Apex Digital, Inc. Business Information, Profile, and History

Company Perspectives:

Apex Digital, Inc. is the leading provider of DVD players in North America and the fastest growing company in consumer electronics history. The privately held company's 2002 revenue approached $1 billion and is expected in 2003 as well.

Fueling this aggressive growth is the pioneering leadership of Apex Digital in DVD and television technology as well as its focus on providing the consumer with the best price performance in the industry. Since its founding in 1997, Apex Digital has been a premier price and performance leader in the consumer electronics industry. The succession of state-of-the-art products, first introduced in 1999, has powered the rapid growth of the company.

For cofounders David Ji, Chairman, and Ancle Hsu, Vice Chairman, the accolades are welcome; however, they continually encourage their employee associates to re-affirm these award-winning ways and not rest on yesterday's successes. "We have a mission and a vision," says Hsu. "Our mission is to continually pursue product innovation, customer satisfaction and operational excellence."

From the beginning, Apex Digital has embraced a total value philosophy, in which lower product cost does not compromise quality or superior customer relations. The company not only responds rapidly to customer needs, but it also carefully listens to consumers to better anticipate their future requirements.

History of Apex Digital, Inc.

Apex Digital, Inc. is a leading importer of DVD players and other consumer electronics to the United States. It is believed to sell more DVD players than anyone else in the country, and is the fourth leading producer of televisions. The scourge of more established rivals, Apex competes at the low end of the price spectrum. It is able to keep prices low by working closely with its Chinese suppliers. The company also has been innovative, however, in making new technologies accessible to the mass consumer. As company cofounder David Ji told Forbes in 2002, "We are the only real American brand. That should give the Japanese the willies." According to an NPD Group study cited in Fortune magazine, the average price of DVD players fell 90 percent between 1997 and 2004; Apex Digital was a huge factor in that price drop.

Not many companies achieve annual sales of $1 billion with only 100 employees and without having to pay for advertising. Apex made this happen by outsourcing production to China and using a low-price strategy to rapidly gain market share. Apex products are found in more than 20,000 stores.

Origins

Digital video disks (DVDs) first entered the U.S. market in 1997. DVD players cost $600 at the time. While the price of VHS videocassette technology had fallen relatively slowly in the previous 20 years, that of DVD players would tumble drastically in a few short years, in large part thanks to Apex Digital, Inc.

Apex Digital, Inc. was founded in August 1997 by David Ji and Ancle Hsu. According to Time, the two met while working for a Los Angeles scrap metal dealer. Ji, from Shanghai, China, arrived in the United States in 1987 to work on his M.B.A. Hsu arrived from Taiwan in 1984.

In May 1992, the duo formed their own business exporting scrap metal to China, called United Delta, Inc. Ji also started a car stereo speaker business in City of Industry, California. Other ventures included herbal supplements and rubber gloves, reported Forbes.

The pair then began producing DVD players with a Chinese manufacturer, Visual Disc and Digital Video Corporation (VDDV). According to CNN.com, the first microchips were sourced in California. According to Fortune, the availability of standard, digital components found in DVD players would allow their price to fall much faster than that of videocassette players, which used more specialized parts.

Ji was Apex Digital's CEO, while Hsu served as chief operating officer. Stephen Brothers, who originally led sales and marketing efforts, was named president in September 2003.

First Big Sale in 2000

Apex first broke into the U.S. market in a big way with its AD-600A DVD player. These players were an instant sensation due to their unique ability to play MP3 files; the format was used mostly to download music files off the Internet during the height of the Napster controversy. The player also had a karaoke feature. Adding to the popularity was a retail price of $179--about $100 less than others. Apex kept prices down by working closely with its low-cost suppliers in China and by eschewing advertising.

Circuit City bought 5,000 of these in February 2000, reported Electronic Business, and sold out of them quickly. Best Buy and Wal-Mart soon followed. Sales were $120 million in 2000.

A programming quirk in the company's first DVD players enabled users to disable the Macrovision copyright protection. The ability to play DVDs from any region in the world and to record them onto videocassettes did not seem to bother buyers, but it offended copyright owners, and this loophole was closed in subsequent models.

By the end of 2001, Apex was the second leading marketer of DVD players in the United States, with a market share of 13 percent to Sony's 22 percent, by one count. Another estimate placed Apex just ahead of Sony, with a little more than 15 percent market share.

