back to article GT sapphire glaziers: You signed WHAT deal with Apple?

It's been a terribly exciting few weeks, as we've seen GT Advanced Technologies (GTAT) stumble and crash headlong into bankruptcy protection. The more documents are released by the court the more we can find out about just how this happened. And the more we do see, the more we realise that what actually happened is the …

FAIL

Just wasted five minutes hoping to learn something about why the deal with Apple caused grief, and if anything I am now less informed than before.

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Because

They signed an unbelievably bad contract.

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Been there, done that.

Tim Worstal - "Sure, we also get great leaps in efficiency when someone thinks up an entirely new way of achieving the same task, but it is a bit of a puzzle as to why it just seems to happen, almost all on its lonesome."

To put it simply, it's because the company accumulates people with years of experience and who know what they're doing. You know, the sort of people the MBAs are anxious to get rid of these days because they cost too much money?

Tim Worstal - "GTAT just didn't appear to have any of this learning-by-doing knowledge regarding how to actually run banks of the machines that it constructed. It may have been pretty shit hot at machine making but not at machine running."

This is not unusual. Knowing how to build a machine isn't the same thing as knowing how to use the machine plus organize all the other activities around it. The organization, knowledge, and type of personnel needed for the machine building industry aren't the same as for the industry which makes the products which the machine produces. This is aside from the fact that running the machine is usually just part of operating the business as a whole.

It's the same principle as to why mechanics don't necessarily make great race car drivers, and why software developers don't necessarily make great system administrators. Great in-depth knowledge of one aspect of a process doesn't automatically grant equal knowledge of the much greater breadth of experience required in the rest of it.

I've seen this elsewhere in other types of manufacturing industry. I've even seen a company which made solar cell manufacturing equipment try to go into the business of manufacturing solar cells themselves. It didn't turn out well because they simply didn't have the knowledge and experience of running a lean, efficient, manufacturing operation which involves doing a lot more than just running their machines.

There are companies which do encompass machine building and product manufacturing. However, these tend to be completely separate operations which just happen to be owned by the same conglomerate. The two groups typically operate at arm's length and may often not like each other much - (been there and done that).

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Anonymous Coward

Re: Been there, done that.

In my experience the makers of machine tools often have agreements with their leading edge users that give them first access to improved technology in exchange for feedback. But the machine tool makers doesn't get told the secrets of how to get the best out of their products. That's trade secrets.

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Silver badge

Re: Been there, done that.

To put it simply, [the efficiency gain is] because the company accumulates people with years of experience and who know what they're doing. You know, the sort of people the MBAs are anxious to get rid of these days because they cost too much money?

Words to that effect should be mandatory reading on every MBA. The world would become a better place. And the MBA would become less of a laughing stock amongst... well, everyone who hasn't been duped into doing one.

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Anonymous Coward

Re: Been there, done that.

Agree. The manufacturers of the instruments we use more or less said outright to us that we knew more about using them then they did. To the extent that they asked if we could show some people they were selling the instruments to how they were used in practice.

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Re: Been there, done that.

Works the same with software. I've just been poached back by an old boss as I know more about how the software they use actually works than the developers. Not that hard though given that over the last 6 years most of the new features in the software were specced and designed by myself for the specific use of the company I was working for.

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Anonymous Coward

Re: Been there, done that.

Sadly, MBAs tend to be laughing stocks all the way to the bank. Because an MBA is supposed to give you what you missed by not going to Eton - a handy contacts book and a training in self-PR. The trick is basically the same as successful country house burglary; put yourself where the money is, liberate some of it, and disappear before anybody is aware that it has been liberated. Running a company is secondary.

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Beggars cannot be choosers.

That is how it works and and this is exactly the same as that Apple Sharp deal.

Apple logic is that you get the company to take all the risk and when they fail you make sure you inherit the wealth.

Remember, Apple would have used Sharp amongst others to persuade GT how Apple works.

UK Imagination likely has similar a deal, locking them out of lots of selling to big players elsewhere.

So damned if you do, damned if you don't ?

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Was it a bad move?

It might have been a bad contract agreement but that doesn't make it a bad decision to have accepted it.

For one it may well have been "take it or leave it"; as noted they make the machines that others use to make the glass so they were not the only ones Apple could have approached, and very arguably weren't the ones best suited to the job.

There was undoubtedly a "you keep making it and we'll keep buying it" understanding, even if not in writing, and no reason to believe Apple would have reneged on that or evidence they have. It was indeed all going fine until GTAT failed to deliver to expectations. If GTAT hadn't screwed up then it did not not matter that the written contract wasn't very good.

Unless Apple had agreed to a "we pay even if you don't deliver as per expectations" I can't see how any contract would have saved GTAT, and surely no one is expecting Apple to have agreed to such a thing. We would instead be here laughing at Apple if they had.

If Apple had simply shafted GTAT after crafting a contract which favoured themselves that would be one thing, but GTAT seem to have shafted themselves. It's not Apple's responsibility to provide a guaranteed safety net for GTAT screw-ups.

