PC manufacturer Gateway 2000 grew into a multibillion-dollar business in just seven years. Charles Platt went to South Dakota to see how.
__I'm sitting with a guy named Jerry in Jim's I-29 Liquor & Lounge out here in North Sioux City, South Dakota. If you follow Interstate 29 north and take the second exit after the state line, you'll find Jim's across from the Olde Glory Fireworks factory, next to a dog-racing track. It's a funky little place with two pool tables, country music on the jukebox, and draft Miller for 75 cents served in old-fashioned jelly jars - the kind that have screw threads molded into the rim. Jerry is sitting next to me on one of the beat-up black vinyl bar stools, wearing a checked shirt and a baseball cap. He used to work in the local hog-processing plant, where him and his partner used razor-sharp knives to scrape hair off of the carcasses. Jerry tells me they had to work fast, 'cause the plant was processing 800 hogs an hour. He wore steel-mesh gauntlets to keep from getting cut, but there were always accidents, like when one of the hogs broke loose before it got killed and leaped onto Jerry's back. He had to throw it off and beat its head with an iron pipe.
On the killing floor in the summer, it's a hundred degrees and it stinks something terrible. The work's so hard, you wake up in the morning, your hand's all clenched up from holding the knife, and you can't move your arm. Jerry's Vietnamese wife still works at the plant - there's a lot of Vietnamese and Mexican labor there since the union was broke a few years back - but he quit and got himself a job at Gateway 2000, the new computer factory. The pay ain't so good, but the place sure smells a whole lot better, and his arm doesn't hurt anymore.
In fact, Jerry says that a lot of folks around here are too proud to admit it, but Gateway has changed their lives. When I go visit the factory I should bear this in mind, he says. Maybe it'll help me keep things in perspective.__
Sioux City has a population of about 80,000, but it lies in Iowa, a mile south. North Sioux City is a tiny community, dwarfed by the flat, white, winter wasteland of South Dakota. There's a cluster of ramshackle wooden houses under some trees near a water tower, and a two-lane highway runs past a liquor store and a row of funky little bar-restaurants built from boards and cinder blocks. You could drive straight through North Sioux City and hardly even notice it.
But you'd notice Gateway 2000. Right beside the highway, just outside of town, stand a couple of two-story buildings with white, ribbed metal walls, like utilitarian trailer homes. The buildings are gigantic, a quarter-mile long, and next to them is a parking lot the size of an airfield. Even at midnight, there are lights burning and big rigs waiting at the loading dock with their engines idling, exhausts steaming in the frigid air.
Most people know Gateway from its distinctive, lavish, eight-page ads that run in half a dozen computer magazines. (Macintosh owners may have missed the ads, as they're aimed at PC users.) Every ad tells a wacky story. One of them shows Gateway's maverick Chair and CEO Ted Waitt dressed up as Robin Hood; another portrays him as a poker player in an Old West saloon, beating the pants off his competitors; yet another has Gateway employees dressed as hippies in a VW microbus, advocating computing "power to the people." My favorite shows Julius Caesar sitting on a heavenly cloud shortly after his assassination, drinking out of a Gateway coffee mug and musing, "Sometimes it's hard to know who to trust - especially in the competitive computer business."
Waitt designed the early ads himself; they're still done entirely in-house, using Gateway workers as models. The company operates in a defiantly personal, down-home style, no different from when it started out eight years ago in a red barn on the Waitt family's cattle ranch. The Gateway mascot is a cow. Gateway systems are shipped in boxes that are mottled black and white - like Holsteins. Even the big, modern, main building at Gateway is painted like a cow.
But the gross revenues are hardly bovine. Selling computers entirely by mail order, Gateway is now in the Fortune 500 and has achieved growth that's phenomenal even by the standards of the industry (see performance chart, next page). Two years ago, the company established a factory in Ireland to pry open the European market. Waitt now says he's aiming for nothing less than first place among PC-compatible man ufacturers. Currently, Compaq, IBM, and Packard Bell are ahead of him; Dell has already been left behind.
