Published on April 29, 2014

API pursuing distinct business model

VALENCIA, Calif. — American Pacific Industries Inc. (API) is a distinct player in the Chinese tire market in that it imports most of the tires it sells from Chinese factories but owns the brands and the molds.

“We're wholly owned. We're not owned by an investment banking company; we're not owned by a trading company,” said API CEO Jeff Kreitzman. “We manage our business like businessmen, we are able to make good quality decisions for our customers, and we have a very loyal growing customer base because of that.”

The company, he continued, designs “all our own tires. A lot of these private branders, they just simply go into a factory and take whatever is available and slap their name on the side of it.

“We don't do that. We design our own green tire.... We build our own molds. We don't use any factory molds at all in any of our product lines, and we have our own engineering staff. We have over 36 people in China on the ground full time. So we are very different in how we go to market,” he said.

Tire Business photo by Bruce Davis
Jeff Kreitzman, CEO of American Pacific Industries Inc.

"We have some factories that are setting up their own distribution with API and other factories that are very happy just to do business with API and our brand. We represent significant volumes for the factories we do business with.”

Since it's a private company, Mr. Kreitzman declined to disclose sales volume, but said the company increased its sales 40 percent in 2013 over 2012.

He said the surge over recent years was not so much due to the end of the elevated tariffs the U.S. imposed on Chinese-made tires in 2009-2012 but to other factors, including the introduction of new products.

“We brought to market in the last two years 340 new SKUs,” he told Tire Business.

When the elevated U.S. tariffs were first imposed in 2009, API had to raise its prices 35 percent in the first year. “We didn't have 35-percent margin to give away,” he acknowledged.

“We dropped out of the gate a little bit when the tariff came on, because everybody just panicked and didn't know what to do. So there was a dip over two or three months and then people realized, 'We're going to have to buy tires.'

“And they started buying again. So there was a two- to three-month lull before and then business was back to normal. Margins were depressed but, all in all, sales were OK, and they continued to grow for API anyway,” Mr. Kreitzman said.

He expects continued growth in API sales over the next two to three years — in the range of 40 percent.

“A lot of that is due to new customers and new programs. It's not from our existing customer base, the market isn't growing at that pace. We just have some good things that are happening,” he said.

“We're in the steel wheel and assembly business for OE — that's all new business for us. ATV in the last two to three years, that's all new business for us. Light truck — we've added a significant number of products in the light truck category. That's all new business for us,” he continued.

“The Zenna high-performance line — we just launched it six to eight months ago and that's already 41 part numbers and we're adding another 19 right now. So you can see with all the product lines, you're going to have significant growth.”

API contracts with 12 overseas tire manufacturers that operate 16 plants — one in Indonesia, two in India and the rest in China — to produce bias and radial tires.

Mr. Kreitzman said API has chosen mostly Chinese manufacturing plants to build its tires because the U.S. regulations create an unfriendly business environment. Major tire makers have virtually eliminated private brand production in the U.S., and Mexican labor rates are too high.

The cost of producing tires in China is on par, by the time freight costs and duties are added in, with producing in the U.S. “It's not a lot cheaper,” he said. “It's about building quality products on a timely basis.”

He noted that the communist government in China has a strong grip on the manufacturing-based economy, but they try not to harm their businesses intentionally.

Mr. Kreitzman admitted that doing business is China “is very difficult. The problem you have, unless you're a significant player, is you don't get any priority in the factory and in production. It's like chaos, because these factories are not well organized.

“You have to have feet on the ground over there to make sure that tires are loaded correctly, that tires are stored correctly, tires are labeled correctly. There are a lot of things you take for granted they are just not capable of.”

For these reasons, API has several of its staff on site at the Chinese plants, he said.

“If you buy a container here, buy a container there, it's quite easy. Not a big deal. But to run programs and manage high volumes, you've got to have resources to do it otherwise you're not going to be successful, not in the long term.”

API stepped up its game a few years ago, creating a U.S. joint venture with China's Shandong O'Green Group to sell that company's O'Green brand of truck/bus radials in North America. So far the partners have signed up eight regular dealers in the U.S.

Mr. Kreitzman said the venture is planning to expand into light truck tires and possibly passenger tires in the future.

API's main brand is the Gladiator, which covers light truck/SUV, medium truck, all-terrain and agricultural tires.

“That line has grown and done really well for us. It's been a very successful program and it's relatively new, and we're adding sizes to it every year. Actually every few months there are sizes coming out and new products in that whole category,” Mr. Kreitzman said.

API sells the brand in North America, including Canada and Mexico, and recently took it to the European and Australian markets.

The company also has delved into the steel-wheel business with O'Green for OE high-speed trailer tire/wheel assemblies.

API operates a sales office in the United Kingdom and several offices scattered throughout North America. It also has a sales office in China where it began selling tires this year. API said its reach covers 85 percent of the world.

However, API operates only a handful of distribution centers — in China and one in the U.S.

“We do that intentionally because we don't want to be in competition with our wholesalers or our dealers. It's really an emergency back up and (the U.S. warehouse) is also where we run our OE tire-and-wheel assembly business out of,” Mr. Kreitzman said.

He said the biggest challenge to his business: “There's too much product in the marketplace, so you really have to distinguish your products from the competition.”

The company accomplishes this, he said, with “quality and service. Price is price, the market finds the price. You can't dictate the price. The market dictates the price. If you're going to be in business, your market is going to tell you where to sell you product. So the key is to make sure you are building the right product for the right market.”

He said API's business is not greatly impacted by the flood of low-priced Chinese tires coming into the U.S.

“We're not as affected as others because we have our own brands and our own quality levels and our own quality standards. We do rigorous testing on our products and we can sell the difference. We can distinguish the difference between our product and theirs. So it's affecting margins somewhat, but that's about it,” he said.

“It doesn't cost more to build a good tire, it actually costs less. The downfall of the Chinese in a lot of cases is they overbuild the product trying to make it work. And what that means is that the tires are heavier and perform worse and they cost more to make because they don't have the current technology on how to build tires the way the major branders do, which is basically lighter, not heavier,” he added.

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To reach this reporter: kmccarron@crain.com; 330-865-6127.

 

 

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