Apple and GT Advanced settlement: Ending the madness

“Although not a great deal of information has come out of the GT Advanced Technologies bankruptcy proceedings, Philip Elmer-Dewitt recently reported a settlement between Apple and GTAT that calls for the selling off of 2,036 furnaces that GTAT built in Mesa,” Mark Hibben writes for Seeking Alpha. “With benefit of hindsight, the construction of such a large number of furnaces seems monumentally stupid, if not madness. The settlement is in effect an acknowledgment by Apple that there was plenty of blame to go around for this debacle.”

“More than anything else, I had assumed that GTAT and Apple would be reasonably intelligent about ramping up sapphire production at Mesa. Clearly, I was wrong about that,” Hibben writes. “I had argued that Apple would not commit to using sapphire for iPhone until GTAT had demonstrated reliable production capability for a much smaller volume product, the Apple Watch. Supplying sapphire for Watch would only require on the order of 100 furnaces, not the thousands that were rumored. The construction of the 2,000 furnaces indicates that production of sapphire screen covers for an iPhone 6 variant was intended, and more importantly, these would be solid sapphire… Once again, I believe that sapphire was never going to make it into the iPhone 6, but Apple may have had plans for a high durability version of the phone for some time in the near future. Based on Elmer-Dewitt’s report of October 15, GTAT stated that they had about 1000 furnaces in operation, so it appears Apple was still expecting to take delivery of iPhone sapphire screens later this year.”

“It’s clear that Apple must have concurred with GTAT’s decision to build the 2,000 furnaces. The Agreement mandates the building of the furnaces, and besides, as GTAT’s landlord in Mesa, Apple would be responsible to provide the infrastructure to power them, a massive undertaking in itself. This is Apple’s share of responsibility for this mess,” Hibben writes. “GTAT’s bankruptcy demonstrates that they had decided that there was no way to meet their financial and supplier commitments to Apple. Why that is we may never know, and there are so many ways in which this could have fallen apart that it’s difficult to select a most likely failure mechanism.”

“The best clue to the failure is, in my view, the fact that only about half of the 2,000 furnaces were operational at the time of the bankruptcy filing. It’s likely that the other half haven’t even been completed yet, or are unable to produce usable boules. This goes back to my recent theory of how GTAT got into trouble. It appears that GTAT committed to a new and unproven furnace design, capable of producing much larger (~200 kg) boules in order to reduce production costs. GTAT subsequently ran into unanticipated problems getting the furnaces operational, and consequently burned through Apple’s prepayment faster than expected,” Hibben writes. “This saddled GTAT with only a set of non-options going forward.”

Much more in the full article – recommended – here.

Related articles:
GT Advanced, Apple ink deal for ‘amicable’ split-up – October 21, 2014
GT Advanced Technologies Inc. suspended by Nasdaq – October 17, 2014
GT Advanced confidentiality hearing with Apple delayed – October 16, 2014
GT Advanced bankruptcy judge challenges Apple’s penchant for secrecy – October 15, 2014
Apple, GT Advanced in secret session with bankruptcy judge – October 9, 2014
Apple supplier GT Advanced: Confidentiality pact rules out bankruptcy explanation – October 9, 2014
Apple ‘surprised’ by GT Advanced’s bankruptcy filing – October 8, 2014
Shattered sapphire dreams at GT Advanced – October 8, 2014
Apple’s withholding of $139 million payment led to GT Advanced bankruptcy filing – October 7, 2014
GT Advanced CEO sold 9,000 shares the day before Apple’s iPhone 6/Plus event – October 7, 2014
Law firms launch investigations into possible violations of federal securities laws by GT Advanced – October 7, 2014
Analyst: Apple may take possession of sapphire furnaces from GT Advanced – October 7, 2014
Apple to provide debtor in possession financing to GT Advanced? – October 7, 2014
Investors stunned over GT Advanced bankruptcy filing – October 7, 2014
GT Advanced files for chapter 11 bankruptcy court protection – October 6, 2014
Apple and GT Advanced rampup sapphire production in Mesa – August 11, 2014
GT Advanced expects sales of sapphire production tools to boost profit; shares surge – August 5, 2014
Apple and GT Advanced open second sapphire plant in Salem, Massachusetts – June 19, 2014
Apple patents method for embedding sapphire displays in LiquidMetal device chassis – May 27, 2014

10 Comments

  1. Elmer-Dewitt is an idiot. Apple had no intention of using sapphire for the iPhone 6 or 6 Plus, this would have been for the iPhone 7 or other future iPhone models. In order to have been used for the 6, sapphire would have had to be produced in large numbers several months prior to the iPhone 6/Plus introduction, and that was never in the cards simply due to when Apple bought the Mesa facility.

    Plus, the Mesa facility didn’t need “huge” infrastructure changes; it had been built as a solar panel manufacturing plant, so all of the power supply infrastructure would have been to the building. Yes, some work inside the building would need to be done, but that would be GTAT’s responsibility.

    The real reason for Apple’s quick deal with GTAT is that coming to an agreement ends any possibility of Apple’s contracts, plans for sapphire, and other secret information from being released to the news media. And it’s not like dragging the bankruptcy out would have improved Apple’s status; GTAT’s assets still would need to be sold in order for Apple to get paid.

    What will be interesting is to see who buys the furnaces, whether they are removed from the Mesa facility, and whether the buyer becomes Apple’s new sapphire supplier.

    1. I have impression that this whole bankruptcy thing is huge PR action, attempt to cause a scandal and postpone payments to Apple.

      GTAT’s assets surpass $1.5 billion, and normally a firm would just sell off those and pay its liabilities, with immediate ones being Apple’s $400+ million loan. Instead of that, GTAT has chosen to halt payments to Apple by using bankruptcy as protection and causing an uproar and threatening to leak Apple’s confidential information one way or another — to renegotiate the loan.

      Apparently, GTAT has succeeded in that.

    2. I have my own ideas about who the idiot is, and it isn’t PED.

      PED simply was the reporter on the settlement. The real question to me is where Hibbens got his information.. Hibbens says there isn’t enough information to figure out the failure mechanism, but he proceeds to do it anyway. And the lemmings follow and believe.

      All that concerns me as an AAPL shareowner is that the iPhones 6 & 6+ are successes even without sapphire.

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