Tedium - Gateway Country 🐄

Today in Tedium: Whatever your opinion of the ongoing trade war between the U.S. and China, and the way tariffs often get used as a cudgel in that battle, the fact of the matter is, it represents something of a proxy battle over the United States’ place in the world of manufacturing. And computers are, quite often, in the line of fire. Earlier this year, there was a freak-out moment when it looked like Chinese-made semiconductors (including GPUs) were about to see a huge tariff hike, though that was delayed for a while. Companies that play both sides, like Apple, have had to do gladhanding to keep their tariffs low—apparently Tim Cook personally gave Donald Trump a $6,000 Mac Pro in exchange for lower tariffs on that computer’s fancy parts. We closely associate modern computing with Chinese production apparatuses, to the point where it makes no logistical sense to slap a “made in the USA” sticker on the box. But just a few decades ago, a lot more computers were assembled in the U.S. Why did that change? Perhaps the fate of a company whose boxes literally screamed Americana has a lot of the answers. Today’s Tedium considers how globalization changed Gateway 2000. — Ernie @ Tedium

An early Gateway 2000 ad from Computer Shopper, circa 1987. (Jason Scott/Flickr)

If a company like Gateway 2000 existed today, it would be hailed by politicians as an example of American ingenuity

The story of Gateway 2000 isn’t new to Tedium—I discussed about it four years ago, in the context of a piece on Computer Shopper, a magazine where it frequently advertised—but, given the tenor of the recent trade talks, its story is particularly telling. Because the company’s evolution does a great job of highlighting some important questions about globalization.

If a company like Gateway existed today, its factory would be the kind of place that the president would visit just to highlight the fact that someone was building computers in the U.S. and having a lot of success at it—just like Bill Clinton did in 1998 … in Ireland.

Here was a firm that, throughout the late 1980s and early 1990s, kept overhead low and profits high by bringing jobs to a part of the country that might have struggled to attract a high-tech firm otherwise. It was homegrown, and founders Ted Waitt, his brother Norm, and Mike Hammond did something impressive: Early on, they kept it local, taking advantage of the community’s unique resources, and even underlining that point with their marketing.

The company, at first, eschewed things that other competitors deemed necessary. It was located far from other centers of tech-field activity of the era, like Texas and Silicon Valley, and it didn’t function like those companies, either. Initially launching out of a barn, it later moved to Sioux City’s Livestock Exchange Building, meaning the firm had literally displaced cows to build computers.

According to FundingUniverse, rather than doing market research, they built their computers based on Ted Waitt’s specifications, believing that common sense was the best way to spec out and price up a computer. (His instincts were often correct.) And rather than bringing in a marketing team to publish its first big ad, Waitt designed it himself—coming up with the iconic “Computers from Iowa?” line in the process.

The ad approach was so unusual that the company became downright famous for its print ads. While, admittedly, it’s hard to get a hold of a full array of Gateway magazine ads in 2019, it’s worth noting that their print advertising game was possibly some of the most ambitious being produced during the era—in any industry.

The front page of a Gateway ad from 1992.

The inside spread.

The back. That’s Waitt, dressed as a janitor. (via Internet Archive)

Gatefold spreads? Over-the-top photography? The founder seemingly in every photo shoot? Gateway knew that it was in a field where its competitors hadn’t gotten past product shots, and there was serious concern about the small guys being fly-by-night companies. Putting the brand out front allowed it to differentiate itself from the rest of the herd in 1992.

By carrying itself like a big guy when it was still a small guy, eventually it became a self-fulfilling prophecy.

Gateway, within just few years, was on a massive hot streak, seeing its mail-order-only sales soar. By 1991, it was the the top company on the Inc. 500, with the article about the win noting that Gateway had managed to stand out in an incredibly difficult business—to the point where the story trailed the owner of a competitor who felt compelled to travel nine hours to Gateway’s headquarters to investigate the suddenly overwhelming competition.

In the article, Waitt pointed to the folksy style and the inexpensive locale, of course.