How did Waitt manage to sell more than a million units in 1994 while playing the fool? Why has his idiosyncratic company flourished out in the boondocks while hundreds of clone makers have been eaten alive by the ruthless mail-order market? And what happens when those wacky ads start losing their novelty value and everyone who wants a Gateway PC has already bought one?
"Economical" is the polite term for Gateway's offices. "Ruthlessly cheap" might be more accurate. Big, ugly, industrial air-conditioning units stick out of the corrugated metal wall beside the unobtrusive main entrance, and the lobby is a bare box. There are a couple of couches, a couple of plants in tubs, some computers on Formica display tables, and two ramshackle coat racks that look as if they were dragged in from a garage sale. Visitors in immaculate business attire arrive here in the early morning like suitors courting a wealthy débutante, but the young, shaggy-haired Gateway employees who come wandering out to meet them look like mall rats in their faded jeans, dirty sneakers, and T-shirts.
Michelle Gjerde, of the press relations staff, seems to be the only Gatewayite who feels an obligation to dress well. She takes me to the assembly building, where she introduces me to a guy named Shane Hartnett. Shane is only 24, he's been working at Gateway since he was 17, and he's still taking college evening classes in business studies. Meanwhile, he supervises the entire Gateway manufacturing operation.
Big cartons containing motherboards, ribbon cables, and disk drives enter the receiving area from trucks outside. The cartons are inspected and stacked on enormous steel shelves that rise 30 feet above the polished concrete floor. Orange-tinted high-pressure sodium lamps illuminate this 250,000-square-foot area, which looks like the warehouse in the final shot of Raiders of the Lost Ark; but the inventory of most parts lasts only five days, at most.
From the warehouse, parts are shifted to the assembly area. To laid-back rhythms of country music, as many as 32 teams of 25 workers run their own mini-assembly lines, Japanese-style. Kids in sweat shirts and jeans seem relaxed and cheerful as they use electric screwdrivers, building PCs by putting together motherboards, power supplies, and disk drives. They make it look as simple as, say, installing a new car stereo.
Gateway never builds a computer until someone orders it, and every system is custom-configured. After assembly, the units are hooked up for automated testing and software installation, then moved on conveyors to the shipping area where they are packed in black-and-white "cow boxes" and rolled onto big rigs owned by United Parcel Service. The trucks have to travel 100 miles to Omaha, Nebraska, to reach the nearest airport that's big enough for jet service.
"It's a fairly simple process," says Shane. "Really, it's more of an assembly operation than a manufacturing operation."
In fact, Gateway doesn't manufacture anything. It buys a bunch of ready-made components, screws 'em into a case, and ships 'em out. If it's really that simple, why isn't everyone doing it?
"We run what we call a virtual engineering organization," says Tony Olson, a quiet, methodical man who is director of engineering. "We go out and see what's being done, and we decide which standard is going to become dominant."
On the basis of this research, and guesswork - Olson's people specify every detail of a new computer from the chip set to the keyboard layout. After that, they get somebody else to do the fabrication. In the case of "Liberty," a new Gateway laptop with an oversize 10.4-inch color screen, Gateway drew up the specs, then got Sharp to make the screen and Sanyo to manufacture the computer.
By delegating the manufacturing chores, Gateway leaves itself with only four things to think about: design, advertising, selling, and predicting the market. This last factor is probably the most crucial. But in a fast-changing industry ruled by fickle public taste on one side and unpredictable giants such as Intel and Microsoft on the other, how can Gateway possibly plan ahead?
"We maintain multiple road maps here," says Tom Grueskin, who is currently responsible for companywide implementation of Windows 95. "There are people trying to plot future paths in software, or operating systems, or hard drives, so when we want to design a new product, we have a list of all the alternatives."
Shrewd, bottom-line-oriented, and well-educated, Grueskin, at 32, is one of the elder statesmen at Gateway. "In school I was a finance guy," he says. "Then I worked for a baking company and sold institutional croutons. I was so embarrassed about that job; I hated telling people what I did. Then I went out to Ted's ranch, and there were no locks on the doors, a couple of cars out front, a UPS truck, and a couple of dogs running around. When I started officially, we had 40 employees - and we did our first $2 million month."
