Appleinsider recently broke a story that Apple is planning to expand operations in Mesa by possibly adding a second building to expand production (see Appleinsider’s comments in the image below). The expansion of the current facility along with a target date of June makes complete sense, but expanding to a second building just does not add up at this time.
GT Advanced built a 20,000 square foot sapphire production facility in Salem, MA that was completed in 2011. The facility holds over 100 furnaces including over 80 ASF sapphire growth furnaces and there is plenty of room to spare to add additional furnaces, if needed. The Mesa Sapphire Plant has 1.3 million square feet of production space or the equivalent size of 65 of GT’s Salem sapphire production facilities. GT’s Salem sapphire production facility can hold over 80 furnaces and if we assume the same space to machine ratio within the Mesa facility the maximum sapphire growth furnace capacity inside of Mesa is over 5,000. Appleinsider reported (see image below) that the Mesa sapphire facility will be equipped with 1,700 furnaces, which by themselves would only fill 1/3 of the Mesa facility and it’s more than likely in my opinion that the Apple has only completed one or two of the planned expansion phases within the Arizona facility.
According to the Mesa facility lease agreement between GT Advanced and Apple will deliver the Mesa facility to the tenant (GT Advanced) in multiple phases as each phase becomes ready for delivery to the tenant. The Mesa delivery of the premise from the landlord (Apple) to the tenant (GT Advanced) is broken into 9 phases and they are referred to within the agreement as Phases 1 to 6 and Phases A to C. Appleinsider reported that the construction would be finished no later in June and based on the lease agreement between the two companies it seems more than likely that Apple may be targeting June to complete the remaining delivery phases inside of Mesa. Once the remaining delivery phases are complete, Apple’s tenant GT Advanced to can grow sapphire and process sapphire boules within the remaining dedicated delivery zones (phases).
1.2.1 Phases. Landlord anticipates that it will deliver possession of the Premises to Tenant in multiple phases as each phase of the Premises (each, a “Phase”) becomes ready for delivery to Tenant. As used in this Lease, the term “Current Demised Premises” shall mean, at any given time, the Premises or the Phase(s), and the portion of the Premises corresponding to such Phase(s), of which Tenant has accepted delivery in accordance with Section 1.4. Exhibit C describes each of the nine (9) Phases of the Premises. The Phases are designated on Exhibit C as “Phase 1”, “Phase 2”, “Phase 3”, “Phase 4”, “Phase 5”,”Phase 6”, “Phase A”, “Phase B” and “Phase C”. Except as expressly set forth in Sections 1.2.2, 1.3 and 1.4, Landlord shall deliver each Phase of the Premises to Tenant in its then “as-is” condition without any representations or warranties regarding condition.
The master development and supply agreement between Apple and GT Advanced sheds some significant light on the contracted expectations between both companies. According to the master development an supply agreement, the expectation is that “GTAT will at its expense, purchase, install, test, maintain and operate all equipment necessary to manufacture and deliver the development deliverables and the Goods”. Additionally, “before placing orders for or purchasing any materials for use in Goods that are comprised of multiple components, GTAT will provide for Apple’s review and approval, a complete engineering bill of materials for such Goods…”. The language in this agreement appears to indicate that GT will not only be responsible for development deliverables (sapphire boules) but the delivery of the goods (sapphire screens, sapphire components, etc.).
21.1. Unless agreed otherwise in an SOW, GTAT will, at its expense, purchase, install, test, maintain and operate all Equipment necessary to manufacture and deliver the development deliverables and the Goods. GTAT will also secure all materials in accordance with applicable Specifications necessary to timely manufacture and supply the development deliverables (pursuant to Attachment 2) and the Goods. Upon Apple’s request, GTAT will purchase materials directly from Apple, and, at Apple’s request, will provide Apple with (i) weekly reports by part number specifying demand for such materials for the immediately following 12-week period; and (ii) weekly receipt logs of any such materials. Before placing orders for or purchasing any materials for use in Goods that are comprised of multiple components, GTAT will provide Apple, for Apple’s review and approval, a complete engineering bill of materials for such Goods, listing the GTAT part number(s), lead-time(s), and cost(s) of each material therein. Except for amounts due pursuant to a Letter of Authorization, the applicable SOW or Purchase Order, Apple will not be responsible for any costs associated with the materials. “Equipment” means fixtures, tooling, test equipment and any other equipment used in connection with the development, manufacturing, testing, packaging, delivery or servicing of the development deliverables or Goods. “BOM” means the engineering bill of materials that Apple creates and approves for the development deliverables or Goods.
The master development and supply agreement also indicates that GT will likely be responsible for storing goods for just-in-time delivery at an Apple Hub. An Apple Hub is defined as a. “Apple-approved facility located at or near Apple-specified manufacturing or distribution facilities, or other Apple-specified location”.
13. Hubs. As agreed in any SOW, GTAT will store Goods in Hubs before their Forecast delivery date to support just-in-time delivery of the Goods. GTAT will: (i) bear all costs associated with warehousing Goods in Hubs; (ii) maintain a sufficient inventory of Goods in the Hubs to satisfy the requirements of the then current Forecast; (iii) ensure that the Authorized Purchaser or its carrier(s) may withdraw Goods from the Hubs as needed; (iv) fully insure, or require the Hub operator to fully insure, all Goods in transit to or stored at a Hub against all risk of loss or damage until such time as the Authorized Purchaser takes title to them; and (v) require that the Hub operator take all steps necessary to protect all Goods in a Hub consistent with good commercial warehousing practice. “Hub” means an Apple-approved facility located at or near Apple-specified manufacturing or distribution facilities, or other Apple-specified location.
The “9” Delivery Phases & Multiple Components within Mesa Takeaway
The “9” delivery phases (1 to 6 and A to C) within the Mesa facility are likely for specific products and/or sapphire components. If you are going to design a manufacturing plant it would make sense to zone off area based on the specific sapphire “form factor” and the required finishing technique(s) to process the finished sapphire good. GT’s former CFO Richard Gaynor summed up the “form factor” benefits perfectly during GT’s Q4 2012 conference call, “One of the benefit of the technology that we have is that it can actually change the form factor of the boules that you produce. And so you can actually customize the size of the boule to the application you’re trying to build for”.
In January 9to5Mac reported that Apple was hiring for iPhone/iPad manufacturing design engineers for the Mesa, AZ sapphire plant. The master development and supply agreement specifically calls out how GT Advanced will handle Apple “goods” that are comprised of multiple components. The iPhone/iPod engineering job posting in addition to the contract language regarding multiple components certainly send a strong signal that the Mesa sapphire plant will not be limited to just the iPhone. I have thought for sometime that Apple would refresh the iPod alongside the upcoming iPhone in 2014. The size of the current iPods and iPhones are nearly identical and it makes sense that you could grow “formed” sapphire boules for “multiple components” (iPhone & iPad) within the same “good” (sapphire boule).
The various contract agreements between GT Advanced and Apple indicate that a lot of activity is going to occur inside of the Mesa sapphire plant. GT Advanced appears to be responsible for purchasing and installing the ASF equipment, growing the sapphire boules, producing the finished goods and shipping and storing the goods at an Apple approved facility. At this point it is still anyone’s guess as to what exactly will be produced from the Mesa sapphire plant, but the “9 phases” and the mention of “goods with multiple components” certainly indicate that the scope of the Mesa operations may include all of Apple’s iDevices and not just the next generation iPhone and or iWatch.
Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings in the next 72 hours