In China's Net Cafés, Intel Pours It On

Its locally designed new system caters to a booming market

Some 11 million PCs in over 110,000 Internet cafés. If you're Xu (Ian) Yang and your job is to sell Chinese on using computers with Intel chips, those numbers will surely grab your attention. In late 2003, Yang, the Beijing co-general manager of Asia-Pacific for Intel Corp. (INTC ), was in the northeastern city of Harbin to speak to university students. It was a typically frigid northern day, and since Yang had a little time to spare, a staffer suggested they warm up in an Internet café.

While China's Net cafés had a reputation as seedy firetraps, this one impressed the Intel team. It was filled with students playing online games, watching movies, and instant messaging their friends. "There had to be 500 people there on three floors," recalls Yang. If there were so many PCs in just one café, what sort of opportunity might exist nationwide? "I said to the guys: 'Come up with data on this,"' says Yang.

It wasn't easy. Many cafés operated without licenses, so numbers were sparse. But Intel's team tracked down encouraging figures from the government: At that time, China had 110,000 Internet cafés, with an average of 100 PCs each, for a total of 11 million. Intel's reaction? "We went, 'wow, this is an industry,"' recalls Yang. Because cafés cater to Chinese gamers who want to play the most up-to-date games, owners replace their PCs every two years or so. That amounts to about 6 million PCs per year. Yang realized he needed a strategy for Net cafés. "How do we serve that market?" he asked.

The answer came a few months later in a Beijing traffic jam. Stuck in the car were Minerva Yeung, who had recently transferred from Silicon Valley to Intel's Shanghai research and development center, and two other Intel executives. "We understood there were a lot of pain points for the owners," says Yeung, a Xiamen-born Princeton University PhD who is now 37. While the car crept forward, the three started brainstorming, and before the drive was over they decided they ought to focus on making it easier for café operators to manage and update their computers. They also wanted the technology to be more affordable than the advanced designs that big corporations use for maintaining their thousands of PCs.

A team of engineers soon put together a prototype. But Intel's China operation had never come up with a new product from scratch, and it was difficult for the Net café group to find a champion within the company. A breakthrough came in September, 2004, when the team took Paul S. Otellini -- today Intel's CEO but then its chief operating officer -- to a café in Shanghai and sold him on the concept. "We could see it was going to be something huge," says Robert Liu, a 36-year-old software engineer from Taiwan. Intel launched the first version early in 2005 and has already updated it twice.

It's a big time saver for café owners. The system cuts maintenance costs by 78% and reduces software upgrade times by 85%, Intel says. The company is working with local PC makers such as Lenovo and Haier as well as component suppliers from Taiwan to build interest in the technology, and it hopes to sell 1 million computers with it this year. But many café owners working on thin margins aren't interested in buying pricier Intel machines if they can spend less on cheaper PCs now. "China doesn't fully understand support and service," says Ed O'Donnell, a marketing director in Intel's Shanghai office.

What the Chinese do understand is price. While the system itself adds just $1 to $2 to the price of a PC, Intel's machines cost roughly 15% more than computers equipped by Advanced Micro Devices Inc. (AMD ), which has launched a Net café product of its own. That has helped AMD break Intel's erstwhile lock on China, and the smaller rival has captured some 20% of the market. That's a problem because China remains crucial for the company: Intel last year sold $5.8 billion worth of chips there, or 8.5% of its 2005 revenue, according to market researcher iSuppli Corp.

Intel acknowledges that selling operators on the system isn't easy. So company engineers are trying to make the chips more alluring, for instance by reducing power consumption (electricity is the No. 2 cost for café operators, after rent). For Intel, the Net café system proves that its Chinese engineers can come up with innovative products. Getting Chinese consumers to embrace that innovation may turn out to be the bigger challenge.

By Bruce Einhorn

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