Apex’s Fast Rise May Be Checked by CEO’s Arrest

Apex Digital Inc. disrupted the consumer electronics industry by pushing prices lower than its powerhouse rivals dared.

Now the Ontario company faces a major disruption of its own.

Last week, Chinese police arrested Apex’s founder and chief executive, David Longfen Ji, on undisclosed charges. Chinese manufacturer Sichuan Changhong Electric Appliance Co. had alleged in a U.S. lawsuit that it was owed hundreds of millions of dollars for television sets it made under the Apex brand. And Taiwanese DVD maker Genius Co. said it was owed $4.3 million by Apex.

Chinese authorities refused to comment on Ji’s arrest. Apex spokeswoman Marietta Schoenherz said Ji planned to return to the United States to attend the company’s presentation at this week’s International Consumer Electronics Show in Las Vegas. She declined to elaborate.

Although hardly a household name, Apex has made an imprint on the $100-billion consumer electronics industry. The company helped drive down retail prices and showed upstarts how to grab market share from established brands without building factories of their own.

“Television took 50 years to be cost-reduced to the point where it was under $200,” said David H. Arland, a spokesman for consumer electronics giant Thomson. “In DVD, it took a matter of months.”

Founded in 1997 as a division of a company that sold scrap metal to China, Apex began as a tale of immigrant success. Within a few years, Ji and his partner, Ancle Hsu, who came from China and Taiwan, respectively, built a consumer electronics juggernaut that by 2003 boasted $1 billion in sales.

It introduced its first product in February 2000, offering a DVD player for $179 -- less than half the price of its average competitor. And unlike virtually all of the other models, Apex’s unit could play CDs filled with songs in the MP3 format, making it attractive to “Internet geeks and nerds,” former spokesman Colton Manley said in a 2002 interview.

The company got an early boost when Circuit City Stores Inc. ordered 5,000 of the players and featured them in its advertisements. “Circuit City couldn’t keep them on the shelves,” Manley said. “Our biggest problem at that point was trying to get enough merchandise.”

The Apex strategy was a time-honored one: By taking very small profit margins on its products, it planned to lure cost-conscious buyers with lower prices than the name brands’. Then, after it had gained a foothold in the market, it would offer more expensive models with higher profit margins.

It also borrowed a page from the computer industry, operating as more of a product designer than a manufacturer. It relied on low-cost manufacturers, primarily from China, to produce the components for its products and assemble them.

The first part of the strategy worked -- maybe too well. Within two years, Apex claimed to be selling more DVD players than any other brand. But to keep its place as the lowest-priced brand on the market, it had to push its prices lower and lower and lower.

Wal-Mart Stores Inc., for example, this holiday sold an Apex DVD player for less than $39.

Meanwhile, other companies tried to beat Apex at its own game, selling ever-cheaper DVD players manufactured in China and other low-cost locales. And companies such as Pioneer Corp. started building plants of their own in China.

Some of Apex’s competitors grumbled that the company undercut their prices by cheating -- in particular, by not paying all the required licensing fees and royalties, which one source pegged at $25 per DVD player. That accusation has been leveled against a number of companies using Chinese suppliers.

“They simply weren’t following the same rules everybody else had to follow,” said Thomson’s Arland.

Apex has been embroiled in a series of lawsuits with various companies and trade groups that hold patents related to DVDs, including Royal Philips Electronics and Sony Corp. Most of those cases have been settled, although the company’s sales and royalty payments are still being audited.

Apex’s attorney, David Reynolds, was not available for comment.

The company’s current difficulties aren’t generating a lot of sympathy from competitors, many of whom resented what they considered to be the company’s fast-and-loose tactics.

“There are many companies who think that Apex is a four- letter curse word,” said Richard Doherty, analyst with consulting firm Envisioneering Group in Seaford, N.Y.

Apex executives acknowledged that some retailers used their low-priced products just to draw people into stores so they could be sold more expensive items. And at least two big retailers -- Circuit City and Best Buy -- have stopped carrying Apex’s DVD players in favor of other low-priced brands.

But Apex’s low prices opened other doors, especially in venues not known for carrying consumer electronics, such as pharmacies and grocery stores. The company’s products are available in nearly 25,000 locations, Schoenherz of Apex said.

Of course, those doors have opened for other suppliers of low-priced consumer electronics too.

“It’s sort of weird to see a DVD player sitting in the middle of the holiday turkey aisle, but that’s what you’ve seen,” Arland said.

Apex took a similar approach to television. It launched a full line of low-priced sets with bulky cathode ray tubes in February 2002, a move that pushed its annual sales near $1 billion that year. A major supplier for those sets was Sichuan Changhong Electric.

The company abruptly dropped those sets in early 2004 after the U.S. Department of Commerce announced plans to slap Changhong Electric with anti-dumping duties. Instead, Apex focused on flat-panel LCD TVs, offering an expanding lineup at prices well below what most other manufacturers charge.

Flat-panel TVs, however, are a big-ticket item compared with conventional sets, with prices approaching $2,000 for the largest models. The company also plans to bring out hard-drive-powered video recorders and portable video players with list prices three to four times that of its original DVD player.

Schoenherz said the company planned to continue offering the lowest-priced models in the markets it entered but also wanted to provide “more upscale” alternatives. “It’s critical to the growth of the company to offer several product categories at different price levels that might appeal to the mass consumer,” she said.

Many of the company’s 80 or so employees in Ontario reported for work last week, but there was a quiet mood at the facility, situated in an industrial park just south of Ontario International Airport. The company also has offices in Diamond Bar, Hong Kong and Shanghai -- each with less than a dozen workers.

One worker in Ontario who asked not to be named joked that at least there hadn’t been any government officials hauling files out of the building when he arrived at work that morning.

Schoenherz said that Apex was “absolutely trying to carry on as business as usual” while its “disagreement” with Changhong is “being addressed through the proper channels.”

Although the company has received a number of inquiries from its retail distributors, she said, the events of recent days haven’t “affected our business relationships.”

Changhong is listed on the Shanghai Stock Exchange, and 53.6% of its shares are owned by the government. The company said in its 2003 annual report that overseas debt receivables were increasing but didn’t elaborate. In its third-quarter report, filed in late October, Changhong reported a net quarterly profit of 17.7 million yuan ($2.14 million), down 55% from a year earlier on sharply lower sales.

In China, Changhong and other television set makers have struggled with an oversupply and tariffs imposed by the U.S. in the spring. Changhong was hit with the biggest import duties, 24.48%. Its sales in the third quarter fell 39% from a year earlier, to 2.57 billion yuan, but the company didn’t break down figures for exports. About 72% of the company’s revenue is derived from sales of TVs.

Although it is the largest television maker in China, Changhong has lagged behind others in moving upstream to high-end sets, such as flat screens, analysts said. Instead, Changhong has relied on the low-end market, which has become increasingly competitive with many players and margins squeezed thinner and thinner with overproduction.

In 2004, Chinese television makers were expected to have sold some 60 million sets, including exports, but production in 2003 reached 70 million, according to Gu Qing, an analyst at Haitong Securities in Shanghai. Gu said Changhong sought to break into the U.S. market and hence signed up with Apex, even though other local TV makers rejected the company.

Until the recent disclosures, Changhong’s investors weren’t alarmed by its dealings with Apex, said Sophia Lee, a television sector analyst for Celestial Asia Securities, a brokerage in Hong Kong. With a big customer such as Wal-Mart, Lee said, “everybody thought Apex was a huge brand name in the U.S.”

Times staff writers Don Lee in Shanghai and Ronald D. White in Los Angeles contributed to this report.