Incoming Gateway CEO Is Focused at Every Turn
When Wayne Inouye takes over as Gateway Inc.’s chief executive sometime next month, he’ll inherit a computer company that is bleeding red ink, losing market share and burning through nearly $3 million in cash each month.
It should feel familiar. EMachines Inc. was in a similar predicament in March 2001, when Inouye was brought in to turn around the fortunes of the sputtering Irvine PC maker. With only $50 million in the bank and a $12-million monthly deficit, EMachines wasn’t expected to survive more than four months.
Through cost cutting and an overhaul of the company’s production and distribution systems, Inouye was able to reverse a $220-million annual loss and put together nine straight quarters of profit after it was taken private by John Hui, who had served on the board of directors.
“We were written off -- the absolute bottom feeders in the computer business,” Inouye recalled recently. “But we’ve turned it into a respectable business. It’s about efficiency, productivity. How do you do this cheaper and better?”
Those are the questions he will ask at Gateway. A $257-million deal unveiled last month for Gateway, based in Poway, Calif., to buy EMachines will make Inouye chief executive.
Gateway’s current CEO, Ted Waitt, will remain as chairman.
Inouye declined to discuss his plans for Gateway. Analysts and colleagues who have observed him say the 51-year-old retailing veteran has just the right set of skills. After peddling guitars and running his own marketing business, he joined electronics retailer Good Guys Inc. in 1986 and spent the next 15 years selling computers to consumers there and at Best Buy Co.
“One of his biggest assets is that he understands retail, and many PC manufacturers have struggled to do that,” said Charles Smulders, a technology analyst in San Jose with market researcher Gartner Inc.
Those who have worked closely with him pinpoint other traits they expect will help Gateway reverse three years of losses that have cost the company $1.9 billion. The son of Yuba City, Calif., farmers who grew peaches, tomatoes, sugar beets, watermelon and alfalfa, Inouye is notoriously frugal -- business lunches at EMachines are strictly limited to $5 a head.
“You’d typically end up having a taco or a burrito,” said Brian Firestone, EMachines’ former executive vice president of business development and strategy. “I have never seen anyone in my life who is as steadfast on expense control.”
One of the first things Inouye focused on was EMachines’ reputation for shoddy quality. Nearly one in five computers the firm made was returned with defects. The broken machines were filling warehouses, creating an inventory nightmare.
Neil Koomen, a technical writer in Raleigh, N.C., took back the EMachines PC he bought in 1999 soon after he plugged it in and was subjected to a flash and a puff of smoke.
“Obviously something was seriously wrong,” Koomen said. “I was afraid it might catch on fire, so I was afraid to keep it.”
Inouye adopted the lean production and quality improvement techniques of Japanese automakers. Associates said his mantra for months was for EMachines to become “the Honda of computers,” renowned for low cost, high value and reliability.
For instance, Honda Motor Co. builds four vehicles -- its Honda Civic, CR-V, HR-X and Acura RS-X -- off the same chassis. Inouye revamped EMachines’ production systems so that it builds all its desktop computers off the same platform.
“Everything we’ve done, we’ve copied,” Inouye said. “The Japanese figured out that quality drove brand perception. Fewer repairs means higher quality perception and higher prices.”
Inouye came down harder on suppliers to eliminate quality lapses. He also took aim at a costly EMachines practice known as “price protection,” which obligated the company to reimburse retailers when prices dropped on PCs they had in stock. Inouye abolished that policy and kept a hawk-eyed watch on inventory, refusing to deliver any computers unless they had been spoken for by retailers.
It was a skill he honed during his six years at Best Buy, said Rod Bare, an analyst in Chicago with securities research firm Morningstar. “He was very attentive in watching orders coming in, making Best Buy well positioned for holidays.”
Customer satisfaction swelled. Tim Hester was impressed by the durability of the several dozen EMachines PCs his Colorado Springs, Colo., company used to process reports from bingo halls across the state.
“If you could see the abuse these things get, with soda spilled on them and mop water thrown on them,” said Hester, the head of data collection at Verify Plus Systems. “They were the right price and they’ve performed reliably.”
EMachines also benefited from the 2002 merger of Hewlett-Packard Co. and Compaq Computer Corp., Gartner analyst Smulders said. With manufacturers consolidating, he said, retailers searched for new suppliers like EMachines so that they could get the best price by playing them off each other.
Altogether, the moves helped EMachines record $1.1 billion in sales last year, its highest level ever. (While the firm still is private, it won’t reveal profit.) The rate of returns on the company’s PCs is down to 5%, which Smulders called “pretty respectable.”
For Inouye, keeping costs in check is as important as boosting sales. He carries only a few dollars in cash and works in an office so sparse that the walls are bare and the desk is adorned with nothing but a computer monitor, a keyboard and perhaps a pad of paper. The company’s workforce numbers 138, compared with 7,500 at Gateway.
Inouye impresses associates by remembering virtually everything he’s told, usually without taking notes. He is exacting about neatness, always making sure he is well groomed.
His one indulgence seems to be fancy cars -- he drives a Ferrari Maranello and previously owned a string of performance BMW, Porsche and Mercedes-Benz sports cars, including a rare Mercedes AMG Hammer. He keeps those spotless too.
Back in 2001, when Inouye and Firestone joined EMachines, they shared an apartment in Irvine for about four months.
“He’d follow after you and make sure you put things in the right place,” said Firestone, who now runs the U.S. operations of German computer and electronics maker Medion. “He’d make my coffee in the morning, then tell me I couldn’t drink it over there, to drink it over here instead in case I spilled it.”
Such discipline should help Inouye tackle Gateway’s high overhead. Much of it is due to the cost of running 189 retail stores and the inventory that’s required for a product line that extends to consumer electronics such as digital cameras and flat-screen TVs.
“I don’t think Gateway’s consumer electronics retail strategy will allow them to gain the efficiencies Wayne was able to do at EMachines,” said Bare. “That’s the conundrum.”
Analysts say store closures and layoffs are inevitable. Smulders, for instance, believes Inouye will have to shutter at least 140 of Gateway’s stores.
Although Inouye doesn’t relish layoffs or shutting down facilities, Firestone said, “Wayne is 100% ‘You gotta do what you gotta do.’ If there’s a guy alive who can turn it around, he’s the guy.”
