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The Tao of War and Business
Francis Vale

 

"Knowledge as a resource is often cheaper than materiel. The information age opens the doors to the resource poor. Knowledge diffuses and redistributes power to the weaker actors. It redraws boundaries. It enables organizations to open up. When it comes to balancing means with ends and ways, knowledge as a resource offers an economical solution." -- Knowledge Strategies: Balancing Ends, Ways, and Means in the Information Age, Lieutenant Colonel William R. Fast, United States Army

The debate surrounding the adoption of Permanent Normal Trading Relations (PNTR) with the Peoples Republic of China cleared the entry of the world's most populous nation into the World Trade Organization. In so doing, it also set off a firestorm of controversy. Attention focused on a long line of business alliances brewing in China and the response wasn't pretty.

As early as November 1999 word spread that GraphOn, a company that sells thin client/server systems for Linux and Windows had supposedly issued a statement that Linux was being adopted as the "official operating system of China." The way this story got played in the media, you would think that GraphOn was suddenly in the Linux distribution business and Chairman Mao himself had been made a posthumous company director.

While there was a lot of Linux-speak mixed into GraphOn's PR melange, there was never a mention of Penguins being made the official software team mascot of China. What the announcement did say was that this "Silicon Valley web-enabling software company announced it has established alliances that it believes will afford millions of users throughout China, Internet and network access to powerful server-based applications and speed adoption of Linux "as China's operating system of choice" (Note the "¨" after Linux in this GraphOn release). As is typically the case, the silliness of the "¨" sent "pundits" into a dizzying tailspin and the most important part of the GraphOn release was utterly lost.

To understand what is really happening in the PRC, go back to the phrase "alliances that...will afford millions of users throughout China, Internet and network access". The point missed in all the brouhaha is that where there is the Internet there is e-commerce. More importantly, where there is the Internet there is Linux and the relationships are transitive.

The Internet, as in the West, is going to profoundly transform China. There are nearly 100,000 Web sites already in China. According to Raymond Ch'ien, chairman of Hong Kong-based Chinadotcom Corp., the growth of the Internet will cause firms to shrink in size and become more specialized. For the PRC in particular, Ch'ien predicts that, "more state-owned behemoths will be broken up as they become less labor intensive and more knowledge intensive." One could argue that the egalitarian Open Source nature of Linux strongly resonates with the Chinese Communist ethos. Unfortunately that would miss the oppressed majority point: Linux is big in China because it's a free, powerful, growing world-wide standard, and it runs on old, cheap, memory-limited 386 machines.

Make no mistake about it; the knowledge revolution is well under way in the PRC and has full government support. In a US Defense Department report dubbed "The Silicon Spear" comes a chilling assessment of the Chinese military's early understanding that "zhan zheng xiang tai" -- a change in the form of war -- had taken place. Accordingly, the Chinese military has seized upon this concept and melded it into their way of thinking.

George Koo, deputy director of Pacific Rim Services for Deloitte and Touche, notes that the PRC has "been laying down hardware and fiber optics at a rate of one Baby Bell per year." Still, the Shangwu Zaobao (Business Morning Post) reports that less than 20% of China's web sites have the capabilities necessary to continue operations. Given this data, it's not hard to understand why IBM, Compaq, Goldman Sachs, CMGI, NASDAQ, and Softbank are all paying a lot of attention to forging alliances with companies in China.

A great deal of the intellectual capital needed to fuel the Linux-associated technologies boom is coming from Zhongguancun, a sub-district area in northwestern Beijing's Haidian District. This Beijing locale is home to 378,000 scientists and researchers in 73 institutes of higher learning. These include Qinghua University, Beijing University, Renmin University, and several research institutes under the China Academy of Sciences. Zhongguancun's high-tech industrial park in will receive an estimated RMB 200 billion renminbi-- US $24 billion -- in investment over the next ten years, according to the park's Administrative Committee deputy director Ren Ranqi.

