THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, October 8, 1995 TAG: 9510070229
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY DAVE MAYFIELD, STAFF WRITER
LENGTH: Long : 193 lines
A more improbable high-tech success story would be hard to find.
A 21-year-old Iowa cattle rancher's son drops out of college, works in a Des Moines computer store for nine months, then quits to return home and launch a business selling add-ons to personal computers.
The original ``office'' is in the family farmhouse outside Sioux City. The seed money is a $10,000 loan from grandma. Soon, the founder's business expands - to a corner of a livestock exchange where cow chips and cockroaches abound.
The founder, stirred to hyperactivity by a constant diet of Camel cigarettes and Diet Cokes, decides to take off-the-shelf computer components and start assembling his own line of PCs. He runs his first major ad in a trade magazine. ``Computers from Iowa?'' it declares. It features photos of three cows and two computers. People from all over the Midwest, and a few from places like New York, start calling. They say things like, ``That sounds like a pretty good deal. I'll take it.''
The founder and his helpers slap together one computer, pack it up and ship it. Then another. Then 20. Then 50. Then a couple of hundred. Then thousands.
The founder says ``cool'' a lot. Everybody who works for him starts saying it, too. One day the founder decides TIPC Network isn't a cool enough name for his fledgling enterprise. He starts thinking about the future, the next century. Computers, he says to himself, are going to be the way to get ahead. They're the gateway, he says.
That's it!
Gateway 2000 Inc. is born.
The founder is Theodore W. Waitt. But you can call him Ted. Everybody who works for him does. All 7,800 of them.
Not counting another 1,000 who'll soon be in Hampton. Gateway said late last month it will build a plant there that will employ that many by 1999.
At Gateway's news conference, Waitt's ponytail bounced as he shuffled impatiently during Gov. George F. Allen's windy speech about Virginia's newest corporate citizen. More than a few onlookers were moved to comment that they had never seen a Fortune 500 CEO in a ponytail before.
By the way, he paid back his grandma's $10,000 loan some time ago. But she would have been better off taking an equity position in Gateway.
You see, Ted Waitt's company is worth, oh, along about $2.2 billion based on the current price of its stock. And 32-year-old Ted owns, oh, about $1.2 billion worth of the stock.
In the 10 years since he started his amazing journey, Ted Waitt and company have shipped out more than 3 million computers. With annual sales approaching $3 billion, Gateway is America's fifth-largest PC seller. And when it comes to direct sales of PCs - that is, straight to consumers rather than through retailers - it's No. 1. Now it's taking its no-middleman approach to Europe and Asia, too.
Back in North Sioux City, S.D., where it is now based, Gateway gobbles up whole graduating classes from technical schools. Yet it still can't get enough workers. With 5,200 employees from the tri-state corner of South Dakota, Iowa and Nebraska, it has driven that region's unemployment rate below 4 percent.
Which led Gateway to Hampton Roads. Construction has begun on its $18 million plant, located on Magruder Boulevard just off Interstate 64. The company plans to start recruiting employees throughout Hampton Roads next spring. It wants to start assembling PCs in Hampton next August. By decade's end, if Gateway's projections are right, it will be one of Hampton Roads' largest private employers. Economic developers in the region say it's bound to be a magnet for other high-tech companies.
Nobody has ever been able to figure out exactly why quirky Gateway ticks.
From interviews with company executives and industry analysts, it's clear the company is one of the most innovative and nimble players in the peril-fraught computer business. But it's also struggling to manage its stupendous growth while holding onto the folksy culture, nurtured by Waitt, that has enlivened the company and underpinned its growth.
Its cheekiness is the first thing that strikes one about Gateway.
Waitt didn't arrive in just any limousine for his company's news conference in Hampton. It was painted in black-and-white spots, like those of a Holstein cow.
And no plain old boxes for Gateway's computers. They're black-and-white-spotted, too.
The image is of a fun and slightly out-of-control company. That image is further cultivated through ads and quarterly ``magalogs'' from Gateway featuring Waitt in getups like Robin Hood's. In spite of - some say, because of - all this hokeyness, Gateway has earned a cachet that more serious-sounding PC marketeers with ad budgets dozens of times larger can't buy.
``Gateway has been able to create a rare value in the commodity PC world: a personality,'' says Smith Barney & Co. analyst Megan Robertson. It helps explain why the company is second only to Apple among PC makers in its percentage of repeat customers, she says.
Behind its successfully offbeat image, though, is where Gateway's bigger strengths can be found - the real cost advantages that give it the nerve to have fun.
Waitt recognized early that personal-computer components were becoming commodity products, and he has capitalized on that trend. The company spends no money on research and development. It simply buys the best of what's available in PC components, pitting suppliers against one another to drive down prices.
And because it custom-builds every PC after getting a customer's phone order, it has no costly inventory of completed computers that it has to blow through its system before updating with new models. That has let it incorporate innovations - like Intel Corp.'s groundbreaking Pentium chip and Microsoft Corp.'s Windows 95 operating system - into its computers more quickly than competitors.
