Details of GT Advanced implosion emerge in Apple letter to creditors

Posted:
in General Discussion edited November 2014
Following bankruptcy court filings that seek to postpone Apple's settlement agreement with GT Advanced, a report on Wednesday reveals inside details on why the ambitious sapphire production project went south.


Defective sapphire boules produced by GT Advanced, included in Apple's letter to creditors.Source: The Wall Street Journal


Citing a letter Apple sent to creditors, along with sources close to the matter, The Wall Street Journal reports Apple's $578 million contract with GT was marked with ineffective leadership, lack of expertise and a "sapphire graveyard" where a bulk of unusable material went to die.

In a letter sent to creditors, Apple disclosed the beginnings of its doomed partnership with GT. In March 2013, seven months before the partnership was announced, GT informed Apple that it had developed an advanced sapphire furnace capable of producing an extraordinarily large sapphire puck, or boule. Weighing in at 578 pounds, the boule was double the size of competing products.

Instead of purchasing the furnaces outright, Apple lobbed the idea of lending GT more than $500 million to operate its own equipment at a plant in Mesa, Ariz., which would be leased to the company for $100 per month. Sources claim Apple had failed to locate a sapphire manufacturer and was reluctant to pay a roughly 40 percent margin for GT's ASF equipment.

Prior to the Apple arrangement, GT was strictly a furnace manufacturer with little experience in operations, a fact quickly made apparent during the early stages of production. In fact, the first boule to pop out of a GT-run ASF furnace was completely unusable. That 578-pound chunk of sapphire was produced just days before Apple inked the agreement, the publication said.



Quality improved somewhat over the intervening year, but about half of all sapphire produced at Mesa was unusable. Employees named the rows of unusable sapphire pucks that piled up at Mesa the "boule graveyard," the WSJ says. Apple said in the letter to creditors that it received only 10 percent of GT's agreed upon goal.

In addition to poor yields, GT reportedly had a variety of other troubles. For example, a manager sent 500 bricks out for recycling instead of shipping them out for processing. The material was ultimately recovered.

Another result of GT's inexperience with production operations was highlighted as the Mesa plant first started churning out material. According to the WSJ, the company hired 700 employees to kickstart manufacturing and kept adding workers despite not having enough furnaces built to accommodate them. These extra employees ended up sweeping floors, while some reportedly took advantage of a non-existent attendance policy and filed for an inordinate number of sick days.

Things came to a head in September, when GT advised Apple of its financial problems. Despite GT not meeting contractual production goals, Apple offered to pay $100 million of a scheduled $139 million payment and push back repayment due dates, the report says. At the time, Apple had already handed over $439 million to GT, not including an additional $700 million spent on infrastructure.

Apple and GT were set to discuss a possible increase in payments for 2015, as well as the ability for GT to sell its furnaces to outside buyers, on Oct. 7. A day before the scheduled meeting, GT filed for Chapter 11 bankruptcy protection.

For its part, GT claims Apple's terms were "oppressive and burdensome" and today's report cites sources as saying Apple management confused matters by applying inconsistent quality standards.

Arizona


The fallout from the venture's failure has yet to be fully realized, but GT has already agreed to a settlement with Apple that will see the company sell off over 2,000 furnaces to repay its $439 million debt. Creditors backing the sapphire maker today successfully argued for an extension to the settlement's approval as they investigate claims of onerous terms imposed by Apple.

As for the workers and Apple's Mesa facility, the futures of both are up in the air. Apple has promised to do as much as it can for existing staff, while a report on Tuesday said the plant would be repurposed, though no definite plans have been announced.
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Comments

  • Reply 1 of 57
    Apple comes across as a fair partner here. But, surprisingly, made a very poor vendor choice
  • Reply 2 of 57
    red oak wrote: »
    Apple comes across as a fair partner here. But, surprisingly, made a very poor vendor choice

    No risk, no reward. It sounds like there really wasn't another option as far as vendors go.
  • Reply 3 of 57
    ronmgronmg Posts: 163member
    red oak wrote: »
    Apple comes across as a fair partner here. But, surprisingly, made a very poor vendor choice

    Why surprisingly? Apple was flat out lied to by GTAT leadership.
  • Reply 4 of 57
    No risk, no reward. It sounds like there really wasn't another option as far as vendors go.

    Agreed. Apple has to keep pushing the envelope

    Hopefully there was production sample signoff before Apple inked the deal
  • Reply 5 of 57
    jungmarkjungmark Posts: 6,709member
    Dear partner vendors,

    Stop over promising and under delivering.
  • Reply 6 of 57
    Glad I am not the only one to think Apple is being fair about all this.
  • Reply 7 of 57

    Wait, Apple is going to do what it can for the staff including those who were hired to sweep the floors or took an inordinate amount of sick days?

