Dylan Lewis: The life of an iPhone, in some ways begins at a Foxconn or Pegatron factory.
I think it really begins even earlier than that. Before they're assembled there, there
are all these components that are made by individual suppliers, or provided by individual
suppliers. I think some people have done very well investing in iPhone component manufacturers.
I think it kind of makes sense to discuss a couple of them here that you're particularly
interested in, that you think are worth talking about. One of the first ones that comes to
mind for me is Corning, and they are the manufacturers of Gorilla Glass, which is the glass that
is on the front of the iPhone. It's the one that your finger touches all the time, and
the one that Steve Jobs famously insisted on.
Evan Niu: Yeah, I remember the story was he had the original prototype which had a plastic
screen, in his pocket, and it kept getting scratched up. Then six months or six weeks,
it was some ridiculous timeline before the unveiling. He was like, "All right, we need
to go make this happen." Which again, kind of ties back in to the whole engineering talent
we were talking about earlier. They needed to make this change within such a short period
of time that you needed to have an army of mid-level manufacture engineers that could
put this together, from a manufacturing perspective to actually make this happen. It probably
wouldn't have been possible in the U.S. with the kind of talent we have here.
Of course now Gorilla Glass is the standard feature in all high end smartphones. Apple
really kind of brought this thing back from the dead because this technology had been
like 60 years old and Corning had no idea what to do with it because there was no market
for it. Then all of a sudden, Apple's like, "Hey" and they created a market for this product.
Now I think they're on Gorilla Glass 4 or something. Of course they improved the glass
every few generations or so, it's so common nowadays.
Lewis: I think, if I remember the story correctly, Steve Jobs said people are going to have this
in their pocket with keys, and the keys are going to scratch plastic, we need to have
something else. Inter-Corning right? I'm sure they're very happy to be an Apple provider.
Although, there was a period where it looked like they weren't going to be an Apple provider,
right? It seemed like Apple was going to be pivoting over to GTAT at one point.
Niu: Yeah, there was a lot of talk about the whole Sapphire thing which has its merits
but also has its downsides. There were pros and cons to switching to it. It's more scratch
resistant, but it's also more brittle, so it actually shatters easier than Gorilla Glass--
Lewis: That was one of the problems in manufacturing it right, and one of the reasons that GTAT
did not pan out as an Apple supplier? Niu: Right. One thing I'll mention about Corning,
is that when it comes to being an Apple supplier ... Being an Apple supplier is such a legitimate
investing strategy nowadays. I think Corning there, it's their specialty materials division
that includes Gorilla Glass. Which is only like 10 or 15% of sales. Corning's not really
a good candidate if you're going and saying, "Hey, I want to buy an Apple supplier that
has a lot of exposure to Apple" because they don't have a ton of exposure. The rest of
their business is making other glass products like, beakers, or science things, and all
these other things that have use for glass. Their exposure to Apple is actually pretty
modest in the grand scheme of things. Lewis: Yeah, they're not your conventional
tech supplier. I mean, they've been around for over 100 years at this point, and have
a lot of operations in the U.S. I know they used to produce the glass in the U.S. and
have since moved a lot of those operations over to Asia. I think part of the idea there
is to just be closer to the contract manufacturing that's happening.
Niu: Right, right. Especially for Gorilla Glass, it's just so popular in consumer tech
these days. Lewis: Yeah. We touched on it a little bit,
but can you give some background on the cautionary tale of GTAT and some of the struggles of
being an Apple supplier? Niu: Yeah, so GTAT is a good, probably the
best example of why being an Apple supplier is really this double edged sword, because
GT announced this giant deal of Apple. I forget all the specific numbers since it's been a
couple years. Basically, they announced this huge deal to Apple where they would sell Apple
the Sapphire material. Whereas GT had historically always been, they always made the furnace
for the Sapphire. They didn't actually make the Sapphire itself. What they did is they
would make the furnace and they would sell it to other companies, and the companies would
actually operate the furnaces, make the sapphire and sell the materials. GT had never actually
had experience making the material in large volume. They only made the equipment to make
the material. This deal with Apple was basically asking
them to switch their entire business model to create and sell a ton of the actual material.