Things are still early in the new 'China Game'. Very little foreign VC money has yet to flow into the country. It takes a very long time - years - to build a successful trading/business relationship in China. China's biggest software company, the Zhongguancun Software Group, has as its primary investors the Peking University Founder Group, Hong Kong's Stone Group, Beijing Centergate Technologies Co Ltd (Centek), and China Huajian Group. There is not a single American VC among Zhongguancun Software's investors.

This situation is not surprising given that the cost of market entry is substantial. There is also a very strong requirement for using local nationals to call the shots on the ground. The unsubstantiated reports in the China press suggesting that the government would officially mandate the use of Linux centered on a particular home grown version developed at the Software Research Institute of The Chinese Academy of Sciences. This distribution flies under the banner of the Red Flag Linux Software Co. The Redmond giant planted another banner in Zhongguancun two years ago, however, when it opened a research laboratory in Zhongguancun.

It's unlikely that a waving Windows OS start-up flag logo will be able to compete with the proud flying banner of Red Flag Linux. In March 2000, TurboLinux Inc. and Motorola announced the release of the first Chinese language version of a Linux embedded operating system running on Motorola's PowerPC. Formerly known as Pacific HiTech, the San Francisco-based TurboLinux Inc. was an early entrant into the Linux China market. In October 1999, TurboLinux invited Richard Stallman, of Free Software Foundation fame, to make a two-hour keynote address at the opening ceremony of the Tsinghu"GNU/Linux" R&D center, which was co-founded by Tsinghua University and TurboLinux.

Then early this year, TurboLinux announced an updated version of its "Traditional Chinese Linux" desktop operating system. The update was designed to be more compatible with Chinese applications; supports double-byte characters, and offers full support for both the traditional and simplified versions of the Chinese alphabet. The Chinese computer manufacturers TCL, GreatWall Computer Corporation, and LangChao have all chosen to bundle TurboLinux with their hardware, helping to make this Asian flavor of Linux a popular distribution in the country.

Who commercially launched a China Linux first is somewhat problematic. When Beijing-based X-Team Software Co., launched its Chinese version of Linux, it asserted that the title of the developer of the world's first Chinese Linux operating system was theirs. X-Team Software also claims the mantle of the first professionally run Linux based software developer and service provider in China. They are currently ranked first in officially reported operating systems sales and control 70% of the Chinese Linux market. How long they can hold this market position is open to speculation.

Adding to the Sino-Linux confusion, China's BluePoint Linux Software claims it developed the first true Chinese Linux operating system. In riposte to X-Team's market leader position claims, BluePoint Linux Software insists that it is the leading Chinese Linux operating system provider and that it's "short-term goal is to become the largest Linux operating system provider in Asia." BluePoint says its Linux distribution is now pre-installed on computers by several major Chinese computer makers, including Great Wall, TCL, and Xiahua Shanbao. As both Great Wall and TCL also carry TurboLinux, press release miasma is rampant in China, which is always a health -- if suspect -- sign of a vibrant computer market.

Meanwhile the assault on Microsoft has seriously heated up. In March, Red Flag Linux announced that it would go public on the Hong Kong and NASDAQ stock exchanges within a year. The Chinese Academy of Science's Software Research Institute, which developed the Red Flag software, said that the IPO proceeds would be used to improve Red Flag and develop new products to "break the monopolistic position of Microsoft's Windows in China." Specifically, they intend to help enterprises using Red Flag software develop e-commerce and to develop embedded software for mobile communications. And to instruct Microsoft on bin'fa (the Tao of war), Red Flag Software recruited Liu Bo, a former of Microsoft vice president, as its president and CEO.

Red Flag has also been busy forging a major Linux deal with IBM, which will preinstall the Red Flag Linux operating system on S/390 computers. Big Blue iron is widely used in China's banks and securities systems. The two parties have also reached an agreement in principal on bundling Red Flag Linux on IBM's Netfinity server products as well as jointly developing a version of Red Flag Linux for IBM's RS6000 product series.

IBM is not alone in dealing with the Chinese Academy of Science. Compaq is also a U.S. co-sponsor of Red Flag Linux. What's more, the CAS Red Flag Linux Software Co. recently reached a partnership agreement with Linuxlab, a U.S.-based company that develops, manufactures and supports advanced server hardware and software products featuring Linux.

