Gateway to cut jobs, outsource more PCs

The company on Wednesday said it will close its manufacturing plant in Hampton, Va., and work with more third parties in an effort to cut costs and improve logistics by establishing a number of local hubs for distributing and servicing its products inside and outside of the United States.

"We are going to combine our own manufacturing and service capabilities with a rapidly expanding network of new and existing partners," Rod Sherwood, Gateway's CFO, said at an investor conference Wednesday morning. "We believe this will give us a significant advantage."

Gateway will take a charge of between $120 million and $160 million over the next few quarters to cover the plant closing, job cuts and other changes. But it expects to save between $115 million and $130 million per year as a result.

The company has cut more than 1,900 jobs and closed 80 retail stores since the beginning of this year as part of its cost-cutting efforts.

The closure of the 450-employee Hampton plant, which manufactures Gateway's desktop PCs, is part of the company's efforts to transform itself into a purveyor of consumer-electronics devices like digital televisions. Gateway has said it will launch 50 new products, most of them consumer-electronics devices, before the end of this year.

Gateway will continue to operate its facilities in North Sioux City, S.D., and Sioux Falls, S.D., but will cut an as yet undetermined number of jobs at those locations as well. The South Dakota facilities will assume some PC manufacturing duties, while Gateway will outsource the rest to third parties, the company said.

Gateway's outsourcing plan will change how the company produces its desktop PCs for both consumers and businesses. The company did not say which PCs would be outsourced and which it would continue to manufacture in-house.

Gateway promised to provide more details on the manufacturing plans at the time of its third-quarter earnings announcement, which will come in October.

The Poway, Calif., company has been leaning for some time toward outsourcing manufacturing as part of its plan to lower costs and become profitable again.

Gateway, which already uses third parties to manufacture some PC products such as notebooks, launched a line of low-price desktop PCs built by an unnamed third party in July. Using a third party helps Gateway compete more effectively in the low-price PC market, the company said.

Gateway executives had been dropping hints about more outsourcing. The company said during its second-quarter earnings call that it was exploring other outsourcing initiatives and would update investors later in the quarter.

Some analysts said that the outsourcing was inevitable.

"For the last two-and-a-half or three years I have been calling for (Gateway) to do this and to evolve into a pure sales and marketing organization," said Brooks Gray, analyst with Technology Business Research. "I guess it's better late than never."

Gray said Gateway lacked the volume of sales to make manufacturing on its own worthwhile, a situation that had been worsening over the last several years.

"There's almost no way that Gateway will be able to turn a profit on hardware of its own manufacturing," Gray said. "It's all about economies of scale."

During the second quarter, Gateway shipped 490,000 units, for a year-over-year decline of 25 percent.

Parceling out more of its manufacturing to third parties mirrors Gateway's consumer-electronics strategy.

In recent months, Gateway has launched a wide range of new products, including new televisions, a DVD player, an MP3 player and several digital cameras. But the company does not manufacture the products itself. Instead, it develops design specifications and contracts with other companies that build the products to those specifications and stamp them with the Gateway brand.

The strategy allows Gateway to piggyback on research and development funds invested by the third-party manufacturers and at the same time deliver products at competitive prices. Gateway's digital cameras, for example, cost between 20 percent and 40 percent less than competitors' cameras, Gateway says.

Gateway will likely update investors on the progress of those new products, during its third-quarter earnings announcement. But the best indication of whether the strategy shift is working will most likely come early next year when the company reports fourth-quarter earnings, including returns from the holiday shopping season.