Did Apple’s Sapphire iPhone Ambitions Bankrupt This Supplier?

Apple CEO Tim Cook shows off the new iPhone 6 and the Apple Watch during an Apple special event

Source: Justin Sullivan/ Getty Images

Some of the biggest rumors circulating about Apple’s iPhone 6 and iPhone 6 Plus models before the devices were unveiled on September 9 was speculation about the implementation of sapphire-covered screens. The rumors about Apple’s use of this extremely hard and scratch-resistant material began last year, when a regulatory filing revealed that the California-based company had made a $578 million investment in a state-of-the-art sapphire manufacturing plant run by GT Advanced Technologies. Media outlets such as The Wall Street Journal and analysts such as PTT Research’s Matt Margolis confidently predicted that at least some of Apple’s new iPhone models would feature sapphire-covered screens. Unfortunately, those predictions — along with GT Advanced Technologies’ stock price — came crashing down on September 9 when Apple announced that the new iPhone models were outfitted with “ion-strengthened” Gorilla Glass, rather than sapphire.

While the lack of a sapphire-covered iPhone was a disappointing turn of events for GT Advanced Technologies’ investors, the blow was softened by the news that many of the upcoming Apple Watch models would feature sapphire-covered screens and that sapphire would still be used as a protective covering for the iPhone’s Touch ID fingerprint sensor and camera lens. However, GT Advanced Technologies investors’ sense of relief didn’t last long. On October 6, the company declared that it was filing for Chapter 11 bankruptcy, an announcement that erased nearly 90 percent of the company’s market value in one day. At a bankruptcy hearing on October 9, GT Advanced Technologies revealed that it intends on shuttering its sapphire operations as part of its reorganization plan, Reuters reported.

So what happened? Due to a confidentiality agreement that GT Advanced Technologies signed with Apple, many of the reasons behind the bankruptcy still remain unknown at this time. However, according to court documents seen by The Wall Street Journal, GT Advanced Technologies’ bankruptcy appears to have been directly caused by the company’s failure to produce sapphire screens for Apple’s new iPhone models. This suggests that Apple may have been planning to implement sapphire-covered screens for its latest iPhone models after all, but GT Advanced Technologies was unable to meet the production goals or the standards of quality required by Apple.

Source: www.gtat.com

Source: www.gtat.com

GT Advanced Technologies’ bankruptcy filing presumably means that the sapphire required for the Apple Watch and the iPhone’s Touch ID and camera components was not enough to keep the company’s manufacturing plant afloat. It should be noted that according to GT Advanced Technologies’ 10-K report, the company was scheduled to begin repaying Apple’s $578 million investment “over a five year period beginning in January 2015, either as a credit against Apple purchases of sapphire material or as a direct cash payment to Apple.” However, the company also noted that “Apple has no minimum purchase obligation” and that a shortage of sapphire orders could leave the company unable to repay its debt.

If GT Advanced Technologies’ failure to produce a viable iPhone sapphire screen for Apple did lead directly to the company’s collapse, this would mean that both parties should have been aware of the company’s financial problems long before the new iPhone unveiling on September 9. Although the documents seen by The Wall Street Journal suggest that the collapse of GT Advanced Technologies’ sapphire operations was due to its failure to produce a sapphire iPhone screen, there may have also been other factors that contributed to the company’s bankruptcy.

According to a statement obtained by Reuters, Apple called GT Advanced Technologies’ bankruptcy announcement “surprising,” which suggests that the iPhone maker was unaware of the company’s dire financial issues. However, according to The Wall Street Journal, Apple withheld a final $139 million payment it was due to make to the sapphire supplier earlier in October for unknown reasons. Reuters also cited a source that said Apple tried to help GT Advanced Technologies meet its production goals, although it is unknown if this effort was for the fabled iPhone sapphire screens or for other sapphire components.

Source: Apple.com

Source: Apple.com

On the other side, GT Advanced Technologies CEO and president Thomas Gutierrez sold 9,000 shares of his company’s stock on the day before Apple’s iPhone media event, reports The Wall Street Journal. While the company claimed that the stock sale was planned months in advance, it will undoubtedly be scrutinized closely by investors and creditors in light of the company’s recent bankruptcy.  Unfortunately, the confidentiality agreements between Apple and GT Advanced Technologies have so far strictly limited what information can be revealed. According to GT Advanced Technologies lawyer Luc Despins, revealing “the full causes of the filing and the game plan in the case” could allow Apple to hit the company with a $50 million damages fine, reports The Wall Street Journal.

Although the causes behind the sapphire supplier’s bankruptcy are still not fully known, it appears that the production of the sapphire-covered Apple Watch will be unaffected. According to a KGI Securities research report seen by 9to5Mac, since the sapphire produced at GT Advanced Technologies was primarily intended for the iPhone 6 and the iPhone 6 Plus, Apple will still be able to source its Apple Watch sapphire screens — as well as the Touch ID and camera lens components — from other manufacturers.

Despite the current plans to close GT Advanced Technologies’ sapphire plant, there is also still a chance that Apple could revive its operations for a future bid to produce a sapphire iPhone screen. “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,” said Apple spokesman Chris Gaither in a statement obtained by Reuters. Either way, according to GT Advanced Technologies’ 10-K filing, Apple has the right to take possession of the company’s sapphire-making equipment in the event that it cannot pay off its debt.

Follow Nathanael on Twitter (@ArnoldEtan_WSCS)

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