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Re: Was it a bad move?

Possibly a contract with a figure for how much Apple would buy, would have allowed them to go to the bank for more money to get more time to finish the job

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Rob

Re: Was it a bad move?

"There was undoubtedly a "you keep making it and we'll keep buying it" understanding, even if not in writing..." even if that was true they still deserved to fail, if it's not in writing it doesn't mean anything.

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Holmes

Re: Was it a bad move?

An understanding "not in writing" isn't worth the paper it's not written on, surely.

A contract, in writing, would have spelled out exactly what each side's undertakings were, and would have given the company (at least) a non-moving set of goalposts to shoot for, and a solid "projected income" if they made the shot. If you have to start applying uncertainty to your projected income, suddenly the financial calculus gets a lot more complicated, and you end up hedging bets, putting off decisions and generally fscking up your manufacturing operations, until by the time you realise you're about to miss your obligations, it's far too late to do anything about it.

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A contract to become Apples preferred furnace supplier would have been a better deal

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Actually, that's probably what lead to this situation. GTAT was the furnace maker, and not in the business of making sapphire. So Apple needed a way of keeping competitors from developing sapphire screens, and one way of doing that is to lock GTAT into a contract with Apple. Of course, GTAT could have shown them the door and said go find a builder because we don't have any experience there, but that was one of only a handful of options available to Apple.

GTAT should have recognized the strength of their hand. There's a reason Apple is approaching you, GTAT.

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What were they thinking?

We'll definitely be out of business if we don't get a deal, we might be out of business if we do.

It looks like they ran out of cash before development was complete and had to take anything they could get.

I still don't think its that smart of Apple though. Pushing your suppliers to bankruptcy isn't a recipe for success. What happens if they start doing the sapphire thing and then have to stop because production has disappeared?

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Joke

Re: What were they thinking?

Pushing your suppliers to bankruptcy isn't a recipe for success.

I believe that is called the WalMart way to maximize profits.

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Apple's dealings with suppliers

I once read a book about Apple's early history, I wish I could remember the name. When Jobs was working on the Macintosh, they had an anecdote about how he pushed suppliers. He pushed and pushed and pushed until they had virtually no margins, then told them to be glad that they were taking part in changing the world, and he sold those suppliers on the idea that Apple would move 10's (if not 100's) of millions of Macintosh boxen, making the investment worthwhile. Of course, the closest sales estimate I can find is that of 70,000 units within 100 days. Certainly not the millions that Steve and Co. were counting on.

Further, I've read unsubstantiated reports that Tim Cook, formerly (?) COO, was also renowned for his tough dealings with suppliers.

It's not surprising that this is how Apple approached the situation. It's moderately surprising that GTAT acquiesced instead of telling them to get lost.

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Megaphone

Re: Apple's dealings with suppliers

Sadly an awful lot of big companies openly prey on the small fry because business as much as anything else is rigged against the little guy (not least of which is look who has the money to lobby). I have seen plenty of small shops that end up actually losing money on a big contract to a big player but rely so much on saying brand X is one of customers for other business they suck it up and soldier on. You learn quickly in industry when to watch for this and avoid working on that project at all costs. I have also seen plenty of cases where several small fry compete for the big boy and give the big boy all kinds of goodies up front for free and under cut each other to shit just to stick it to other small fry. Its just a shame the small fry end up employing most workers. Oh well half a career of busting butt (seeing both the mom and pop and mega corp side) at least has gotten me to that perfect medium of a decent mid-sized corporation that is big enough to not be beholden to any one customer for more than low single digit sales but has flat enough hierarchy so I am not just another nameless number. Probably until I hear in the news we have been bought (before I have enough of their stock in the bank). Sigh here's to working the day you die.

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I can see how this happened...

These sorts of contracts are not as uncommon as we'd like. The sexiness of having Apple (or some other A-list brand) as a major customer is extremely seductive to many 'executives'. Not only because it's great advertising, but the bolstering of the supplier's individual executive ego.

What's perhaps more surprising is the audacity of setting up production to compete with your customers. That's never a good idea, and doing it in such a high-risk method is either incredibly stupid, incredibly cocky or - probably in this case - both.

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Re: I can see how this happened...

>The sexiness of having Apple (or some other A-list brand) as a major customer is extremely seductive to many 'executives

Especially with their golden parachutes and bonuses mostly based on the next quarters performance only. When these deals go down its seldom upper management left holding the bag even if they caused it. I heard GT was actively hiring people almost right up until the bankruptcy filing, with it often being those leaving positions with other manufacturers in the area.

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Anonymous Coward

Aren't Apple just a bit stupid too?

Why would any company go to the manufacturer of an item and ask them to use their products to produce something that they have absolutely no experience of making? Here's a multi-billion dollar company asking complete novices to produce tens of millions of perfect sapphire glass screens, knowing full well that they've never made so much as one before. Why?