Grueskin says that Gateway makes a lot of its deci- sions based on customer feedback. "Because we only sell direct, we're hardWired to the market. When we're doing something our customers don't like, we know it instantly. We have an active staff doing market research, calling our customers every day. We have surveys that run all the time."
Does he foresee eventual market saturation?
"In the United States," he says, "only about one-third of households have PCs. As large as the PC industry is right now, over the next 10 years, the penetration into households will increase. Also, the replacement market will not go away. A lot of our customers are replacing their PCs every three years."
There's a problem, though, in selling to a broadening audience of nontechnical users. Gateway is the only source of information for its own products. As PCs become more complex, incompatibilities become more common, and consumers need more help. Gateway was savagely criticized by InfoWorld beginning in 1993 for failing to keep up with demands for tech support; even now, the Gateway newsgroup on Usenet contains hundreds of complaints from people who want support and can't get it.
Grueskin wearily acknowledges this, but claims that customer service has been restructured. "We're starting to see some significant improvements," he says. "By the time your article is in print, a lot of this will finally be behind us." Well, maybe. Gateway currently has more than a thousand people giving various levels of telephone help from three different US locations (in North Sioux City and Sioux Falls in South Dakota as well as in Kansas City, Missouri). Even so, the 800- number is often busy, and the fax-back service can take two or three days. Here in North Sioux City, incoming calls are fielded in a vast ground-floor area divided into hundreds of 5-foot cubicles, each containing a representative with a headset and a video monitor. At random, I stop and talk to Sheylee Walden, who tells me she's been at Gateway for about six months. She cheerfully agrees that the people who call her tend to be impatient and are sometimes mad as hell ("hot customers," as Gateway terms them), but she seems quite happy to cope with 100 to 120 of these calls per day. "I can usually calm a hot customer down," she says with a shrug and a smile. And all around me, in the other little cubicles, Sheylee's co-workers seem equally, oddly content with their wearying tasks. Technical support is on another floor subdivided into hundreds more cubicles.
There's a two-tier system here, with higher-level support provided for corporate customers and lower-level support for private users. Mark Krapfl is in the latter section. "When the customer calls in," he says, "I'll more'n likely click on this." He points to his video monitor, where there's a list of the "top 50 issues" afflicting Gateway system owners. "For instance," he goes on, "if they have a CD-ROM problem, this will tell me some of the things it most likely is."
If one of the likely problems matches the customer's actual problem, Mark clicks again, and some text ap-pears, giving the solution. It seems to me that his job consists of reading relevant pages from an instruction manual to customers who, for some reason, haven't read it themselves.
"Basically, that's about it," he agrees. "But a lot of times, the customers do know how to fix the problem; they just want someone at Gateway to hold their hands and tell them they're right."
Mark, like Sheylee, seems very upbeat, very happy to go through this repetitive daily ritual. OK, I guess it beats skinning hogs - but I'm beginning to get the impression that Gateway employees aren't just counting their blessings. They seem like true believers participating in an exciting adventure. Soviet socialism was supposed to work this way, with smiling, clear-eyed workers forgoing luxuries and cheerfully pulling together for the greater good. How has Gateway achieved the kind of team spirit that Karl Marx could only dream of?
The spirit is strongest in the sales department. Todd Osborn, vice president for sales, grabs a microphone that is always ready. "Attention all sales!" His voice booms across another vast array of cubicles beneath an unfinished ceiling of galvanized sheeting, air ducts, and steel beams. "The next person to sell two 75s with quads gets a hundred dollars!"
