Gateway's Plan To Stay Relevant - InformationWeek

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10/29/2004
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Darrell Dunn
Darrell Dunn
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Gateway's Plan To Stay Relevant

Merger with eMachines lets computer maker reengineer its manufacturing supply chain to reduce costs and be more competitive

Struggling for years to find the right formula to compete in the business market against Hewlett-Packard, IBM, and direct-sales powerhouse Dell, Gateway Inc. surprised many with its move earlier this year to merge with eMachines Inc., a PC company most recognized as a low-cost provider in the retail channel.

Business customers--who've accounted for about half of Gateway's revenue in the past two years--were left wondering about the company's long-term commitment to the nonconsumer market. Wichita Public Schools in Kansas standardized its approximately 6,000 desktop and notebook computers on Gateway technology a couple of years ago and had been thinking about using Gateway to supply its server needs. "They had told me they want to emphasize their server products," says Greg Rasmussen, executive director of the Department of Instructional Technology at Wichita Public Schools. "But I don't know if that has changed now with the merger," he says.

Gateway's response: The merger with eMachines is enabling the company to reengineer its manufacturing supply chain to reduce costs and tailor its portfolio to be more competitive and responsive to its targeted customers in midmarket companies and the education and government sectors.

To reduce costs, Gateway has cut the number of platforms and suppliers it uses, senior VP Bruce Smith says.

To reduce costs, Gateway has cut the number of platforms and suppliers it uses, senior VP Smith says.
"We will be the low-cost provider in this industry," says Bruce Smith, senior VP of Gateway's professional business unit, which handles the company's commercial business. To get there, the company is taking advantage of eMachines' supply-chain expertise, which includes close relationships with original design manufacturers in China and Taiwan and will use a common chassis between Gateway and eMachines product lines. As eMachines has done, Gateway also is supporting a reduced number of computer platforms.

The merger with eMachines in March was actually a "reverse acquisition," says Rob Enderle, an analyst with the Enderle Group. While Gateway led the acquisition and retains its name as the face of the company, the eMachines management team took control of the company, including the naming of eMachines CEO Wayne Inouye as the new CEO of Gateway.

"They really wanted to acquire that management team and utilize that expertise," Enderle says. "They've really taken on the eMachines model."

Drastic measures were necessary. Gateway has seen its annual revenue fall from nearly $10 billion in 2000 to $3.4 billion in 2003. The company hasn't recorded a profitable quarter since the fourth quarter of 2001. Inouye has pledged to be at break-even or record a profit in Gateway's fourth quarter.

Gateway's commercial business has remained relatively flat the past three years, Smith says. But its consumer business "has been in free fall," says Roger Kay, an analyst at IDC. As a result, production volumes declined to the point that it was going to be difficult to retain the attention of first-tier original design manufacturers, he says. By merging with eMachines, the new company can take advantage of the combined volumes, which puts it third worldwide in desktop computers and sixth in portables, according to IDC.

That means better discounts from original design manufacturers and component suppliers, Smith says. The combined volume of the companies "gives us a significant ability to leverage a better cost structure through our procurement efforts," he says. Gateway has moved to total reliance on original design manufacturers, eliminating all internal manufacturing, which is expected to result in a 14% reduction in manufacturing costs by the fourth quarter.

The company has reduced the number of platforms and suppliers by 30% to 50% since the merger, Smith says. For example, desktop chassis have been reduced from nine to six, notebook chassis from 11 to seven, and notebook designs from five to two. The result is a 7% reduction in the manufacturing cost of a computer, he says.

By reducing the number of its suppliers and manufacturers, while simultaneously increasing its volume through the merger, the company says it has been able to strengthen its position with selected partners. In 2003, Gateway's average selling, general, and administrative expenses were 25% of revenue. In the second quarter, that cost of doing business was reduced to 15% of revenue. The company believes it can drop that to 12% when it reports its third-quarter revenue this week and to around 9%, equal or less than Dell, by the end of the year.

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