How business works in the real world: Apple and GT and Beelzebub

GT Advanced declared bankruptcy and blamed Apple for its problems. Apple called GT Advanced’s story “defamatory”.  I have no idea about the specifics in this case but I do know about  big companies pushing insanely onerous and self-defeating terms on small ones.  Here’s the original claim by GT Advanced:

At the start of negotiations, Apple offered to buy 2,600 sapphire growing furnaces from GT Advanced, which GT Advanced would operate on behalf of Apple, the “ultimate technology client to land,” according to Squiller.

“In hindsight, it is unclear whether Apple even intended to purchase any sapphire furnaces from GTAT,” he wrote.

But after months of hard negotiating, Apple offered a deal under which it would shift away economic risk by lending GT Advanced the money to build the furnaces and grow the sapphire, and then sell it exclusively to Apple for less than market value, Squiller wrote.

GT Advanced was effectively forced to accept the unfair deal in October 2013 because its intense negotiations with Apple had left it unable to pursue deals with other smartphone makers, he said.

Punchinello_Mayor_HallBack when we were selling a real-time OS, I contacted an ex-boss who now had a high position in a telecommunications company to see if he could help us sell into it. His response was “don’ t touch this place, it is expert in destroying small vendors.” And, whatever the actual story with GT and Apple, the storyline is not at all unusual. The elements of a smaller company spellbound by prospects of a huge deal/giant customer, followed by time consuming negotiations, followed by onerous demands – been there, done that. We once were negotiating with a huge semiconductor company about a big deal that, over time, got worse and worse for us. We “finalized” with some terms that we thought might be survivable. And then the semiconductor company negotiators, one of whom by this point our negotiators were privately calling “Beelzebub”, announced they had to take the deal “to management” and came back with much more absurd demands. We were able to walk away but we saw other small companies make deals with Beelzebub and then fail. There is a strong impulse in some big companies, among some business units, to squeeze small company vendors way too far.

Once, after a sales visit to a big Wall Street Firm, two experienced sales people for a second supplier told me they were shocked by what I had said to the customer and advised me never to make the same error. What was my mistake? I had told the customer that we had produced a product that worked a lot better than what they were currently using, cost them a lot less, and was highly profitable to us. “Never do that”, counseled my colleagues, “they want to believe that, at best, you are breaking even on the deal, otherwise they think they left money on the table.”

The absurdity of these kinds of “negotiations” is that they are highly unprofitable for big companies. The potential savings are usually negligible for the bigger company. Negotiating purchase agreements is expensive for big companies. If they are even in the position of dealing with a small vendor, there must be some compelling business reason for getting whatever the small vendor is selling. This also means that a deal that would be unprofitable, perhaps damaging, to the vendor would put a critical part of the supply chain at risk for the purchaser. But instead of closing the deal and moving on, some purchasing groups in some companies want to grind the vendor down to “show value” to their management or maybe even just out of habit. Sometimes this requires the smaller company to walk away, sometimes to go over the heads of the purchasing group to business units waiting for the product. We’ve probably lost some deals that would have worked out well in the end by refusing to accept onerous terms, but we’ve also walked away from deals that would have been fatally unprofitable. The good thing is that walking away from an overbearing big customer is usually a good starting point for a sales effort aimed at its competitors.