|Inside Apple’s Broken Sapphire Factory|
How $1 Billion Bet on iPhone Screens Failed; The ‘Boule Graveyard’
By Daisuke Wakabayashi / WSJ Nov. 19, 2014
(background story on a Corning competitor)
Shortly before 7 a.m. Pacific time on Oct. 6, the chief executive of GT Advanced Technologies Inc. called an Apple Inc. vice president with bad news: GT, which was to supply Apple with superhard sapphire screens for its new iPhones, had filed for bankruptcy 20 minutes earlier.
The filing surprised Apple, because the companies had been negotiating changes in their contract to ease GT’s financial strain, according to a letter Apple later sent to GT’s creditors. Executives of the companies had planned to meet the next day at Apple’s headquarters.
A year earlier, Apple and GT had hailed a $1 billion plan to build an Arizona factory that would produce 30 times as much sapphire as any other plant in the world.
Instead, the alliance turned into a rare—and public—misstep for Apple, whose strict management of its global supply chain has helped it become the world’s biggest company by market value. From the making of the first iPhone in 2007, Apple repeatedly has pushed its suppliers to achieve the improbable, while driving hard bargains on price and time to market.
The Apple-GT marriage was troubled from the start. GT hadn’t mass-produced sapphire before the Apple deal. The New Hampshire company’s first 578-pound cylinder of sapphire, made just days before the companies signed their contract, was flawed and unusable. GT hired hundreds of workers with little oversight; some bored employees were paid overtime to sweep floors repeatedly, while others played hooky.
GT’s meltdown underscores the promise and peril for Apple suppliers. An Apple deal can generate billions in revenue. But it also means adapting to huge fluctuations in demand, at razor-thin profit margins and little room for error. “This is not easy money,” said an executive of a longtime Apple supplier in Asia.
GT Chief Operating Officer Daniel Squiller told the bankruptcy court that Apple had turned his company into a captive supplier, “bearing all of the risk and all of the cost.” GT couldn’t make a profit at Apple’s “dictated pricing,” he said.
Apple put blame for the deal’s failure “squarely at the feet of GTAT’s own management,” according to the letter to GT’s creditors, which Apple allowed The Wall Street Journal to review. “We never wavered from our commitment to make the project successful.”
The Cupertino, Calif., company turned to GT while seeking to solve a big problem with iPhones: scratched or broken screens. Sapphire is one of the hardest materials on earth, now typically produced synthetically, in furnaces that reach more than 3,600 degrees Fahrenheit. It also is expensive—more than five times the cost of glass.
Apple consumes one-fourth of the world’s supply of sapphire to cover the iPhone’s camera lens and fingerprint reader. Early last year, the company began looking for a much larger supply, to cover the iPhone’s screen.
GT made furnaces for producing sapphire. According to Apple’s letter to the creditors, GT told Apple in March of last year that it was developing a furnace that could produce a sapphire cylinder, known as a boule, weighing 578 pounds, more than twice as large as what were then the biggest boules. The larger boule would yield more screens, reducing costs.
GT said in its bankruptcy filings that Apple expressed interest in buying 2,600 of the new furnaces.
Around early summer, Apple switched gears and asked GT to make the sapphire. Apple didn’t want to pay GT’s typical 40% margin for the furnaces, a person close to GT’s operations said.
Apple also was having trouble finding a sapphire manufacturer. An executive at another company Apple approached last year said it couldn’t make a profit producing sapphire at the price Apple wanted.
Apple offered to lend GT $578 million toward building 2,036 furnaces and operating a factory in Mesa, Ariz. Apple would buy and retrofit the factory for an additional $500 million and lease it to GT for $100 a year.
GT was intrigued, because the agreement would provide more consistent revenue than equipment orders. Moreover, GT’s business making equipment for solar cells had fallen on hard times. GT’s 2013 revenue was down 66% from two years earlier.
On Oct. 31 of last year, GT and Apple signed an agreement, a few days after the first 578-pound boule emerged from a GT furnace. The cylinder was cracked so badly that none of the sapphire was usable, people familiar with Apple’s operations said.
