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Why Gates Opened Windows in China

By Bruce Einhorn Bill Gates was in Beijing last week, meeting with President Jiang Zemin and other government officials and promising to give the Chinese access to one of most zealously guarded industrial secrets in Corporate America: the Windows source code. That's a big step for Microsoft (MSFT) in any country. In China, where piracy is rampant, it's a huge leap (see BW Online, 2/10/03, "China Learns to Say 'Stop Thief'").

What drove Gates to make such a move? In part, he's just trying to strengthen Microsoft's position in the vast China market. But he no doubt had the threat of Linux in mind, too.

The open-source operating system is certainly giving Microsoft reason to worry in the West, as a recent BusinessWeek cover story shows (see BW, 3/3/03, "The Linux Uprising"). At first glance, the Pacific Rim numbers would seem to ease Gates's mind. For the Asia-Pacific region excluding Japan, Linux sales were just 1% of the market in 2002, vs. 57% for Windows and 24% for Unix. When measured in shipments, Linux fared better: It had 14%, vs. 78% for Windows.

BEYOND LOW COST. Look a few more years out, though, and the trend becomes more worrisome for Gates & Co. Tech researcher IDC estimates that Linux sales in the region will more than double in the next few years, topping $600 million in 2006, vs. about $200 million last year and what will be about $275 million this year. And government agencies and officials in China and India have expressed support for Linux, which is much cheaper than Windows and therefore a good fit for developing countries.

Still, low cost isn't all that's motivating some Chinese officials to give Linux a try. The open-source code is also a powerful incentive. Microsoft had long guarded the nuts and bolts of Windows, and that was a sore cultural point for some Chinese, who have their suspicions about the trustworthiness of the American giant.

Red Flag Linux, a Beijing-based provider of Linux software and services, is connected to the Chinese Academy of Sciences, the central government's top research institute. Even so, Red Flag is hardly xenophobic. In October, 2002, it announced a partnership with another U.S. company, Sybase (SY), to develop e-business products for the Linux platform. Why should China go Linux? Here's Red Flag's rationale:

BUY LOCAL. "Windows is sold to end users without source code. As a result...end users are ignorant of security leaks or defects that may accompany the software itself.... Obviously, this level of transparency and security fails to meet the government's demands in administration. Malicious use made of the possible leaks with the system will put the important military and economic information of our country at serious risk of disclosure. Consequently, China-made [operating systems should] be the first choice for e-administration."

Such warnings are just what Gary Ma wants to hear. He's chairman of Xteam Software International, which specializes in Linux applications for the Chinese market. Xteam is a tiny company listed on GEM, Hong Kong's Nasdaq-style second board. It poses no real threat to Microsoft, but it's clearly hoping to jump on a Linux bandwagon in the country. "There's no doubt that Linux is gaining market share in China," says Ma.

Even though Ma is fully aware that Linux' share amounts to just 1% for servers, vs. 40% for Microsoft and 60% for Unix, he knows it has a crucial advantage: The government is backing Linux. In early 2002, Beijing bought $40 million worth of Linux-compatible software. Ma says the city government of Guangzhou and the provincial government of Guangdong are also "building up their infrastructure using Linux."

BIG BAD YANKEES. "It's simple math," says Ma. "If your offices are switching to a Windows-based environment, you're looking at $250 per PC. You're paying a lot to the U.S. It's expensive." For servers, he says, Linux is one-third to one-quarter of the price of Microsoft and one-tenth that of Unix.

Moreover, Ma echoes a point made by the Red Flag Linux statement, which is that China prefers open-source software. Chinese are worried about a big bad American company having too much access to secret info. The concern, he says, is that "some guys from the States at Microsoft labs can come into your computer."

Paul Blinkhorn is banking that such suspicions will generate business. Blinkhorn is vice-president for Asia Pacific of Hewlett-Packard's Industry Standard Servers division. In December, HP (HPQ), along with Intel (INTC), opened a Linux solutions center in Shanghai.

MILITARY SUPPORT. Blinkhorn says Linux "is certainly more popular in China than in other Asia-Pacific countries." Indeed, he estimates that China will account for half of the Linux deployment in the region. "The acceptance of Linux in China is strong," he adds. "We are seeing China lead the way in terms of Linux in Asia-Pacific."

His colleague, Jerry Huang, agrees with Xteam's Ma that Chinese nationalism accounts for some of Linux' success in the Middle Kingdom. "The government here in China has been very aggressively promoting Linux," says Huang, who is head of HP's Industry Standard Servers division for China and Hong Kong. When it comes to encryption and other security uses, "China is ahead of or on par with the developed world."

According to Huang, People's Liberation Army generals are big Linux fans. "The military has been one of the earliest adopters of Linux, building systems from the ground up," he says. One reason the PLA has been active in boosting Linux is because China faces restrictions on access to high-end technology like supercomputers. Using Linux helps the military come up with alternatives: "They are using Linux to do large-scale clustering -- over 100 servers clustered in one system."

FIRST SIGNEE. Gates's late February visit is unlikely to have much of an impact on the preferences of China's generals. But Bill's Brigade probably is betting that opening its source code in China will settle some of the qualms about Microsoft. So, on Feb. 28, the China Information Technology Security Certification Center signed an agreement with Microsoft to participate in the Redmond giant's recently announced Government Security Program.

According to Microsoft, GSP is "a global initiative that provides national governments with controlled access to Microsoft Windows source code and other technical information they need to be confident in the security of the Windows platform." Beijing, says Microsoft, "is one of the first governments around the globe to sign the agreement."

It's a good start, but Microsoft will need to keep courting the Chinese if it wants to hold Linux at bay in the Middle Kingdom. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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