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Gateway could cut work force by half

Pressing to turn a profit, new management is evaluating a number of scenarios, including simplifying its product lines and eliminating up to 2,000 workers, CNET has learned.

Hoping to turn a profit by year's end, Gateway executives are crafting a restructuring plan that could reduce the company's product lines and, in a worst-case scenario, slash its work force by half, sources familiar with the plans told CNET


What's new:
In order to achieve profitability by year-end, Gateway's new management is evaluating a number of scenarios, including simplifying the company's product lines and eliminating employees.

Bottom line:
Management is evaluating at least one scenario that would cut the work force to approximately 2,000 workers, about half the current number. The company is also looking at flattening management, consolidating some facilities and realigning some products.

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The discussions, which are being led by new CEO Wayne Inouye, are aimed at altering Gateway's costly operations to bring them more in line with the business model of eMachines, which Gateway acquired in March.

In addition to direct sales, Gateway has relied on selling PCs and consumer electronics through a costly network of retail stores. eMachines, by comparison, was successful in using relatively few employees to sell computers through mass retailers such as Best Buy and Costco.

The shift would take the PC maker down a familiar path for Gateway's new executive team: Inouye held the CEO post at eMachines before the acquisition, and seven other former eMachines executives have landed top posts at the combined company.

In a memo to employees last week, Gateway Chief Administrative Officer Adam Anderson noted that speculation about more layoffs is creating anxiety but the company has no choice.

"Naturally, your foremost concerns are whether you have a job, which job and how you'll be treated if you lose your job," Anderson wrote. "We are in the process of realigning Gateway to pursue a new, streamlined business model."

As part of its planning, Gateway management is evaluating at least one scenario that would cut its work force to approximately 2,000 employees, about half of its current figure of 4,000, according to sources. It was only three weeks ago that Gateway said it would eliminate 2,500 jobs, or nearly 40 percent of its work force, to get to the 4,000 mark.

Streamlining for the bottom line
The company is also looking at flattening management, consolidating some of its facilities and realigning some of its product lines, all with the aim of returning to profitability by the end of this year, the sources said.

Gateway is likely to discuss consolidating its facilities in the Midwest. It has already announced plans to relocate its headquarters from Poway, Calif., to somewhere near Irvine, Calif., where eMachines was headquartered.

According to sources, Gateway's reorganization will focus for the most part on four businesses: consumer direct, retail, professional and international.

Some details of the plans--which are fluid and may change--could be announced when Gateway reports quarterly earnings on April 29. Another opportunity for Inouye to discuss his vision for the company is during its annual shareholder meeting in May.

Gateway executives declined to comment ahead of the company's earnings report.

The PC maker has gone through several different business strategies in the past three years. During 2003, Gateway attempted to return to profitability by launching a consumer electronics effort, which resulted in 118 new products in 22 categories. The plan generated higher sales of consumer electronics goods during 2003, but Gateway ultimately reported a wider fourth-quarter loss.

Gateway announced the eMachines deal Jan. 30, the morning after the rocky fourth-quarter earnings announcement. At the time, then-CEO Ted Waitt said the acquisition would give Gateway a strong No. 3 position in the U.S. market, following heavyweights Dell and Hewlett-Packard.

Under Inouye, the company appears to be remaking itself to operate more like eMachines--but with low-end and premium brands. Many of the proposals now being discussed suggest that Inouye seeks to simplify Gateway's business, retreating from some areas if necessary in order to focus its efforts on its strongest markets, such as consumers, business, education and international sales. Lowering costs is another priority.

"It seems more like eMachines took over Gateway in some respects," said Roger Kay, analyst with IDC. However, he said, "I think that the whole idea is that the eMachines economic model fits the price points (Gateway needs to hit in the PC market), which makes them more aggressive. It's a good business model, and it competes well with direct" selling.

Caught in a numbers crunch
Analysts have long said that in order to compete with companies such as Dell, Gateway would have to lower its costs considerably. Although Gateway lost $515 million in 2003, a streamlined company would increase the revenue per employee and possibly allow the company to make a profit.

According to analysts, Gateway took in $3.4 billion in revenue, or about $450,000 per employee in 2003. During the same period, eMachines collected $1.1 billion, or nearly $8 million for each of its 138 employees.

One of Gateway's first postmerger decisions was to shutter its 188-store retail chain and lay off 2,500 of its 6,500 employees. The company is now working to establish relationships with other retailers to sell its PCs. For example, Gateway has been courting Best Buy and Wal-Mart as potentially two of its top retail relationships, sources said, but it is also likely in discussions with others. Gateway aims to place its Gateway-branded PCs on those stores' shelves, alongside its eMachines PCs. It could also use those relationships to sell consumer electronics gear.

The company could position Gateway PCs as a premium brand and continue to offer eMachines as a low-price brand. Gateway has several PC products, such as its all-in-one Media Center 610, that are more feature-laden than models carried by some mass retailers.

Gateway is expected to continue selling PCs and other products direct to consumers via the telephone and the Internet, the sources said.

As for corporate sales, Gateway is evaluating whether to put more emphasis on serving smaller-size businesses and education customers, for example, the sources said.

The company is also considering streamlining some product lines, such as business PCs. It could consolidate its business desktops around one chassis, for instance, allowing it to use more common components across the product lines.

Gateway now sells four different business PC models in an array of configurations. In addition, the company sells two Profile all-in-one desktop models, the Profile 4 and Profile 5.

As Gateway's Anderson wrote in his note to employees: "Let me stress that we are committed to making Gateway a great place to work again. But, frankly, that can't happen until the company returns to profitability and the culture of success that was so much a part of this place is restored.

"Once that happens, we are fully committed to sharing the rewards of that success with those who work here. That's part of the history of where the eMachines team has come from. And it's a tradition we intend to maintain."