Did the company that makes the sapphire glass for the iPhone camera turn round and tell Apple it couldn't be done? That they couldn't make that many, to that specification and price? Did the other (presume there are others, although not that many) sapphire glass manufacturers all say it wasn't possible? Did Apple's arrogance get the better of them? Did they think they knew more than the experts?

Whoever decided to sign a contract with GTAT, and ultimately ended up dragging Apple into this farce, should be shown the door. If not, they could end up awarding the contract to make the iPhone 7 to the company that makes the solder that holds the 6 together.

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Anonymous Coward

Aren't Apple just a bit stupid too?

You think the RDF is a vector field. It's actually scalar.

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Re: Aren't Apple just a bit stupid too?

>Aren't Apple just a bit stupid too?

Somewhat but unlike GT they had a backup plan. The iPhone 6 might not have sapphire all over but considering how hard it was to get one through Verizon they'll be alright.

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Nothing new under the sun

I was once stuck on a train with a colleague ranting about a similar contract. The contract was in the 40s between Woolworth and his grandfather who ran a broom factory. Woolies started off with a small order, gradually increased until they took all the output then drove the price down until the factory went bust.

The only difference is "the speed of the internet" as Google would say.

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Tel
Coat

Re: Nothing new under the sun

That's the problem with putting all your apples in one basket. Pun intended and I make no apology for it!

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This post has been deleted by its author

Anonymous Coward

Re: Nothing new under the sun

Interesting stuff. This is behaviour I was aware of from Wal-Mart, from stories such as this:-

http://www.fastcompany.com/47593/wal-mart-you-dont-know

and this:-

http://www.fastcompany.com/54763/man-who-said-no-wal-mart

But it just goes to show that it was going on *long* ago, and- as you say- there's nothing new under the sun.

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Anonymous Coward

Scaling

I don't think semiconductors improved by the boules getting bigger; I think that as the defect rate reduced due to improved processing, it became possible to use bigger boules and so get economies of scale. At each wafer size, it is presumably possible to identify process improvements that can be incorporated into the next iteration of machinery, but the rising costs of plant suggest that each size increment is harder to debug than the previous one. When I started off, feature sizes were in microns. They are now in nanometres, but the wafer diameter certainly didn't scale up proportionally.

If GTA decided that they could simply scale up the machinery and get bigger defect free boules, it may be that this turned out to be wrong. The fatter the boule, the harder it must be to control temperature gradients.

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Aaah the old Jack Tramiel method

Business is war

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Silly little three year old...

So what? That GTAT screwed up their contracts and went bust as a result is not the interesting storey here. Why not use your industry skills to tell what is happening to the businesses that used to buy GTAT machines to make saphire screens? Where will they get their machines now?

Tell us about the businesses who woke up to find their suppliers in direct competition with them, did they survive or go bust? Do they still make saphire screens or have they moved into different markets?

Also, why not tell us who you think Apple (and other) phone makers are going to buy their screens from now? Instead of going from $30 to $10, are they going to go to $60?

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Re: Silly little three year old...

Only flaw in this line of thought is that there are absolutely no phone manufacturers at present using sapphire screens. Whether Apple even had any intent of incorporating such into their current line up is not known for certain.

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Say goodbye to the gift horse

Used to work for a food manufacturer where the boss deliberately and politely turned down a contract to supply a premium high street retailer.

His reason :- " We can easily meet their quality standards, but they want the right to visit anytime. If they visit on the one bad day we are bound to have, when we would have dumped the production anyway, we're doomed." Wise man and still in business.

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Re: Say goodbye to the gift horse

Obviously not in Hull then!

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Anonymous Coward

Re: Say goodbye to the gift horse

My mother used to work for a specialised wire manufacturer. One day they got an enormous purchase order from BICC. The MD phoned them up and told them that, knowing BICC, if they accepted the order the net result would be bankruptcy.

Family business, you see, with an eye to the long term future.

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Coat

Words to live by.

This:

"An awful lot of knowledge is local, some of it is implicit, and a great deal of both are gained simply by doing"

Is probably one of the most powerful truths in any field. Period.

Sadly, this includes contract law. Which from what Tim is saying, GTAT apparently needed more practice doing contract law with Apple.

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Facepalm

Ah Sun Microsystems!

(as Sun often used to do with the next generation of RAM) finance the existence of that leap in cost performance and thus make it actually happen.

Whatever happened to them ?

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Re: Ah Sun Microsystems!

Sun never made the move from a bespoke systems supplier to a generic box shifter, you could argue that Linux and generic boxes killed Sun, but that would be too simplistic.

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Apple may well have seen the ability to force this company into bankruptcy by various refused quality issues, and then be the top bidder at the auction for the production methods and patents, so they can create a situation where only they have sapphire screens after the smoke settles.

One hopes the judge will bar the company who caused the problem from bidding.

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Who sups with the devil needs use a long spoon.

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