapphire crystal Apple required within the agreed-upon timeframe. But he contends Apple is partly to blame for those delays.

The specialized Apple facility in Arizona that was to house more than 2,000 sapphire furnaces and fabrication equipment, wasn’t operational until December 2013 — six months before GT was expected to be operating at full capacity, GT said. Apple chose the facility, negotiated all the contracts to design and build it, and GT had no direct contact with the Apple subcontractors.

GT also said many of the processes associated with cutting, polishing and shaping the sapphire were new because of the unprecedented volume of the material to be grown at the facility. Apple dictated what the fabrication equipment GT was to use in the Mesa facility — but many of these tools, including a diamond wire tool used to cut sapphire boules, fell short on performance and reliability, and needed to be replaced.

All of that cost time and money.

GT said it has incurred roughly $900 million in costs associated with the sapphire project — with $439 million in financing provided by Apple under a loan agreement that it would repay over five years, beginning in 2015.

As fabrication costs began to mount, Squiller alleged that Apple made it clear that it expected GT to absorb these additional costs. That left the supplier with the prospect of selling sapphire material to Apple at a “substantial loss,” Squiller said. The red ink would only deepen in 2015, when Apple had negotiated a price cut.

In the weeks leading up to the bankruptcy, Squiller said GT’s senior management met with Apple executives to explain the company’s dire economic straits. Apple responded with a number of proposals that didn’t address GT’s cash crisis, he said.

Apple offers a different account of the days leading up to the bankruptcy filing. The company said it continued to fund the Mesa facility, and made payments to GT, even though it was failing to reach production milestones. Apple was open to alternatives, such as permitting GT to produce lighter-weight quantities of sapphire than were required under the contract.

On the eve of GT’s bankruptcy filing, Apple offered a number of concessions — including advancing a large chunk of the $139 million installment payment, and allowing GT to sell its sapphire furnaces to third parties to bring in more income.

Instead, GT filed for bankruptcy.

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