  • Reply 8 of 57
    gtbuzzgtbuzz Posts: 129member
    Let's see now. GTAT inked a deal with Apple and GTAT failed to perform after substantial payments by Apple. GTAT has inked a settlement deal with Apple and now they do not want to perform. Why is it that I think GTAT is the one at fault ? Because they are.
  • Reply 9 of 57

    Apple needs to spend as much time on this as they have Liquid Metal to perfect it.

    Time frame was way to short from a supplier who has never produced this material before.

    The only produced the furnaces in the past.

  • Reply 10 of 57
    Quote:

    Originally Posted by RonMG View Post



    Why surprisingly? Apple was flat out lied to by GTAT leadership.



    Shhh. You'll wake sog. ;)

  • Reply 11 of 57
    Quote:
    Originally Posted by Suddenly Newton View Post

     

    Wait, Apple is going to do what it can for the staff including those who were hired to sweep the floors or took an inordinate amount of sick days?




    that will never happen—not unless, in an alternate universe, ballmer becomes CEO.

  • Reply 12 of 57
    A very un-Apple decision, whether you think they lied to Apple or not, there are processes for checking someone's credibility. Moreover, hiring a furnace manufacturer to produce boules was obviously a stupid idea. It sounds like someone at Apple thought he had the same insight as SJ when he got Gorilla Glass to magically produce something that had never been done before.
  • Reply 13 of 57
    A very un-Apple decision, whether you think they lied to Apple or not, there are processes for checking someone's credibility. Moreover, hiring a furnace manufacturer to produce boules was obviously a stupid idea. It sounds like someone at Apple thought he had the same insight as SJ when he got Gorilla Glass to magically produce something that had never been done before.

    ...Corning developed Gorilla Glass in the '70s. They just brought it out of storage and began producing it again when Steve called.
  • Reply 14 of 57
    Quote:

    Originally Posted by TheWhiteFalcon View Post





    ...Corning developed Gorilla Glass in the '70s. They just brought it out of storage and began producing it again when Steve called.

    I've asked this question a few times before but no one seems to be able to answer it. Why does Apple not appear on the Corning list of GG product users?

     

    http://cgg.dev-box.org/en/products-with-gorilla ;

     

    http://cgg.dev-box.org/en/products-with-gorilla/full-products-list

  • Reply 15 of 57
    I've asked this question a few times before but no one seems to be able to answer it. Why does Apple not appear on the Corning list of GG product users?

    http://cgg.dev-box.org/en/products-with-gorilla 

    http://cgg.dev-box.org/en/products-with-gorilla/full-products-list

    Apple doesn't like to talk about the other companies making parts for them. They tolerate mentioning Intel, that's about it.
  • Reply 16 of 57

    Interesting details, and very informative.

     

    The question that someone in the upper ranks of Apple management has to answer is: why partner with a company that has no track record of production? They were great at building furnaces, it would appear, but not at using them. At least, not the big ones.

     

    So why did Apple go this route rather than finding a company that had experience, and maybe doing a three-way deal?

     

    It seems to me that there are a lot of problems on both sides of this deal.

  • Reply 17 of 57
    Quote:
    Originally Posted by Suddenly Newton View Post

     

    Wait, Apple is going to do what it can for the staff including those who were hired to sweep the floors or took an inordinate amount of sick days?




     
    Originally Posted by mac_dog View Post

    that will never happen—not unless, in an alternate universe, ballmer becomes CEO.




     


    I wouldn't be so sure (except about Ballmer). Apple dropped a pile of coin on this, including power plant, etc etc. And made commitments to the local government as well. It is certainly in Apple's interest to make the best use of this that it can. 
  • Reply 18 of 57
    dunksdunks Posts: 1,240member

    The extent and variety of imperfections in those defective boules suggests very lax quality control.

     

    It makes you wonder if there isn't a major design fault in the furnaces themselves.

  • Reply 19 of 57
    Quote:

    Originally Posted by Red Oak View Post

    ... surprisingly, made a very poor vendor choice

    No question of that. I expect that several people at Apple will soon be, or are already, working elsewhere. But the problem touches the highest levels of management. I presume that Tim Cook had to sign off on a deal this big. What was he told about it?

     

     
    Apple comes across as a fair partner here. 

    Maybe. I agree that this is a lot better than it had appeared earlier. But I am still interested to see just what the "onerous conditions" were. 

     

    Apple drives a hard bargain but it  knows that, for it to make great products, its vendors and suppliers have to survive. To me, the T&Cs we've heard about so far are so one-sided and unreasonable that no Board in its right mind would have signed up to the deal. That makes me suspect that we've heard only a small part of the story thus far.

  • Reply 20 of 57
    Quote:

    Originally Posted by Dunks View Post

     

    The extent and variety of imperfections in those defective boules suggests very lax quality control.

     

    It makes you wonder if there isn't a major design fault in the furnaces themselves.




    Not necessarily. Lots of things work differently when you embiggen them. 

     

    But, to your point, GTAT did not have much experience using even their smaller furnaces. A very serious lack of production experience and it is amazing to me that Apple didn't "get" that right away.

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