Gateway, the fourth largest personal computer maker in the United States, announced Tuesday that they would eliminate nearly 5,000 employees in their global workforce, close their Australian/Pacific Rim offices and contemplate an exit from Europe. This is what passes for Ògood newsÓ in Gateway Country and I actually agree.

Sure, it sounds even worse when you look at the numbers that Gateway released to the press during their conference call on August 28, 2001. Gateway plans to cut 25% of their workforce, 10% abroad in Japan, Australia and the United Kingdom and 15% stateside in Virginia, South Dakota, Utah and California. Add these reductions to the 4,700 jobs Gateway cut in January and youÕve got the makings of a dot-com-bomb style layoff at a major high tech company.

Gateway currently has $1 billion (US) in cash and marketable securities according to Gateway CFO Joe Burke. ThatÕs going to come in handy now that those layoffs will force Gateway to take a $475 million hit in ÒchargesÓ in Q3 and the company will post a loss of about a penny per share according to First Call analysts. Gateway hopes to return to ÒmarginalÓ profitability by Q4 but this quasi-optimistic statement should be tempered with a lower than expected consumer confidence index released by the New York-based Conference Board on the same day. Ironically, the Board said the consumer confidence index was so low because of Òcontinued weakness in the job market.Ó

In the past couple of years, Gateway made a couple of tactical errors. The company attempted to compete on a global scale with much larger companies like Dell and Compaq. In doing so, Gateway spent millions on marketing and entered into a price war against companies that had much more buying power and capacity. It would be similar to the local independent grocery store spending millions to go global in hopes of competing against Costco. Gateway lost the price war before the first battle.

Gateway tried to extend their product line from home and business computers to the server market with little success. Gateway makes good computers for home, school and small businesses but they tried to get into web servers, turnkey email solutions and thin client network PCs. Gateway had just spent all kinds of money to get the point across that they were the friendly computer company from North Dakota with cow spots on their boxes. The corporate PC market is extremely competitive and is owned by Compaq, Dell and HP.

Gateway tried to be something they werenÕt (or as we say in Texas: ÒThey got too big for their britchesÓ) and now theyÕre paying the price. Forecasts of Q4 losses, little to no computer shopper spending in the foreseeable future, the facts that almost 10,000 Gateway employees are losing their jobs and the company is shrinking in size is all bad news. Does this mean that Gateway is circling the drain?

Hardly. Gateway is taking a one time $475 million hit by firing its employees and restructuring, but that will actually save the company $300 million a year. This restructuring means that Gateway will focus on the home and small business segment, a segment that Gateway does fairly well in compared to the number three US computer company, Hewlett Packard. MicrosoftÕs new operating system, Windows XP, is believed to spur some much-needed computer demand for small businesses.

Although big corporations havenÕt made plans to upgrade their PCs to Windows XP (most still havenÕt made the jump from the three year old Windows 98 to Windows 2000), this would really hurt the major players like Dell and Compaq rather than Gateway. Frankly, Gateway canÕt compete with Dell and Compaq for corporate or government contracts but they can win over the neglected small businessmen and businesswomen in America.

America is going to probably be the only place that Gateway will sell its computers and that looks bad to most analysts. A shrinking company is never a healthy company to analysts, especially now that the high tech sector has taken a downturn. The politically correct answer is that Gateway is ÒrestructuringÓ to fit the needs of their core customers in North America but the fact is that Europe, Australia, Japan and the Pacific Rim nations arenÕt buying computers. Japan has been suffering through three years of price deflations, plummeting export sales and who knows how long their economic woes will continue.

France, the United Kingdom and Germany all have the Euro dragging them down and their semi-socialist economies werenÕt in that great of shape to begin with. Gateway has no reason to continue losing money by marketing and selling to countries that canÕt afford computers. China is the only nation that has been spending on computer hardware, but much of that hardware is networking equipment and firewalls to keep their citizens from accessing sites the Communist Party deems unsuitable. China doesnÕt need Gateway, Dell, HP or Compaq computers because ChinaÕs own Legend Computers has an overwhelming market share in the region. China is spending like crazy in the hopes of staving off inflation and despite moves by Dell and HP into China; Legend will be the primary computer supplier for the Chinese for the next few years.

Gateway looks bad right now, but things will pick up as long as they donÕt completely destroy their customer base with poor customer service and badly built computers. The best scenario is that Gateway can basically start over, concentrating solely on their North American business and keeping their costs low. That wonÕt get them the piles of fast cash that most high tech businesses are used to getting but these are different times.

Worst case is that Microsoft is slapped with a restraining order by the new judge in their antitrust case keeping Windows XP off of new PCs, Gateway moves away from the PC business and tries to become a Òservice and supportÓ company. If youÕre hardly selling any of your own computers, it makes no sense to sell Òservice and supportÓ for other peopleÕs computers. As an IT manager, IÕd be scared to have bought Dell Optiplex PCs for my office then have a service contract with Gateway to support those Dell PCs. Why not hire the White Spy to fix the Black SpyÕs leaky roof while youÕre at it?

GatewayÕs made mistakes and theyÕre living with them. Now they have to be smart enough to learn from those mistakes.

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