In the retail market, sales of Chinese Linux systems actually exceeded Chinese MS Windows by a ratio of 200:1. According to official counts, only 1,000 copies of Chinese MS Window Systems were sold in China during 1999! What this statistic does not reflect is the huge number of pirated copies of Windows that are rampant in the country. This flourishing underground is the reason Microsoft in September increased its investment in a customer support center in Shanghai by $40 million. According to a spokeswoman for Microsoft (China) Co Ltd, Microsoft has already put several hundred million dollars into this project.

To start to recoup on that investment, last year Microsoft went on the legal warpath. Microsoft China's sued both the Haisida Science and Technology Development Company and the Min'an Investment Consulting Firm. Surprisingly the First Beijing Intermediary People's Court ruled decisively for Microsoft and ordered the defendants to pay RMB 540,000 (US $65,300) and RMB 253,440 (US $30,650), respectively. Worse yet, the defendants had to publish face-losing apologies to Microsoft in designated newspapers.

If the gang from Redmond wasn't reading Sun Tzu, they should have been reading Ruy Lopez. After devouring the poison pawn served up by the First Beijing Intermediary People's Court, Microsoft immediately set its software copyright infringement sights on the Beijing Yadu Group claiming compensation in the amount of RMB 1.5 million (US $180,000). But instead of taking on the bowed behavior of the previous two defendants, Yadu went on a PR rampage. Yadu even convened a press conference to publicize the great injustice done to it by Microsoft's legal bullying.

For Yadu, the timing was exquisite. Just as this drama was playing out in the Chinese media, NATO "accidentally" bombed China's embassy in Yugoslavia. As reported by chinaonline, the Chinese nation "in a fury (over the bombing) and eager for an (American) scapegoat, focused its rage on Microsoft for the Yadu affair." Like a confused cruise missile, the Yadu case exploded in Microsoft's face.

In an even greater twist of business irony, BluePoint Linux Software and Federal Software, China's largest software distribution chain, teamed up to take Chinese consumers where they really wanted to go today. The two business partners launched the "BluePoint Freedom Swirl," a promotional campaign to distribute BluePoint Linux CDs at the same price as pirated-copies of MS Windows√'about RMB 10 or US $1.20 each.

The worst, however, was yet to come. It didn't take long for an old interview of Bill Gates in a July 20, 1998 issue of Fortune magazine to start showing up in postings on China news web sites, like sinopolis.com. It was devastating.

Utterly obtuse to the history of China Gates had said, "Although about three million computers get sold every year in China, people don't pay for the software. Someday they will, though. They'll get sort of addicted, and then we'll someday figure out how to collect sometime in the next decade." For Mr. Bill to use a word like "addicted" to describe its Sino-trade practices creates a trade relation's situation that goes well beyond a poor choice of words. The pain and humiliation of the 19th century Opium War with Great Britain still runs deep in China.

In that sorry episode, Britain got China addicted on the narcotic in a diabolical economic scheme to create a trade surplus. In 1836 alone, the Brits smuggled eight million pounds of opium into China, a substance unknown to China in 1820. Is it any wonder that the China Youth Daily proclaims, "The rise of Linux ... [is] a little like the peasant uprising of Chen Sheng and Wu Guang. In a world of hegemony long suppressed, many feel oppressed, but the majority doesn't know where their suffering originates. Once someone stands up, he will have followers like clouds." Is it also any wonder that new Linux operations are sprouting up like lotus blossoms all over China?

As the IPO tsunami starts to roll over China, a new wave of money will sweep in to keep the Linux coders and companies running flat out to serve this enormous, rapidly emerging computer market. A forecast by International Data Corp. puts the China home computer market at 10 million units by the year 2000, or 10 percent of the world total. Naturally, Red Flag, BluePoint, X-Team, and all their US partners like Compaq, IBM, Motorola, and TurboLinux, will dearly want to see a smiling Chinese Emperor Penguin on every new shining Sino-system.

Francis Vale, copyright 2001, All Rights Reserved

21st, The VXM Network, http://www.vxm.com

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