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Incoming Gateway CEO Is Focused at Every Turn

The cost and inventory problems Wayne Inouye will inherit are similar to ones he successfully tackled at EMachines.

February 17, 2004|Terril Yue Jones | Times Staff Writer

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.

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