Christopher Tang
To create the next generation of display for Apple’s products, Apple decided to use sapphire glass, a more scratch- and shatter-resistant than Corning’s Gorilla Glass (and yet ten times more expensive). In November 2013, Apple decided to source its sapphire glass from GT Advanced Technologies (a little-known manufacturer of solar components) by investing $578 million in a factory to manufacture sapphire glass screens. Since then, a series of mishaps (not enough furnaces, quality and yield issues, etc.) at GT has caused major delays. In September 2014, Apple was unable to release its iPhone 6 with sapphire glass.
Rightly so, Apple withheld its $139 million final payment in April 2014 because GT did not meet the output or quality requirements as specified in the supply contract. However, facing with significant cash-flow problems, GT asked Apple to pay the final $139 million payment and requested a meeting with Apple to discuss the contract price. Just one day before the negotiation meeting with Apple, GT filed for bankruptcy on October 6, 2014.
Many suppliers were sympathetic about the whole incident and commented that GT should not have focused on a single key customer (Apple) and GT should not make promises that it cannot keep.[1] While we do not exactly what happened behind the scene, we think Apple should learn a few lessons:
- Beware of supply risk. When dealing with unproven technology such as sapphire glass screens, Apple should continue to use Corning’s Gorilla Glass and shift gradually to sapphire glass.
- Beware of supplier solvency. If one examines GT’s annual report posted on (http://investor.gtat.com/annuals.cfm), it is clear that GT incurred a profit loss in 2013 and GT was having financial problems even before it formed the partnership with Apple in November 2013. It should not be a surprise that GT filed for bankruptcy in 2014 after some failed attempts to make sapphire glass.
To stay afloat, I think it is quite likely that GT overpromised Apple about its capability and accepted low contract price offered by Apple. Therefore, the key lesson for Apple is to beware of adverse selection. When a giant company (Apple) demands a tiny supplier (GT) to deliver products at low price, the “eager beaver” is usually the wrong partner for you.
In other words, suppose you propose to marry someone you just met. If this person accepts your proposal right away, then you should run for your life and don’t look back!
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