Apple, GT Advanced Technologies, and the ‘new’ vertical integration

“Much has already been written and speculated about Apple’s (AAPL) strategic investment in GT Advanced Technologies (GTAT), a company that develops high-grade sapphire,” Matt Lew writes for Seeking Alpha. “The investment includes a pre-payment of $578M, which will be paid back over a five-year period starting in 2015. No secret – you could have read this in about three-dozen different articles published since the deal was made public. But, while the arrangement is new, the mechanics and eventuality of it certainly are not.”

“There was great anticipation for what the licensing arrangement between Apple and Liquidmetal Technologies (LQMT) would yield. In short, the reality has been… not much. Unless you consider, a sim-ejector tool to be a significant advancement in personal electronics, the deal (which will expire in February 2014) has not produced the breathtaking mock-ups of alloy devices that were created when this partnership was first announced. And there is still hope that this partnership can produce something substantive for future iDevices, but unfortunately, not many are holding their breaths,” Lew writes. “It should be noted that Liquidmetal Technologies’ components in Apple’s devices may go beyond the sim ejector tool, but the fact that nobody has been able to identify core components probably means that the application has been extremely limited.”

“The GTAT deal is different – I think. First of all, as mentioned, the company has already indicated that the arrangement will have an astronomical effect on its financial statements immediately (revenue will more than double next year). Additionally, GTAT expects the arrangement to be cash positive and accretive to earnings next year as well,” Lew writes. “Second, Apple is already using sapphire in its products, with significance far beyond a sim-ejector tool. The TouchID button on the 5s requires sapphire due to the scratch resistance of the material. Apple also uses sapphire for the lens cover of its iPhone cameras, which is also made of the durable material. Third, and perhaps most important, GTAT has already shown significant advancements in its sapphire production capabilities.”

“Apple’s deal with GTAT is an ‘exclusive’ arrangement, which means that any practical application of sapphire coming out of that Arizona factory is restricted to Apple’s use,” Lew writes. “This type of deal may be new for GTAT, but it’s all-too-common for Apple. Why buy the cow when you have exclusive rights to all of the milk? …Anything of value that comes out of that Arizona manufacturing facility will be for Apple’s use only, and any of the downside will be absorbed by somebody else – that is the new vertical integration. And that is the Apple way.

Much more in the full article here.

[Thanks to MacDailyNews Reader “David E.” for the heads up.]

Related articles:
Apple partner GT Advanced recruiting for Jobs at Arizona sapphire plant – January 21, 2014
Apple patent application reveals sapphire flexible transparent display devices created with Liquidmetal – December 19, 2013
iPhone 6 rumors: Curved display, Liquidmetal, sapphire glass, and more – December 11, 2013
Apple spends over half a billion dollars on rumored iPhone 6 sapphire glass feature – November 29, 2013
Arizona OKs tax break for Apple sapphire glass plant – November 20, 2013
Incentives to lure Apple’s sapphire glass plant to Arizona revealed – November 19, 2013
Analyst: Sapphire likely to be used in new small form factor Apple device (Think iWatch) – November 8, 2013
GTAT able to supply sapphire for over 30 million iPhone screen covers due to Apple funding – November 8, 2013
Apple’s iPhone 6 could feature unmatched sapphire glass display – November 7, 2013
Why Apple’s new sapphire manufacturing agreement is a big deal – November 7, 2013
GT Advanced Technologies spikes on sapphire deal with Apple – November 5, 2013
Apple expands ‘Made in USA’ efforts with sapphire glass factory in Arizona, creating over 2,000 jobs – November 4, 2013
Apple strikes sapphire supply deal with GT Advanced – November 4, 2013
Gorilla glass maker Corning enters into strategic partnership with Samsung Display – October 23, 2013
Sapphire glass may be used in 2014 iPhone Retina display, sources say – September 18, 2013
Vertu COO: Apple investigated sapphire crystal displays, but found them infeasible at this time – June 13, 2013
Corning’s Gorilla Glass vs. sapphire for mobile touch displays – May 28, 2013
Apple’s next iPhone screen could be made of Sapphire – May 2, 2013
Steve Jobs, steel balls and Corning’s Gorilla Glass (with video) – January 11, 2013

10 Comments

  1. You buy the cow when you need the lots of steak. However, that volume is unhealthy.
    Apple does not need to absorb the supplier into it’s own infrastructure since sapphire may only be usual for a few years until something better comes along. They are thinking long-term and want to avoid having to shut down a factory because it is not longer useful for making Apple products.
    It’s a win-win because Apple gets assured supply of materials and the vendor gets the investment they need to build capacity. Apple can walk away when they are ready and the vendor can find additional applications and customers.

  2. Here’s of the main problems that arise when a company acquires another company, such as the idea of Apple acquiring GT:

    Apple isn’t in the sapphire manufacturing business, and likely doesn’t know a lot about said business.

    What can be applied about running Apple to running GT? Absolutely nothing. Completely different businesses, business models, etc. If Apple bought GT, the *only* reasonable way to do so would be to maintain them as a completely separate business and make zero effort to integrate them into Apple or get them to be more “Apple-like.”

    Apple is better off doing what they’ve done…make the investment to get the exclusive license and not get bogged down by the details and risk of actually owning and running a new side-business.

    1. Agreed. This strategy was used to secure large quantities of NAND flash for the iPod (well before the iPhone came out) and severely crippled the production of other companies.

      I’ve always wondered whether it was Tim Cook or Steve Jobs who came up with this concept.

    2. Cheaper in the long run they are simply operating ad a bank offering loans at far better rates than others would, allowing the product to be supplied cheaper to the client ie the lender of the money, a commodity it has in droves.

  3. You just KNOW Google is going to read this article and figure out how “Why buy the cow when you have exclusive rights to all of the milk?” works and start doing it themselves.

    Curse you Matt Lew who writes for Seeking Alpha!
    /s

Reader Feedback

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