He's talking about 75-MHz Pentium systems with quad-speed CD-ROMs. Selling at Gateway is not just a matter of quoting a system price; it's a holy crusade. Sitting in his windowless office, which is about as glamorous as a shoe box and only slightly larger, Osborn lists special incentives that motivate sales people who are paid almost entirely on a commission basis. "We have an achiever award," he tells me, "a rookie-of-the-month award, a plaque, and $25 or $50 in cash - you get recognized in front of the group, maybe three hundred reps. It's amazing what that does. Then the person who sells the most Pentiums gets a trip to Omaha and dinner for two. In a monthlong contest, you might win a trip to Florida or a cruise for two." He looks at me with powerful sincerity.
"I try to instill in our employees the idea that if you've had dreams, you can make them happen here. You really can."
Todd breaks off as he notices that my laptop is a Compaq. For a moment, he looks pained, like a true believer encountering someone who has not yet been saved. Before he has a chance to redeem me, I ask him another question. About how much money does a typical salesperson make?
"Thirty to forty thousand, on average. Some make six figures. Everyone's very ambitious. They all want more. You see, we're trying to make a dynasty here. But it takes a lot of hard work, and personally, I still feel we're at the ground floor."
He claims that the whole operation is based on customer satisfaction. "You're not going to be dissatisfied when I sell you a system. You're not going to call me six months from now and say, 'Todd, why didn't you sell me the quad CD?' because - I already did! What you're going to do is call me and say 'Todd, my buddy wants a system just like mine.' More than 45 percent of our business comes from referrals." He shakes his head in awe of the statistic. "That's just amazing."
I ask where he gets his supply of positivism.
"I've been an achiever all my life. I set myself lofty goals, and this company is a beautiful platform for that sort of person. If you like what you do and have a goal and a plan, if you want it bad enough" - he spreads his hands - "you can do anything."
In every department at Gateway, I've heard Ted Waitt's name mentioned in casual conversation. Everyone refers to him as "Ted," and they almost always speak of him warmly. I'm assuming that he's the main source of the feel-good spirit that seems to permeate every level of the company.
The executive offices deviate just a little from the bare utilitarian look that prevails in the rest of the building. Glass walls surround the waiting area, and GATEWAY 2000 is spelled out in white letters behind the reception desk. Ornamental wooden cow sculptures stand beside two comfortable chairs.
Waitt's own office is modern, all done up in black and white (the cow motif again), with rock music playing in the background. He's 32, tall and lean, and the bony look of his face is accentuated by the way he wears his hair, pulled back tight in a thin ponytail. He's tense and driven - but he tries to be polite about it. As he waits for me to ask him questions, I sense him checking his restlessness with great effort.
I ask how he started out. As I understand the story, he was capitalized by his father's cattle-ranching fortune.
"Not true," says Waitt. "His business ran into trouble. I was 18 years old, and he told me he didn't want me to go into cattle, and he'd support me emotionally, but not financially. Texas Instruments had been trying to market its professional computer. It was better than IBM but" - he grins - "they forgot about that compatibility thing. So when TI discontinued the product, the users ended up abandoned - they felt like orphans - and there were companies selling accessories and software to them at extortionate prices. So my brother and I started a user group with collective muscle to force the prices down."
He sits back in his chair, reminiscing for just a second. "There are still some people out there who used to sell that overpriced hardware and don't like me a whole lot." He says it with a happy smile.
Waitt recalls that he came up with the name "Gateway" because in the mid-1980s, setting up micro-to-mainframe "gateways" seemed like the key to the industry. Someone he was drinking with in a bar suggested adding "2000" to the name, and it sounded good, so he went along with that. Then he started selling PC compatibles, and Gateway's gross revenue grew by a factor of eight in the first year, and it grew six times more in the second year.
I ask him how he managed to finance that kind of expansion.
"We did our typical business plan," he says. "Went out to bankers and said, Hi, here we are, we want money. We were extremely naíve. The bankers said, Do you have any collateral? And we said, Nope. In the end we used a CD (certificate of deposit) of my grandmother's as collateral: $10,000. But I could never count on banks for financing, and we haven't borrowed in a long time, except when the state of South Dakota offered us a loan at 3 percent, which you'd have to be crazy to turn down. We now have the lowest debt-to-equity ratio in the industry, and we have more than $100 million in cash.
