December 24, 2001

Red Flag takes the battle to Microsoft

Author: JT Smith

- By Mike Newlands -
Microsoft Corp. scored a coup earlier this month by getting several of China's top PC makers, including market-leader Legend, to agree to bundle the Windows XP operating system on their machines. The Linux community there is fighting back.

Some of the early leaders in getting Linux onto China's PCs -- including the recently-listed Xteam, which developed the first Chinese Linux OS for PCs -- appear to have withdrawn from the PC battle to concentrate on the server market. But state-sponsored Red Flag Software Co. is leading the battle to get Linux OS onto China's desktops. Red Flag has just drafted a report detailing the financial and security issues involved in government departments using Microsoft products.

Red Flag was founded by the Software Research Institute of the prestigious Chinese Academy of Sciences, also the parent of the Legend Computer Group, and NewMargin Venture Capital. Initially
concentrating on operating systems for servers, it has branched out to Linux PC systems, embedded Linux for PDAs, thin clients, set top boxes, and recently, Linux for the country's rapidly growing computerized lottery system.

Red Flag aims to become the top software developer in China, and in doing so, claim the lion's share of the market from foreign firms in the same way Legend has done in the PC market.

Sun Yu-fang, Red Flag's chairman, says the Red Flag report provides convincing proof of the economic losses and security risks that could be caused by continued use of Windows, rather than Linux products. Chinese government officials and Linux developers have been harping on this theme for some time, but the Red Flag report is the first attempt to quantify the situation.

The report comes as China has finally joined the World Trade Organization after more than a decade seeking admission. And one of the expected changes WTO membership will bring is a crackdown on software piracy, starting with the rampant piracy within the country's huge bureaucracy, whose computers operate on mostly bootleg Windows operating systems and Microsoft applications software.

In the report, Sun says that China could save itself up to USD $20 billion next year if the 9 million PCs that are expected to come off production lines were to be bundled with a Chinese-developed Linux OS rather than a Microsoft OS.

He says the current penetration rate of the Chinese version of Microsoft Office XP, which was launched in China less than six months ago, is already more than 90% in government departments, although he doesn't say how much of this was legal business and how much pirated.

Albert Li, chief executive of another listed Linux developer, Hong Kong-based Thiz Technology, says using local versions of Linux would boost China's software market and the economy as a whole. "The intellectual property rights issue is something China wants to pursue due to the WTO accession. Right now at least 85% of the software used in China is pirated. But China will lose a lot in foreign exchange if companies now turn to genuine software and the money goes to a few foreign software vendors."

Last year, legal software sales in China, excluding software bundled with PCs, were worth $893.7 million USD, nearly all of it going to foreign software developers, with Microsoft in the forefront. And Microsoft expects to do increasingly well in China as piracy is rooted out. A few years ago, Microsoft chairman Bill Gates said of piracy in China, "At least it's our software they are pirating," and he predicted a windfall
when piracy is eliminated and people brought up on Microsoft products start buying legal versions.

But the Chinese government and Red Flag have other ideas. Vice minister of information
industry Qu Wei-zhi recently told the official China Daily newspaper that local software makers are in danger of being completely controlled by big firms in other countries. But he noted the government has Linux initiatives in place to encourage Linux adoption on a nationwide level.

On the security front, Sun does not make any new observations, but reiterates that, because Microsoft has not disclosed Windows source code, there are security problems for government departments such as the national defense agency if they adopt Microsoft platforms.

Red Flag is also looking for overseas expertise to help it boost Linux sales in China, and has just signed an agreement with Sun Microsystems to bundle its StarSuite office utility applications with its Linux OS, both for PC makers to bundle with machines and for the retail market.

Known as StarOffice in the United States, StarSuite was developed in Germany and bought in 1999 by Sun Microsystems, which has since released most of the source code to the open software community. Open development continues though the OpenOffice.org Web site. In Asia, the product can handle traditional Chinese, simplified-Chinese, Japanese and Korean characters. StarSuite applications include a word processor, spreadsheet and presentation software.

Because of Microsoft's high licensing fees for its Office XP software, Sun Microsystems is hoping companies looking to save money will opt for StarSuite. "StarSuite software and other desktop product offerings from Sun are ideally suited for the China market," says Sun Webtop and applications group vice-president Mike Rogers. "StarSuite software is a great help for customers to move from other office products, because it offers a
competitive, yet affordable solution for everyday needs at home and in the office, while maintaining compatibility and platform neutrality."

Earlier this year Red Flag signed an agreement with Norwegian company Trolltech AS to create an embedded Linux platform for handheld device manufacturers in China, integrating Red Flag's own embedded Linux operating system and applications with Trolltech's Qt/Embedded and Qt/Palmtop.

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