Apple Accused of ‘Bait and Switch’ - WSJ
Apple sapphire partner GT Advanced accuses the iPhone maker of a “bait-and-switch” strategy. Above, the new Apple Watch, which is expected to use synthetic sapphire for screens on some designs. REUTERS
GT Advanced Technologies Inc. said it sought bankruptcy protection last month because Apple Inc., a key customer, engaged in a “classic bait and switch” strategy that left the company stuck in “an onerous and massively one-sided deal.”
GT Advanced’s Oct. 6 bankruptcy filing stunned investors and creditors because it came less than a year after the company announced a major deal to supply Apple with sapphire screens for its devices.
Initially, court papers gave little hint of what exactly went wrong after Apple put $439 million toward GT’s transformation from a maker of furnaces for making sapphire to an actual producer of the synthetic material.
The details emerged Friday in a scathing declaration by GT Chief Operating Officer Daniel Squiller. The statement had been filed under seal before U.S. Bankruptcy Judge Henry Boroff ordered its release.
Mr. Squiller wrote Apple had turned GT into a “captive supplier” by “constant interference” and changes in product specifications, for which it didn’t compensate the New Hampshire-based company.
An Apple spokesman declined to comment Friday.
In an earlier motion seeking to keep Mr. Squiller’s declaration under seal, Apple said the filing was intended to “vilify Apple and portray Apple as a coercive bully.” Apple said Mr. Squiller’s statements were untrue and defamatory.
Apple also said it didn’t trick GT, which it said is a “sophisticated publicly traded company” with its own lawyers. The iPhone maker also noted the deal didn’t work out well for Apple either, as it loaned $439 million but didn’t get sapphire material it wanted.
Sapphire is one of the hardest materials on earth. Apple has been interested in using synthetic sapphire as a scratch-proof replacement for the glass currently used in iPhones and other devices. Sapphire is already used in watch faces and other products, but it has never been produced in the quantities Apple required.
After the bankruptcy filing, shareholders and suppliers speculated on the chances Apple and GT could somehow repair their relationship. However, the situation had deteriorated beyond repair, GT lawyer Luc Despins advised the judge during a closed-door court session on Oct. 9.
“There are discussions between Apple and the company not about continuing the marriage but rather what I could call a divorce without a custody fight,” Mr. Despins said.
GT wanted to make the Squiller declaration public, but agreed “not to put all the dirty laundry in the public domain” as long as it had some freedom to explain its bankruptcy filing, Mr. Despins said at that confidential court session.
The company faced a $50 million penalty if it breached its secrecy agreements with Apple. “We’re basically under a gag order while they’re out there talking to the press,” GT’s lawyer said.
“Apple would prefer not to have the discussion of its business relationship take place in the public eye,” Apple lawyer Christopher Mirick told the judge.
Mr. Squiller’s declaration could open Apple to challenges from other creditors as it tries to collect on debts owed by GT, even though GT and the committee representing unsecured creditors in its bankruptcy had previously warned that suing Apple would be prohibitively expensive.
GT, which was founded in 1994 and at one time had 1,300 employees, estimated its debts at $1.3 billion when it filed for bankruptcy. It had $85 million in cash.
The bleak picture painted by Mr. Squiller stands in contrast to earlier statements by GT executives who trumpeted the Apple deal and stressed that the company had sufficient funds even if it failed to meet Apple’s requirements for the sapphire factory.
According to Mr. Squiller’s account, the problems with Apple started even before the October 2013 agreement between the companies. At the time, GT made furnaces for synthesizing sapphire, and Apple initially expressed interest in buying furnaces.
After months of negotiations, the iPhone maker proposed a different deal: GT would make the sapphire itself, and Apple would lend GT money to produce more than 2,000 furnaces, Mr. Squiller wrote.
Apple had no obligation to buy GT’s sapphire but would restrict the company from selling sapphire to other consumer-electronics manufacturers. GT thought the deal was one-sided, Mr. Squiller said, but executives felt like they were “out of options” in negotiating with Apple.
“Knowing that GTAT had no practical choice at that stage other than to concede to Apple’s terms, Apple forced a set of agreements on GTAT, that in combination with Apple’s economic leverage, put Apple in de facto control of GTAT,” wrote Mr. Squiller. Elsewhere in the declaration, he described the relationship as “heads I win, tails you lose” proposition for Apple.
Mr. Squiller said Apple’s main legal negotiator in its talks with GT was a bankruptcy specialist. He said the choice “speaks volumes about Apple’s perspective on the transaction that it was about to enter into.”
When GT’s managers expressed concerns about some provisions of the contract, Apple responded that all of its suppliers agree to such terms and there was no room for negotiation, Mr. Squiller said. He quoted Apple as having said: “Put on your big boy pants and accept the agreement.”
When GT started operating the sapphire plant in Mesa, Ariz., in December 2013, Mr. Squiller said Apple employees assumed a level of authority that was “disruptive and prevented GTAT from managing its operations as it saw fit.”
He said Apple dictated what tools to use at the factory and prevented GTAT from speaking to the suppliers involved with the fabrication process of cutting and shaping the sapphire. Mr. Squiller said it cost 30% more than expected to make the sapphire, but Apple wouldn’t take responsibility for the increase.
He also said Apple constantly changed the specifications to GT, but never compensated the company for losses associated with those changes.
Mr. Squiller also rejected Apple’s contention that it was surprised by GT’s bankruptcy. He said GT’s senior management informed Apple a few weeks before the bankruptcy filing that it was losing substantial amounts of money on the sapphire project and it would soon run out of cash.
In its motion, Apple said it “bent over backwards” to work with GT including making payments to the company even when it failed to meet performance requirements. Apple said it was offering “significant concessions” to GT up until the eve of its bankruptcy filing.