Apple would basically be buying a ton of Sapphire at the low market rates, but it was such a
massive deal that GT kind of, I think they got caught up in the storyline and they knew
it's sexy to be an Apple supplier, so they kind of signed on board. Even without having
much experience in this kind of model of operation that Apple's asking for. Apple recently said
we were going to buy furnaces, but then they kind of swapped in there that we just want
the material. They set this whole agreement up where they're going to build this plant,
in I think Mesa, Arizona, and they were going to operate it. Apple inserted themselves in
this process at so many points, and plus the deal was so asymmetrical. GT basically took
on all the risks associated with this, Apple took on very little risk--
Lewis: They did provide some financing though, it really was like $500 billion dollars to
build that facility. Niu: Right, they basically offered to have
these pre-payments. They had these four installments of pre-payments of the total, I forget, I
think it was $800 million or something like that. Basically, there was these different
milestones that GT has to hit to get these pre-payments. The pre-payments are used because
someone needs to help fund the capex of building this facility and making all these furnaces.
GT was still going to be the owner of the furnaces. It's a ton of money that they don't
really have at the time to just go and do this, so Apple is pre-paying them and they're
getting to all these milestones. What those pre-payments did is, Apple gets to pre-pay
and that's basically a credit that they were planning to use as payment for Sapphire later
on. It's like, we'll pre-pay you now, and they can use the money to build this thing
up. Once they start outputting Sapphire, then they start delivering some Sapphire to Apple,
it's like bar tabs, and then they owe all the Sapphire.
It just became such a mess because Apple executives are overseeing GT engineers and trying to
tell them what to do, but Apple doesn't know how to do that stuff either. I remember reading
through some of the bankruptcy filings and GT's like, "Hey, we need spare backup generators
because if the power goes out we can lose hundreds of dollars of these bools in a batch."
Apple was like, "Nope, we don't want to do that." Then the power went out two or three
times, so you have this whole mess. They were basically betting the entire company on this
deal. It's really not a far stretch to say that.
Particularly in light of the fact that they felt trapped by Apple. They felt that they
were completely trapped in this deal, and the only way to get themselves out was to
declare bankruptcy, which they did. Of course, if you look at the timing of the GT executives,
they were cashing out some of their stock when the stock was high, right after the deals
announced. It's like everyone's excited Apple brought up a deal. So the stock goes up and
you see GT insiders start to cash out, and then 6 to 12 months later they declare bankruptcy.
Lewis: It didn't look good. Niu: It was a little shady.
Lewis: Yeah. Niu: I think they bit off way more than they
could chew, and GT shareholders got burnt pretty bad. They ended up bankrupt.
Lewis: If you're looking for a visual representation of how things went for GT, I would just search
for the bools themselves online in Google Images. Because they have these hundred pound
bools of Sapphire that are cracked and unusable for manufacturing purposes, because it was
something that was out of their competency. It wasn't in their--
Niu: When you have Apple saying, "Hey, we want a ton of it." It was just such a huge
change, like why would you think you could do this. I mean, of course at the time that's
what was leading all the speculation that they were going to use Sapphire to cover glass
for the iPhone. Despite it being more brittle, and all these, some trade off. They still
use Sapphire on the touch and home button, and as the camera cover glass thing. Those
are two pretty small pieces compared to the front panel.
Lewis: Yeah, the risk of that cracking is much lower.
Niu: I mean, people drop their phones all the time and Sapphire's more expensive too.
There's that too, that's another downside. Lewis: Yeah.
Niu: It's kind of a trade off. What's more important, scratch resistance or cracking
resistance? You know what I mean? No one likes scratching their phones, but if you drop your
phone you don't want it to crack instantly. At the same time, it's kind of debatable,
which one is more important. Gorilla Glass is better at one, and Sapphire is better at
the other. Lewis: I think the lesson with investors with
GTAT is if you're looking to play companies that are acting as Apple suppliers, see how
reliant they are on Apple as a business and see that they are operating within a competency
they are used to being in, right? Niu: Right. It was just such a bad deal.