“People try to make things more complicated than they are,” Waitt told the magazine. “There’s no magic formula. It all revolves around the way we do things.”

Gateway was notable in that, like Dell, it leaned hard on the ability to customize computers. The company did not have a place in stores at the time, so much of its sales took place via mail order. And by using mail-order, the company could give users specific say in what they wanted for their laptop or desktop.

A portion of a Gateway ad that ran in PC Magazine in 1993.

However, the way they did things would quickly run into challenges. Around 1992 or so, the company’s down-home approach started to buckle a bit under the weight of its fast-charging success. The mail-to-order business started to face challenges with shipping its computers on time, and despite having more than 1,400 employees at the time according to Bloomberg, there would be delays of weeks and major quality control issues.

You know a great way to solve challenges with delays and quality control issues? You outsource so you have more access to human capital resources, though at this juncture in its history the company didn’t do that. It faced challenges in finding enough employees in South Dakota, but it kept those workers on the job.

Eventually, though, its values—and leadership—changed.

Former Michigan Gov. Rick Snyder, a former Gateway president who has had to defend his record on outsourcing that happened on his watch. (Jim Greenhill/Flickr)

Gateway’s record of outsourcing became a political liability for a former company president and CEO

While Ted Waitt probably saw the most financial success from his time with Gateway and remains a multibillionaire to this day, arguably the most well-known person associated with the company was Rick Snyder, a longtime board member who at various times served as Gateway’s president, chief operating officer, chairman, and interim CEO.

Snyder, while having a much smaller net worth than Waitt—smaller being relative, as $200 million is certainly not struggling—found later success in the political realm, serving as governor of Michigan for eight years and even coming up in Mitt Romney’s search for a vice president in 2012.

But Snyder’s political rise highlights how the harsh economic realities that lead to outsourcing make for bad political optics. When Rick Snyder ran for office, he faced a ton of questions about his track record on outsourcing. One example of this comes from a conservative blog, Republican Michigander, which went to the trouble of actually checking the bottoms of old Gateway accessories to confirm that they weren’t actually made in the United States. (Weird flex, but OK.)

Blogger Dan Wholihan noted that, due to the loss of auto-industry jobs associated with the region, having an affiliation with outsourcing was political poison.

“This is Michigan. Our backbone is manufacturing, and for all this talk about diversifying the economy, all the talk of the cookie cutter new urbanism and creative class claptrap that Richard Florida types say is our future, we can not throw manufacturing under the bus,” Wholihan wrote. “Diversifying the economy must include manufacturing.”

Wholihan predicted that Snyder, if he won the primary, would lose the general election in a landslide. Instead, he served two full terms. Part of the reason for that is that Snyder got ahead of the issue and could make the case that he was a voice of opposition on Gateway’s board.

Snyder, a member of Gateway’s board throughout both its periods of success and struggle, stated that he disagreed with the moves to outsource, and noted that when he became interim CEO in 2006, he brought some of the outsourced jobs back. (This is true, but the company sold off to Acer soon after he left the CEO role.)

“I was a minority voice on the board, saying I didn’t agree with several of those steps,” he said, according to The Ann Arbor News.

Still, the outsourcing issue gave critics a quick way to dig at both Snyder’s business record and his gubernatorial record. Shri Thanedar, a Democrat who ran in the gubernatorial primary last year, pointed to Gateway’s outsourcing when offering his opinion on Snyder’s track record.

“He went to Gateway and managed the billion dollar corporation and he looked at jobs and Gateway outsourced jobs,” Thanedar said when announcing his run in 2017. “They were focused on the bottom line and that’s the kind of mindset he brought to Lansing.”

Snyder had other, more pressing, political crises on his watch—most notably the water crisis in Flint, which has made Snyder the subject of investigation in recent years—but the fact he even had to deal with Gateway’s outsourcing issues at all says a lot about how outsourcing is much less a business liability than a political one.

Analysts cheer on companies that cut the fat—but those are real people and real jobs, and job loss makes people mad.