The Danger Of A Big Customer: G T Advanced Technology’s Bankruptcy

The bankruptcy of Apple supplier GT Advanced Technologies (GTAT) offers lessons to all vendors to large companies. Whether supplying a physical product or a service, smaller companies selling to larger companies have to be cautious.

Selling to a giant, such as Apple (AAPL) or Walmart (WMT) or Bank of America (BAC), offers the potential for tremendous revenue. However, selling to a whale risks having no other customers to sell to.

Some companies have succeeded with one customer, but it’s a dangerous business model. The key is not having any competitors. If, on the other hand, you are one of several suppliers of a particular product, and you don’t have any other clients, you’re extremely vulnerable. The buyer is likely to play off one vendor against another, ensuring that none of them make much money. And if one of several suppliers goes bankrupt, that’s not a big problem for the buyer.

Thus, the first rule of thumb for selling to a big buyer is don’t go overboard. Maintain strong relationships with other customers. That may require your company to turn down some business from the whale, but sometimes turning down business is the key to long-run success.

The second rule of thumb is to be ready to produce other products. Some equipment is highly specific to one customer, while other equipment is more flexible. Flexible is good. This was part of GT’s problem.

For an example from another industry, think about French Fries. A McDonald’s (MCD) fry is not the same as a Burger King fry (BKW), which is different from a Wendy’s fry (WEN) . Differences include size, shape and coatings. The cheapest way to make French Fries is to buy machinery specific to one customer. That’s generally the way to get the lowest unit cost—specialize.

In the frozen potato industry, however, companies have been investing in just the opposite direction: more flexible equipment. They accept higher cost to get the ability to produce for one customer in the morning and a different customer in the afternoon. What they lose in cost per fry they make up by better utilization of their equipment. It’s easier to keep general-purpose machinery busy than highly specialized machinery.