It’s the sort of public row few suppliers would ever engage in with a major customer of Apple Inc.’s size and influence within the electronics supply chain. With bankruptcy looming, though, GT Advanced Technologies Inc. seemed to no longer care how angry Apple Inc. executives might get if details of the two companies’ component sourcing agreement were publicized. It’s now up to a bankruptcy judge to decide if detailed information about the consumer electronics giant’s procurement strategy could be made public.
Many in the electronics industry would like to see the terms of the sourcing agreement described by GT Advanced as “oppressive and burdensome” in court filing. Apple, on the other hand, is aggressively trying to keep the information sealed as part of a long tradition of keeping suppliers in check by the manufacturer of smartphones and tablet PCs. The case is now before a bankruptcy judge who is reportedly skeptical of Apple’s justification for keeping the terms of the agreement confidential. “I’ve got a foot-high stack of documents, and it can’t be that it all must be sealed,” said Judge Henry Boroff of the U.S. Bankruptcy Court, Springfield, Mass.
While media reports have said Apple’s request is “unusual and unprecedented,” this isn’t exactly true. The Cupertino, Calif.-based company is reputed for imposing strict conditions on its components providers, including forbidding them from discussing the terms of the procurement agreement or even identifying themselves as suppliers to Apple. In the case of GT Advanced, the disclosure of the sourcing agreement between the supplier of display materials and Apple could result in fines of up to $50 million per occurrence.
The reason behind GT Advanced’s bankruptcy filing itself is equally controversial. The company reached an agreement to supply artificial sapphire to Apple for use in its iPhone and other displays. To establish itself as the sole buyer of GT Advanced output from a plant built in Arizona, Apple promised to loan GT Advanced about half a billion dollars and established certain operational targets the supplier must meet, a burden the company now says were deadly to its operations. “The cash burn at GTAT’s sapphire-manufacturing operations for the benefit of Apple is not sustainable,” GT Advanced said in a court filing.
GT Advanced has chosen instead to pursue file bankruptcy for all its nine business units to save its non-sapphire operations. It wants to shut down the sapphire plants and lay off more than 900 employees, representing almost three quarters of its staff. It is also seeking protection from creditors it owes approximately $145 million in addition to the $434 million owed bondholders.
"GT has a strong and fundamentally sound underlying business," said Tom Gutierrez, president and CEO of GT in a press statement issued on Oct. 6. "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. We are convinced that the rehabilitative process of chapter 11 is the best way to reorganize, protect our company and provide a path to our future success.”
The bankruptcy filing itself should have been a humdrum affair with the proceedings open to the public and investors, except for Apple’s insistence on secrecy. The company wants the details of its arrangement with GT Advanced sealed but is now facing a pushback from media outlets, including Dow Jones Co. and Bloomberg, both of which have asked the court to ensure reporters can have access to the documents. The media wants access to the transcript of the bankruptcy proceeding on October 9, 2014 since Apple’s request meant reporters and other GT Advanced creditors could not attend the session.
They want more. In its filing, Dow Jones noted that “some information, concerning demeanor, non-verbal responses, and the like, is necessarily lost in the translation of a live proceeding to a cold transcript.” In other words, the press wants full access to the entire hearing and as much of the documents involved as the judge would consider appropriate.
If Apple loses its bid to keep the proceedings private the impact will reverberate throughout an industry where sourcing agreements are considered unbreakable. Suppliers have long chafed under onerous secrecy requirements imposed by OEM customers many of them seeking to avoid the disclosure of information about component pricing and delivery terms. Even so, for big companies of Apple’s size, sourcing secrecy has become the norm in procurement contracts and it’s unlikely that this strategy would be abandoned.
This is because similar to other supply chain issues, procurement sourcing terms are considered a major part of most companies’ overall competitive strategy. The press and GT Advanced may be able to force the disclosure of information Apple wants to keep sealed in this instance but the company is likely to appeal such a decision to a higher court. If it still fails, there’s always the option of making sure a component supplier is not forced into bankruptcy.