China's Linux industry considers mega-merger

A major reorganization is in the works for China's open-source software industry, with discussions under way over how local Linux vendors and industry organizations can cooperate more closely -- including the possibility of a merger between several of the country's top Linux companies.

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If the discussions result in a merger, it would be one that involves some of the biggest names in China's Linux industry, including Turbolinux China Software, Red Flag Software, and Beijing Co-Create Open Source Software, according to executives involved with the discussions.

Closer cooperation among Chinese Linux vendors and industry organizations is essential if the country's software industry is to become a major contributor to international open-source efforts, said Lu Shouqun, president of the China Open Source Software Promotion Union. Lu also serves as the honorary chairman of Co-Create.

In June, Turbolinux China, Red Flag, Co-Create, and three other partners -- Sun Wah Linux, the Ministry of Information Industry's China Software and Integrated Circuit Promotion Center (CSIP), and Open Source Development Labs (OSDL) -- agreed to jointly develop Linux software. That agreement, which expanded an existing partnership between Turbolinux China and Co-Create, was the first step towards closer cooperation on development of the Linux operating system, including the possibility of a merger, Lu said.

The merger talks were inspired in part by the success of Chinese search engine Baidu.com's recent initial public offering on the Nasdaq stock exchange, one executive involved in the discussions said. A merged Chinese Linux company could easily be taken public as a "Chinese Red Hat," he said.

At present, China's Linux industry is small and highly fragmented, with several companies that offer competing distributions of the operating system in versions designed for servers and PCs.

According to figures released by IDC, revenue from Linux sales in China grew 20 percent between 2003 and 2004, from $7.8 million to $9.3 million, and is expected to continue growing at a compound annual growth rate of 24 percent through 2009, when revenue will top $27 million.

The small size of the market belies the importance of the operating system in China.

Chinese Linux advocates have long pushed the software as an alternative to Microsoft Corp.'s Windows, which critics say holds a monopoly over the operating-system market. "The goal of open source and Linux is to break up this monopoly," Lu said, adding that users should have a choice of operating systems.

Despite the proliferation of Chinese Linux companies, Red Hat and Novell are currently the only two vendors that offer "mainstream" versions of Linux, or versions capable of winning widespread support from hardware and software vendors, according to Lu. China should aim to develop its own mainstream Linux product, he said.

However, developing a product like that in China requires more resources than any single company here can muster by itself, Lu said. To overcome this lack of scale, China's Linux community must find ways to work more closely together, such as through the formation of a new Linux organization or through a merger, he said.

Whether a merger of China's leading Linux vendors eventually takes place remains to be seen. Putting a deal together will require complex and careful negotiations, which have just started, Linux executives here said, noting the large number of shareholders that currently hold stakes in local vendors. Even so, one of the executives said a merger is inevitable.

"This will definitely happen," said a senior executive involved with the merger discussions, who asked not to be named, citing the sensitivity of the subject.