Inside the spacious warehouse where solar-energy equipment was once made, about two dozen employees are building the craziest thing to be built in Denver: computers.
Major PC makers moved manufacturing overseas long ago, but System76 isn’t known for following others. Its computers don’t have Microsoft Windows, but rather, the open source Linux operating system. The bootstrapped company never took a dime in venture capital and instead let sales beget growth. And CEO Carl Richell says the time was right to move manufacturing to Denver, a decision that had more to do with customization and speed than rising costs in China or the ongoing trade war.
“We think we can manufacture our own products, and we think we can do it at a volume and price that is competitive, and do it locally,” said Richell, who co-founded System76 in his basement 18 years ago.
System76 joins nearly 6,000 companies that build stuff in Colorado. From that can of Dale’s Pale Ale to machined parts headed to Mars that are being built in Grand Junction by Wren Industries, manufacturing is a $23 billion industry in Colorado, according to the most recent economic outlook from the Leeds School of Business at the University of Colorado.
“We have 6,000 manufacturers in Colorado, and about 80 percent of them employ 20 people or fewer. It’s small businesses but in terms of manufacturers’ contribution to the state, manufacturing brings in more revenue to the state than tourism,” said Jessica Cowden, with Manufacturer’s Edge, a public-private partnership that is part of the National Institute of Standards. “Overall, there is over 140,000 people in manufacturing jobs just in the state of Colorado.”
Tourists, by the way, spent $19.7 billion in Colorado in 2016, according to the Leeds report. Top manufacturing areas in the state include aerospace, health care, craft brewing and outdoor apparel and equipment.
But personal computers? That’s a surprising move, said Heidi Hostetter, vice president at Faustson Tool in Arvada, and chair of the NoCo Manufacturing Partnership, an organization representing manufacturers in Northern Colorado.
“We’ve seen a shift in the past 20 years from what the industry calls low mix, high volume. We took a drastic turn about 10 years ago when we became a really precise state. Our manufacturing became high mix, low-to-mid volume. It made sense because of the companies we have here: ULA, Ball, Lockheed Martin. We pivoted,” said Hostetter, whose company makes parts for the aerospace, aeronautics and defense industries.
Making computers stateside, when it’s less expensive to do so outside the U.S., is unlikely to return anytime soon, she said. But that’s OK for Colorado, which has a new reputation.
“That’s been a great thing (for Colorado), and now people are looking at us all over the world as being a precision state,” she said.
For a decade, System76 plugged along, winning fans and fame for focusing on Linux software and the open-source mantra. But it was the inability to customize the computers or quickly make hardware changes that got Richell riled up enough to make this company-changing decision.
“We required an additional motherboard-mount location in a chassis,” said Richell, geeking out about how they wanted to put two brains in a single PC. “It’s a simple operation, but the manufacturer refused to add it, forcing us to alter the parts when they arrived.”
That was the last straw.
No, wait. This was the last straw:
“Power buttons were often lower quality than we’d want on our high-end products,” he said. “In one case, the power button would push through the front of the computer if it was depressed hard enough. It took months for them to fix the flaw.”
And there was this:
“Some of our highest performance products would arrive damaged,” he said.
There were many, many reasons. By bringing manufacturing to Denver, System76 could finally turn Richell’s vision into reality. So three years ago, the team began strategizing. Last spring, the company left its 16th Street Mall headquarters and moved into a 24,000-square-foot warehouse in Denver’s Montbello neighborhood that once housed a unit of solar-equipment company.
Building computer products in Colorado isn’t unheard of. Hewlett-Packard picked Loveland back in 1960 to expand outside of its Silicon Valley headquarters. The facility eventually made desktop calculators, according to the enthusiast site HP Computer Museum, and kicked off expansions into Fort Collins and Colorado Springs.
Of course, that was the dawn of mainstream computers, a heyday that is virtually is over. Consumers are much more entranced by devices like smartphones, which for some have taken the place of a PC. Many computer makers still import machines but assemble them in the U.S., including System76 with its existing laptops. But the number of people making computer and electronic products in Colorado has declined 60 percent since 2001, according to the Leeds report.
But there’s a sliver of PC hope coming from national trends. PC sales in the U.S. inched up for the first time this year since 2015, according to market research firm Gartner Inc.
In an email, Gartner principal analyst Mikako Kitagawa said, “manufacturing desktop (PCs) is still a valid business in the U.S.” But that’s only if the company can secure a competitive supply chain and operate in a niche where the big guys don’t compete.