And we don't owe anybody money."
Waitt's brother seems to have been the one with the technical knowledge initially, but he's no longer actively involved. "He's having a good time managing his investments," says Waitt. "He's still a large stockholder."
So how did he mastermind the growth? Why didn't Gateway languish like a hundred other clone manufacturers?
"Focus," he says. "Concentrating on what we're good at. It's not a matter of being first, it's being there at the right time, being first in volume to market, and knowing what trends to stay away from."
Well, OK, but I'm sure his competitors would say much the same thing. If there is a Gateway success formula, he hasn't really told me what it is.
I try another line. What makes Waitt keep on fighting the fight? He could retire at this point and live comfortably without ever working again.
This question seems to catch him off-guard. Until this point, he's been talking in a rapid, staccato rhythm as he alternately sprawls and fidgets on his leather chair, with the radio playing oldies such as "Beat the Reaper" in the background.
He pauses. "What keeps me motivated," he says thoughtfully, "the thing that keeps me going is - the fact we have really only scratched the surface of what we can accomplish." Now he sounds certain again, defining new goals and his ambition to achieve them. "Getting to where we are has been the easy part," he says. "Taking it to the next level is the real challenge, over the next five years. I'm only 32 years old; I'm not intending to go out to pasture just yet." He grins. "No pun intended."
And his objective for Gateway 2000 as a corporation?
Once again, the question makes him pause. "It's one of those things you don't really know until you get there," Waitt says finally. "But - there's no point in aiming to be Number Two. You've got to have a plan-to-win attitude. This whole business is in its adolescence. Right now, we're just like a 14-year-old kid who stole the keys from Mom and Dad so he could go do some really crazy stuff." He laughs, enjoying the image. "There are all kinds of challenges still ahead."
I've spent the whole day in the Gateway complex, talking to people at every level and walking maybe 5 miles along the industrial-carpeted corridors. But I still feel there's something missing, something that hasn't been said. And so, at quitting time, I head back to Jim's I-29 Liquor & Lounge, because I've been told that this is the main after-hours Gateway hangout.
Here I meet a gruff but amiable, heavy-drinking, bearded electronics engineer named Scotty who was one of the original Gateway employees and is the type of computer geek who holds rather firm opinions on just about everything. When I ask him the secret of Gateway's success, he doesn't have to think twice about it. "We wanted to prove," he says, "that out here in South Dakota, we could do what big corporations like IBM had done - and do it better, selling a well-manufactured product at a more reasonable price, with less bullshit." He folds his arms and gives me a steady, deeply serious look. "You have to understand the mentality here in the Midwest. We care. We really do."
Sitting beside Scotty is his distractingly pretty wife, Kelly, who is fluent in four different programming languages. She tells me that she used to hang out at Gateway and do tech support, even though she's never been an employee. "I went there for fun," she says. "People worked all kinds of hours, just because they believed in it. For many of them, it was an obsession." She pauses. "But it's not quite like that anymore."
Scotty nods emphatically. "There are people, now, who don't work hard enough." He says it with an air of righteous disapproval. "And it's getting more corporate."
Corporate? I guess he means relative to the days when the business operated out of a barn. But in the near future, as Gateway continues to make the transition from being one man's obsession to a multinational corporation challenging Compaq and IBM for market dominance, Scotty's perception may be increasingly accurate.
As the company grows bigger, it must surely acquire more levels of management and a more corporate style. In so doing, it will move further from the success formula that has worked so well. Will Ted Waitt's cows still permeate every level of his empire? Will employees see beyond an amorphous corporate entity and continue to relate personally to their quirky CEO? Once Gateway is more industry giant than cattle ranch, can its minions continue to feel part of a small community out in the boondocks, proving itself against the big boys?
To paraphrase Waitt, the real challenge for Gateway lies ahead - but not just in terms of sales. The toughest task facing Gateway will be merely to sustain what has already been achieved, as if by accident, out here in the flatlands of South Dakota.
