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Tech Company's Bankruptcy Offers Warning to Apple Suppliers GT Advanced Technologies suffered the consequences after Apple decided not to use its scratch-resistant sapphire glass screens for the iPhone 6.

By Reuters

This story originally appeared on Reuters

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 also did not respond to requests for comment.

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

Seemingly lopsided deals are common among companies vying to supply components for the hundreds of millions of iPhones and iPads that Apple sells each year.

Being tapped by Apple is often Silicon Valley's equivalent of the mythical Midas Touch as it multiplies a supplier's revenues and makes its technology more desirable to other potential customers.

But the risks of being involved in the next iPhone 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 before it settled on GT, according to a person familiar with the matter, who declined to be named as they were not authorized to speak to the media.

One manufacturer that met with Apple walked away from the potential deal after considering the possibility that Apple would insist on even lower prices in the future, which would squeeze margins, the person said.

Under the terms of the supply deal eventually struck with GT Advanced in November, Apple said it would provide GT Advanced a prepayment of about $578 million to help bankroll the Arizona factory, which would then be paid back to Apple 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 for the handset maker.

In late 2011, Apple invested around $1 billion in an LCD factory operated by Japan's Sharp Corp to make panels for the iPhone 4. The phone, however, didn't sell as well as predicted after its release in October 2012, 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. On the contrary, it's high risk," 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

The details about what happened between GT Advanced and Apple remain unclear. A person familiar with Apple's involvement in the matter said the company had worked in good faith with GT Advanced to help it meet its operational targets.

Several analysts said Apple had likely 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 can surmise, of course, that something has gone dreadfully wrong in the company's once-promising relationship with Apple," Starke wrote in a note to clients on Monday.

"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."

Industry executives and analysts said GT's bankruptcy should be a warning to companies to not hitch their future to one client.

"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.

(Additional reporting by Edwin Chan in SAN FRANCISCO, JR Wu in TAIPEI and Sophie Knight in TOKYO; Editing by Miyoung Kim and Miral Fahmy)

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