At $100 to $350, Apex DVD players were priced below the major brand names. Apex sales for 2001 were about $600 million and growing furiously. It then had just 50 employees at its Ontario, California headquarters.

Apex paid $9 million for a 60 percent interest in Zhenjiang Jiangkui Electronic Group, a state-owned DVD player manufacturer near Shanghai, China, in November 2001. This business was soon renamed Apex Zhenjiang Ltd.

Apex was typically one of the first to bring new innovations to the mass consumer market. The DVD line was expanding to include higher-end models priced up to $350. In 2001, Apex became the first company certified to produce DVD players compatible with Eastman Kodak's Picture CDs. Its AD-7701 was the first to play Super Audio CD and DVD-Audio music formats. The AD-7701 was plagued by quality control problems, however, and its production was stopped. Apex's ViDVD player featured a modem for connecting to the Internet, allowing users to browse web pages, e-mail, and purchase licenses to view special high-capacity "locked," encrypted DVDs developed by Vialta of Fremont, California.

Fourth in TVs in 2002

Eager to stay on top of consumer electronics trends, Apex introduced a couple of new products in 2002, including a DVD player with a built-in hard drive for downloading TV programs, and a line of 18 television sets. The TVs were developed in partnership with Sichuan Changhong Electric Co. Ltd., China's largest manufacturer of color televisions and a supplier of some of Apex's DVD players. According to Consumer Electronics, Sichuan had 13,000 employees, $2.5 billion worth of annual production, and had been making television sets since the 1980s. It was founded in 1958 as a defense electronics contractor. At the time of its partnership launch with Apex, oversupply in the domestic TV market had been cutting into its profits.

After a copyright infringement suit in January 2002, Apex agreed to pay Philips, Sony, and Pioneer a $7 patent royalty fee for each DVD player it made, becoming the first Chinese manufacturer to do so. Apex had already been paying a licensing fee to these companies; most Chinese manufacturers balked at paying additional royalties since the makers of the components they used had already done so.

Apex had sales of nearly $1 billion and only 100 employees of its own, most of them in California. The company also did not advertise. In one effective and unique marketing ploy, however, it sold 142,000 20-inch television sets through the Albertson's grocery store chain in the run-up to Christmas 2002. By the end of 2002, Apex was in more than 15,000 stores across the United States. In ten months, Apex had become the fourth leading TV brand.

A Proliferating Product Line in 2003

In 2003, Apex commanded a 10 percent share of the U.S. DVD player market by unit volume--still second place to Sony--according to one estimate. Its somewhat stripped-down AD-2600 model retailed for just $60, and was sometimes marked down to half that price. At $399, Apex's DRX-9000 DVD+RW recorder was priced about $100 lower than competitors' models. According to EE Times, a single-chip DVD encode/decode processor from California's LSI Logic made this low price possible. Apex was getting microchips for its DVD players from Zoran Corp., Media Tek, and Cirrus Logic, reported EE Times.

Apex began shipping 42-inch high definition plasma screen TVs in March 2003. LCD monitors followed the next month. Apex expected to sell 60,000 of the plasma TVs, which retailed for $4,000 each, during the year.

The company continued to roll out a large variety of new products, from portable DVD players with LCD screens to 65-inch projection TVs. In January 2004, Apex introduced its "ApeXtreme" console for playing PC video games on a television screen. The expanding DRX line of DVD recorders added software geared to converting VHS home movies into DVDs. They also included a chip for filtering out offensive content from movies. Revenues were expected to reach $1.5 billion in 2004.

Principal Subsidiaries: Apex Zhenjiang Ltd. (China; 60%).

Principal Competitors: Matsushita Electric Industrial Co., Ltd.; Pioneer Corporation; Royal Philips Electronics N.V.; Samsung Corporation; Sony Corporation; Toshiba Corporation.

Chronology

• Key Dates:
• 1997: The company is founded in Ontario, California, by David Ji and Ancle Hsu.
• 2000: The first Apex DVD players are introduced in the United States via Circuit City.
• 2001: Apex enters a TV set partnership with Changhong Electric Co. of China.
• 2002: Apex becomes the fourth leading TV brand in just ten months.
• 2003: Plasma screen HDTVs and the ApeXtreme game console are launched.