Apple Inc. (NASDAQ:AAPL) has funded GT Advanced Technologies (GTAT) new, massive sapphire crystal manufacturing plant in Mesa, Arizona through a series of massive preorders for the glass produced there. The plan appears to be catapult the formerly prohibitively expensive, scratch-proof display material into widespread use through economies of scale. Sapphire crystal will likely be used on the iPhone 6 and perhaps on the iWatch also. However, it appears that the choice of location may be to further reduce production costs by creating a new Free Trade Zone.
Free Trade Zones are an interesting legal concept which declares certain geographical regions, typically quite limited in extent, to be places where items or materials manufactured for export are not subject to customs, tariffs, duties, and so on as long as they are shipped abroad rather than leaving the Free Trade Zone to be marketed domestically. Despite certain alarmist urban legends, they are still part of the United States and subject to its laws in all other regards.
The way in which Apple Inc. (AAPL) and GTAT would benefit from such an arrangement is not difficult to understand. Raw material could be imported to the factory without paying import duties. After its transformation into sapphire crystal, either cut or uncut, it could then be exported directly to the Asian manufacturing facilities where the actual production of iPhones and other Apple electronics takes place, again without paying duties and tariffs.
This would cut Apple’s costs for using sapphire displays in future products, thus enabling use of the superior material without significantly increasing retail prices. GTAT’s choice of Mesa, Arizona for their site is probably founded on this consideration. The desert city declared its airport and some surrounding land to be a Free Trade Zone in 1997. This provides GTAT and Apple (AAPL) with a crucial air link for importing and exporting materials without crossing large tracts of U.S. soil.
Since Mesa’s Free Trade Zone failed to produce major benefits for years, the city is doubtlessly ecstatic that their efforts are finally paying off. GTAT’s decision to locate here is probably partly due to the Zone’s existence, as well as the availability of cheap land for a building site, and ready access to renewable energy for power, the last to cater to Apple’s “green” philosophy. Though Mesa’s Zone languished for decades, it is now finally bringing just the kind of robust economic activity it was meant to trigger.