Since it's also good at predicting buying trends by carefully monitoring its customers' orders, Gateway keeps its component inventories low. It maintains about 20 days' worth of components on average, according to Smith Barney's Robertson. Compaq averages 77 days.
Gateway also pioneered the use of teams to assemble PCs. Its plants are divided into dozens of teams: each has responsibility for the computers from start to finish in the assembly process. They're given wide latitude to redesign work flows as needs present themselves. That speeds up the process and reduces flaws. Also, Waitt made his home base in South Dakota - where there's no corporate income tax and where wages are relatively low - and you've got the makings of a big cost advantage.
It allows Waitt to practice what he constantly preaches to his followers: ``the value equation.'' Basically, that means packing more into a computer for the money than anybody else.
By the time Waitt took his message to investors in late 1993 with a public stock offering, Wall Street was buying too.
Forget that Waitt owns only one suit (a bad-fitting one, to boot), typically sports blue jeans and seldom wears socks. When he hit Wall Street, he blew away any notions by investment bankers that they were dealing with a rube, says Jim Wharton, Gateway's investor relations manager.
``He talked toe to toe with them on some of the most complex financial ratios you'd ever get into,'' Wharton recalls. ``I'm backing out of there, I'm gone and he's still going. He's got a native intelligence, a brilliance that I've never run across.''
Gateway hit the market at $15 a share. It shot up, then dipped and is now double the original trading price. On paper, Waitt's holdings make him one of America's richest men.
The Hampton plant is a big move for Waitt. It will put Gateway's assemblers closer to customers along the Eastern Seaboard. Wharton says Gateway should be able to sharply cut reliance on expensive air freight.
In Hampton, Waitt's point man is Jeff Livak. That's despite the fact that Waitt took to calling Hampton Mayor James Eason, ``my main man,'' during last month's news conference. Livak will be the Hampton plant manager. He's been staying in hotels in and around Hampton Roads for a couple of months, helping to select the plant site. He's a tall, amiable, mustachioed man with a crew cut. He already says ``cool'' easily even though he only joined Gateway a few months ago.
In Hampton, Livak says, Gateway will be looking for employees who don't mind working long hours, can function on teams and are willing to put a good portion of their pay (10 percent, on average) up for grabs every month depending upon whether the company hits its sales and profit targets.
Gateway has said that starting wages will range from $13,520 to $65,000 a year, with the average about $18,000.
Some may find starting wages for the assembly jobs low. But Gateway is counting on recruiting lots of good candidates because its rapid growth means the potential for quick advancement is high.
``We're going to have a lot of promotions,'' says John d'Auguste, Gateway's vice president for manufacturing, who recommended Hampton for the plant site.
d'Auguste is a former General Electric Co. executive who joined Gateway 2 1/2 years ago. He's an extremely intense, serious man.
He typifies a new breed of manager that has flowed into Gateway in the past several years: experienced, inventive hands from big-name companies.
They have helped Gateway manage its extraordinary growth. But they have also injected a more grown-up attitude into the company and have had some difficulty adapting to Waitt's oddball culture.
Take ``cool,'' for example. ``It took me about a year before I could say it without flinching,'' d'Auguste admits.
Company insiders say the maturing of management is positive and and largely reflects Waitt's personal journey. He recently married his girlfriend of eight years and the mother of his two young daughters.
But some analysts say the jury's out on whether Gateway has built enough depth in its top ranks to meet the challenges that could choke off its tremendous growth.
``The main issue for them going forward is management bandwidth,'' says Scott Miller, a PC analyst for Dataquest Inc. ``How big a bite can you take and still chew?''
Gateway already has faced one scare when it came under sharp criticism in industry journals for falling down on technical support for its products. A year ago, wait times on the company's tech-support lines were approaching 15 minutes. Gateway beefed up tech staffing; Wharton says wait times should be cut to 2 minutes soon..
Now, with ventures in Europe and Asia, the company is trying to catch up with rivals like IBM, Compaq and Dell overseas - where growth potential and profit margins are higher.
Dell, Gateway's closest competitor, gets 40 percent of its sales outside the U.S., Gateway only about 15 percent. Some analysts say that Dell's lead overseas may give it the profits it needs to undercut Gateway's prices back home and take away critical market share.
Another big issue for Gateway is deciding whether to start selling through retailers. Dell tried, then pulled back. Some analysts say that, in the long run, both may need to hook up with retailers because most consumers aren't willing to buy direct.
Ted Waitt has his hands full, no doubt about it.
But don't count this farm boy out. If Waitt has his way, someday we'll all be buying computers stuffed in black-and-white-spotted boxes. ILLUSTRATION: Color photo
KENNETH D. LYONS/Newport News Daily Press
Gateway 2000 founder and Chief Executive Theodore W. ``Ted'' Waitt
by CNB