By Daisuke Wakabayashi
Apple Inc. last year said it would invest $700 million to build
the world's biggest artificial-sapphire factory. On Monday, the
company running that factory-- GT Advanced Technologies Inc.--filed
for bankruptcy protection.
The bankruptcy filing comes less than a month after Apple
unveiled new iPhones with glass screens, rather than sapphire.
Apple's decision not to use sapphire followed tests in which the
synthetic sapphire proved brittle, cracking when phones were
dropped from various heights and angles, according to people
familiar with the matter.
The final straw for GT appears to be Apple withholding a $139
million payment, according to people familiar with the matter. That
was to be the last of four prepayments from Apple to GT totaling
$578 million. In August, GT had said that it expected the last
payment to arrive by the end of October--contingent on meeting
certain operational targets at the plant in Mesa, Ariz.
GT shares collapsed 93% Monday following the surprise bankruptcy
filing, wiping out roughly $1.4 billion in market value.
"The company appears to have bitten off more than it can chew in
regards to the relationship with Apple, which we believe is the
culprit here," Cowen and Co. analyst Jeffrey Osborne wrote in a
note to clients.
It also casts doubt on Apple's bet on sapphire, and on GT. When
Apple announced the deal last November, the tech giant said it
would create more than 2,000 jobs and move an important part of its
supply chain to the U.S.
Sapphire was seen as a potential solution to a big problem for
iPhones and other smartphones--broken or scratched screens. Apple
already uses sapphire from other manufacturers to cover the
iPhone's camera lens and fingerprint reader.
As recently as a few months ago, Apple engineers were testing
iPhone prototypes with a sapphire screen cover, according to the
people familiar with the matter. By using sapphire as an
alternative to hardened glass, Apple was hoping for a more scratch-
and shatter-resistant cover for its flagship smartphones, they
said.
In the end, Apple decided to scrap the sapphire screens for the
iPhone 6 and iPhone 6 Plus and stick with Corning Inc.'s heavy-duty
Gorilla Glass.
The Wall Street Journal reported in August that Apple was
considering using sapphire screens for some iPhones.
Two of the three models of Apple's new smartwatch will be
covered by sapphire. A person familiar with Apple's plans said GT's
bankruptcy won't affect those plans.
Eric Virey, a senior analyst at French research firm Yole
Développement, said the size and scope of the Arizona plant
suggests Apple had planned to use the sapphire screens for more
than the watch. At full capacity, he estimated the plant would
produce twice as much sapphire as the current output from nearly
100 manufacturers world-wide. "For me, there is absolutely no doubt
that it was for the smartphone," he said.
Mr. Virey said GT struggled with low manufacturing efficiency
and that other suppliers struggled to work with "finishing" the
sapphire to be smooth and blemish free.
"Today's filing does not mean we are going out of business;
rather, it provides us with the opportunity to continue to execute
our business plan on a stronger footing, maintain operations of our
diversified business, and improve our balance sheet," GT Advanced
Chief Executive Tom Gutierrez said in a news release.
A GT spokesman wasn't available for additional comment. A
message on his answering machine pointed to the company's
bankruptcy filings.
In its filings, GT said it had about $85 million in cash as of
Sept. 29, and it is now seeking debtor-in-possession financing.
The company expects that it will receive court authorization to
conduct business as usual during the reorganization effort.
In a petition filed with U.S. Bankruptcy Court in New Hampshire,
GT and its affiliates reported $1.5 billion in assets and
liabilities totaling approximately $1.3 billion. In filings, GT
listed Apple among hundreds of its creditors.
Mr. Gutierrez and another senior executive sold GT shares on
Sept. 8, a day before Apple announced the new phone will use a
glass screen. Mr. Gutierrez sold 9,232 shares of previously
restricted stock that vested that day, at roughly $17.38 a share;
according to a filing, the sale was part of a pre-arranged selling
program. Monday, GT shares closed at 80 cents.
Apple last year bought the 1.4-million-square-foot Arizona
facility--about the size of two dozen football fields--from a
solar-panel producer for $113 million and leased it to GT, a
leading maker of furnaces used to produce sapphire.
It agreed to a series of prepayments to outfit the factory with
cutting-edge furnaces. As part of the agreement, GT would start
repaying Apple in 2015.
For GT, it was a huge gamble. Up until its partnership with
Apple, the company had only produced the furnaces to grow synthetic
sapphire. It wasn't a manufacturer of sapphire itself.
For small suppliers, working with Apple can be a double-edged
sword. As one of the world's biggest manufacturers, an order from
Apple can be huge and, unlike other big firms, it pays suppliers
promptly, according to people who have worked with the company. It
can also help elevate a supplier's standing, because of Apple's
reputation to only work with firms that can meet its tough demands
and exacting standards.
However, suppliers often need to expand production rapidly to
meet demand created by the millions of Apple devices--a decision
that can backfire if something goes awry.
Write to Tess Stynes at tess.stynes@wsj.com and Joseph Checkler
at joseph.checkler@wsj.com
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