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Why Apple's Relationship With Sapphire Glass Supplier In Mesa Soured

Apple Inc.’s sapphire glass supplier is completely broke, and the New Hampshire bankruptcy court will decide Wednesday in a hearing whether to shut down its new factory in Mesa by the end of the year.

GT Advanced Technologies Inc. shocked Wall Street last Monday when it filed Chapter 11 bankruptcy, showing it was in debt by almost $1 billion.

Initially, the company said that daily operations would continue as usual as it reorganized its finances in the court.

But things quickly unraveled from there, and by Friday, GT filed motions asking the court for permission to end its contract and lease agreements with Apple and also shut down its sapphire glass productions in Mesa and Massachusetts. If approved on Wednesday, all 700 employees in Mesa and another 190 in Massachusetts could lose their jobs by December.

GT's stock plunged from $10.97 per share Monday morning before the bankruptcy filing to 81 cents at the end of trading day Friday, according to Yahoo Finance.

Apple’s arrival just a year ago was a huge deal for Arizona, which lured the tech-giant with more than $10 million in tax incentives. While the number of jobs it created was relatively small given gigantic size – 1.4 million square feet – of the former First Solar plant, it was still a $578 million investment and gave Arizona bragging rights.

So naturally, last week’s developments have been a big letdown for Arizona.

Mesa spokesman Steve Wright said the city didn’t have a comment on Friday’s developments. Arizona Commerce Authority spokesman Joseph Valdez said in an email that the state has not issued any tax-incentive payments to Apple.

Former Mayor Scott Smith, who helped facilitate the Apple deal during his tenure, said he’s trying to stay hopeful.

“Obviously anyone in Arizona should be disappointed that there’s a hiccup in this program, and as a citizen I’m disappointed,” Smith said.

Apple owns the Mesa plant outright, so it could keep it going if it signed a deal with another sapphire glass supplier. Smith said he can’t imagine why Apple would walk away from such a huge investment.

“I’m not sure that it’s totally played out. And I think what we need to do is sort of wait and watch and see how Apple responds,” he said.

An Apple spokeswoman declined to comment on Friday’s court filings by GT, and reiterated a company statement from earlier last week.

“We are proud of the jobs we've helped create in Arizona through Apple’s domestic manufacturing initiative and our state-of-the-art facility powered entirely by renewable energy sources,” the Apple statement said. “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.”

No one knows for sure why the relationship between Apple and GT soured; both have been tight-lipped and the terms of their contract have been kept highly confidential from the beginning.

It’ll stay that way in the courtroom, too. U.S. Bankruptcy Judge Henry Boroff has allowed some documents that detail GT’s financial problems and contract with Apple to be under seal.

But analysts say the fact that the new iPhone 6 screens weren’t made out of sapphire glass could be a clue into what went wrong.

The glass is supposedly indestructible. It’s already used on iPhone camera lenses and is expected to be used on the upcoming Apple Watch.

Rumors speculated the new iPhone 6 screens would sport the high-tech glass, but were proved wrong when it rolled out last month.

Arnold Maltz, associate professor at Arizona State University’s W.P. Carey School of Business, said Apple probably had to change course because GT was having problems making the glass on such a large scale and volume – something it hadn’t done before.

“I would’ve thought that Apple would’ve tested some of that stuff before they tried it. But it looks like, and maybe they did, but it looks like in large batches, they couldn’t get consistent quality,” Maltz said.

The initial agreement, struck in November last year, was that Apple would loan GT $578 million to get the Mesa facility going. GT would pay Apple back over five years, starting in 2015. But when GT ran into problems, Maltz and Wall Street analysts think Apple had to find a new game plan for the iPhone and that may also explain why it withheld the final loan payment to GT.

Additionally, GT’s cash reserves dropped from $333 million to $83 million in just the third quarter alone, according to filings with the Securities and Exchange Commission. That has fueled speculation that GT wasn't meeting certain performance benchmarks, which triggered early repayment of Apple's loan and eventually pushed it into bankruptcy last week.

As for the Mesa plant, Maltz said the question now is whether Apple can find another supplier to do what GT apparently couldn’t.

“If this plant has been equipped and designed for the form factor of the phone, and if in fact the, whatever the performance is not possible with this technology, then they’re going to have to do something else with it,” he said. “It may very well be dead.”

Arizona has more than $10 million lined up in tax incentives for Apple. But an Arizona Commerce Authority spokesman said nothing has been paid out.

Updated 10/13/2014 at 4:06 p.m.

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Kristena Hansen was a reporting at KJZZ from 2014 to 2015.