The supply chain is the tough part, though, because as it is today, PCs are designed for high volume and low margins, Kitagawa said. Even for larger companies, it’s challenging in this time of uncertainty with tariffs and less consumer demand. But there is movement. Apple committed $350 billion to support domestic suppliers and manufacturers earlier this year.
It’s too early to look at growth as recovery, but the meager 1.4 percent growth in the second quarter this year was driven by the business market, which happens to be an area System76 targets.
Richell has designed a system to make its computers profitable by keeping much of the work in-house. Though System76 has just under 30 employees — roughly eight hired this year — only four are needed on the manufacturing floor at any time to build the new Thelio computer. They cut and bend metal, powder coat metal with Sterling Black paint, rub linseed oil on real walnut or maple wood veneer and then assemble the exterior case without using a single screw.
“The math just worked out. We’re a very, very lean company. We ship tens of thousands of computers and yet we have about 28 employees,” Richell said. “We write a lot of software to make ourselves really efficient. When you really get down to it, making stuff isn’t as hard as it feels when you first approach it. I think anyone shouldn’t be afraid of just trying it.”
The rest of the team designs, develops, markets and manages the company. That’s where you’ll get extra touches like home-built Thelio boards that let users slide in multiple storage drives. A cooling system blasts heat out to keep warm air from lingering inside the case. There’s an air vent shaped like the solar system at the start of Unix Epoch, when time began for Unix computers. The Thelio logo is next to a bunch of zig-zag lines, a nod to the company’s Rocky Mountain roots.
The computers include the company’s own open-source software Pop!_OS based on Linux, but the whole computer — hardware and all — is open to anyone who wants to duplicate the Thelio. That’s the open-source way, and Richell’s OK with even competitors, like Dell, copying its ideas.
“Absolutely! If they take this and make it, it’s licensed under GPL, General Public License. It has a social contract, which means if Dell chooses to use this backplane or firmware or anything about it and makes an improvement to it, they have to share it with everyone,” he said. “By people making contributions, it gets better for everyone.”
There’s still room for financial improvement. A laser cutter System76 planned to use to cut its cases out of metal sheets arrived five months late. The company made do by taking the metal to a local cutter.
“It costs us $145 to cut the metal because right now we have to outsource. When we get the laser cutter, it will cost $45” per computer for labor and materials, Richell said during a tour of the plant earlier this month. The laser cutter has since arrived.
It may have been cheaper to make the cuts in China, but there’s a different cost: Waiting.
“A side (effect) of bringing manufacturing in-house is how rapidly we can respond to problems or our customers’ needs. Previously, getting a fix into production and out to customers could take up to four months. We can now turn around improvements in weeks or even days,” he said.
System76 made this decision before the ongoing trade war with China, but the rising taxes are not helping. In fact, it hurts a small manufacturer like System76 more than a competitor who manufactures in China. There are no tariffs on importing finished laptops to the U.S., but there are taxes on Chinese-made components that go inside System76 computers.
“It’s so backwards. If you manufacturer a computer in China and import it, there’s no tariff. But if you manufacture a computer here and import the power supply or the motherboard, right now it’s 10 percent. On Jan. 1, it’s a 25 percent tariff,” Richell said. “It hurts all of us. All of our costs are going up. It costs more to manufacture in the United States because of the way it was implemented. If it was an even playing field, they can fight whatever they’re fighting. We would at least be able to compete on price with things that aren’t produced here.”
The City of Denver is working with System76 to solve some of the extra trade costs. A 60-mile radius around the Denver International Airport is a designated Foreign Trade Zone that is managed by the city. This would allow System76 to import foreign-made computer components to Denver without paying a tariff, build the computer and then pay the lower tariff on the finished item, if there is one.
“That way, they can use their same manufacturing facility with all the capabilities they need and incorporate all those materials into the product. And from there, they can sell them either in the United States or to a global customer” under a completely different tariff, said Stephanie Garnica, director of Denver’s Office of Economic Development. “A tariff is applied to finished goods, so they’re not paying double duty.”
Richell believes he can make this work and, perhaps in two years, begin manufacturing laptops in Denver.
“We operate on a profit basis so we can’t invest in laptops unless we make money producing desktops and doing it well,” Richell said. “…The margins are good. We’re able to do this.”
Updated 12:00 p.m. on Nov.21, 2018 to reflect that System76 developed its own operating system based on Linux called Pop!_OS. Linux Ubuntu is also an option.
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