Apple’s micro-managing is nerve racking for suppliers

SAN FRANCISCO: The confidential deals that Apple strikes with its suppliers have been dragged into public view by the abrupt bankruptcy of a key component maker in Arizona. Details of Apple’s non-disclosure agreements, which suppliers are not even allowed to acknowledge, have already emerged in court filings by GT Advanced Technology, including the $50 million penalty the iPhone maker imposes for any leak of product information.
GT’s lawyers are arguing that even more information about its relationship with Apple should be published, in the interests of creditors and shareholders. In filings, the Arizona-based manufacturer called its supplier agreement with Apple “oppressive and burdensome”. That marked a sudden about-turn by the Nasdaq-listed company, which only a year ago was enthusing to shareholders how its partnership with the US tech group would transform its business and power a new source of growth.
With the exact circumstances leading up to GT’s sudden filing for Chapter 11 bankruptcy protection unclear, other companies in Apple’s supply chain are watching the case with nervous interest.
Most of Apple’s suppliers are in Asia, but under chief executive Tim Cook it has worked to expand its US supply chain. Its $3,000 (Dh11,000) Mac Pro has been manufactured in Texas since December. Last November, Apple said it would lend GT $578 million (Dh2.1 billion) to help it set up a sapphire manufacturing facility in Arizona.Though neither party would comment on what the synthetic sapphire would be used for, analysts concluded that it was probably destined to replace the hardened glass currently used in the iPhone’s screen. Since then, Apple has said its forthcoming Watch accessory will also come with a sapphire screen.
Encouraged by local tax breaks, both companies had trumpeted the partnership for creating hundreds of jobs in a region hit hard by the housing downturn. Under the agreement with GT, Apple was to design and build a facility in Mesa, near Phoenix, and lease it to the smaller company, drawing power from a purpose-built solar array.
“We are focused on preserving jobs in Arizona following GT’s surprising decision and we will continue to work with state and local officials as we consider our next steps,” Apple said in a statement.However, barely a year into what should have been a five-year relationship, GT filed for bankruptcy. This came as a shock to Wall Street, which sold down its stock by more than 90 per cent in a single day, and to Apple itself, which described the move as “surprising”.
While GT is looking to blame its deal with Apple for its financial difficulties, it already faces a class-action lawsuit from angry shareholders who claim that it “misrepresented and/or concealed” its financial position, its ability to meet Apple’s requirements and its progress on manufacturing the sapphire.
As recently as August, GT said in an earnings call that it was confident it would meet the operational targets set by Apple and receive its final prepayment of $139 million, which had been due by the end of this month. However, when the iPhone 6 was revealed last month without any mention of a sapphire screen, GT’s stock tumbled.
Apple insists on a much higher quality of manufacturing and materials than other consumer electronics companies. Sir Jonathan Ive, Apple’s design chief, has described his extreme attention to detail in developing its gadgets and its efforts to differentiate on quality.
“I believe we sense when there has been care taken with a product,” Sir Jonathan told attendees at a Vanity Fair event in San Francisco, “just as in the same way that we sense carelessness. Sadly most of our manufactured environment testifies to a degree of carelessness.”
Under such pressure, few suppliers are able to achieve a higher profit margin than Apple itself, which reported gross margins of 39.4 per cent in its June quarter. Long-term partners have become accustomed to its unique processes, exacting requirements and demanding financial terms, in part because they have been able to ride on the back of Apple’s rapid growth.
While Apple leaves little room for error, GT appears to be the first of its thousands of suppliers in recent years to run into such public financial distress. Nonetheless, GT’s claims of “oppressive” terms will raise questions for Apple’s smaller suppliers.
It is already beginning to wind down the sapphire manufacturing operations related to Apple products, which it said cost it $1 million a day, leading to the loss of 890 jobs, out of its 1,110 full-time employees. GT hopes that lifting the veil of secrecy that Apple has imposed will help its case in the bankruptcy courts.
GT asked the court for permission to file unredacted details of its situation “in the interest of their creditors, equity holders and other stakeholders, as well as to ensure an open, transparent and fair process”. Its agreements with Apple could include details of the sapphire’s specifications, which would probably betray Apple’s plans for future products, as well as pricing and costs — figures which other suppliers could use as leverage in their own margin negotiations.
To protect its intellectual property and maintain the surprise around its new products, Apple’s demands for confidentiality are unlike any other in the technology industry. GT said that Apple’s non-disclosure agreements “provide that each breach of the confidentiality obligations will require GTAT Corp to pay liquidated damages to Apple in an amount of $50 million per occurrence”.
“Apple has treated the confidentiality agreement itself as ‘confidential’,” it added.
The case could break legal ground as judges must weigh the rights of corporate confidentiality against those of creditors in a bankrupt company.
GT says Apple’s NDAs create “significant logistical problems” and give the iPhone maker “disproportionate power”. Creditors and bondholders are together owed more than $500 million by GT.