GT said the quality would improve, and Apple was encouraged by GT’s track record of making successively bigger furnaces, the people said.
GT quickly set out to hire 700 staffers. Hiring moved so quickly that at one point in late spring, more than 100 recent hires didn’t know who they reported to, a former manager said. Two other former workers said there was no attendance policy, which led to an unusual number of sick days.
GT managers in the spring authorized unlimited overtime to fill furnaces with materials to grow sapphire. But GT hadn’t built enough furnaces yet, so many workers had nothing to do, two former employees said.
“We just kept sweeping the floors over and over,” one of the former employees said. “I just saw money flying out the door.”
Producing sapphire proved to be the biggest problem. It took roughly 30 days and cost about $20,000 to make a single boule. The people familiar with Apple’s operations said more than half the boules were unusable.
GT stored unusable cylinders in rows in an area of the Mesa factory that employees labeled the “boule graveyard,” people close to GT’s operations said.
Mr. Squiller, the GT operations chief, told the bankruptcy court that GT lost three months of production to power outages and delays building the facility.
Apple was responsible for building the facility to GT’s specifications and providing power. Apple told the creditors that GT failed because of “mismanagement,” not power interruptions.
Apple’s comments were “purposely misleading, out of context or inaccurate,” GT said in a brief statement for this article. “There is no point in engaging in a point-by-point debate on each issue.”
Late this April, Apple withheld the final $139 million it was supposed to advance GT, saying it hadn’t met the contract’s output or quality requirements.
GT said in its bankruptcy filing that Apple repeatedly changed specifications for the sapphire. The filing said GT spent $900 million—more than twice the $439 million Apple provided—to get the factory up and running.
On June 6, GT Chief Executive Thomas Gutierrez met with two Apple vice presidents in Cupertino to explain the production problems, according to Apple’s letter to the creditors. He presented a document titled “What Happened,” listing 17 problems, including improperly stocking the furnaces and creating problems by inadvertently changing a furnace design.
Mr. Gutierrez said he was there to “fall on his sword,” the Apple letter said. After the meeting, GT decided to stop producing 578-pound boules and make 363-pound cylinders to get the formula right.
GT spent $900 million—more than twice the $439 million Apple provided—to get the sapphire factory up and running. GT Advanced Technologies
When a boule was suitable, GT used a diamond saw to carve 14-inch thick bricks in the shape of Apple’s two new phones: the iPhone 6 and iPhone 6 Plus. Those bricks would be sliced lengthwise to make screens.
Manufacturing wasn’t the only problem. In August, one of the former workers said, GT discovered that 500 sapphire bricks were missing. A few hours later, workers learned that a manager had sent the bricks to recycling instead of shipping. Had they not been retrieved, the misfire would have cost GT hundreds of thousands of dollars.
By that point, it was apparent that sapphire wouldn’t be used for the screens on the new iPhones, which went on sale Sept. 19. Yet Apple still was eager to get as much sapphire as possible, the people familiar with its operations said. Apple’s letter said it only received 10% of the sapphire that GT originally promised.
The people close to GT’s operations said contractors for Apple applied quality standards inconsistently, sometimes accepting bricks that had been rejected a few days earlier.
In the first week of September, GT told Apple that it was having significant cash-flow problems. It asked Apple to pay the final $139 million loan installment and asked Apple to pay more for sapphire deliveries starting in 2015, one of the people familiar with GT’s operations said.
On Oct. 1, Apple offered to give GT $100 million of the $139 million loan installment and delay the repayment schedule, the people familiar with Apple’s operations said. Apple also offered to raise the price it paid for sapphire this year, to discuss raising it for 2015 and to relax exclusivity agreements so GT could sell furnaces to other customers, they said. The companies agreed to discuss the offer in person Oct. 7 in Cupertino.
Then came the early-morning Oct. 6 call, when GT chief Mr. Gutierrez told Apple that his company had sought bankruptcy protection. The people close to GT’s operations said executives hadn’t told Apple about the bankruptcy plan because they feared Apple would try to thwart them.
GT shares collapsed 93% on the news, wiping out roughly $1.4 billion in market value.