The company behind China's leading Linux client distribution, Red Flag, is shifting its main focus to its server operating system and enterprise customers, and planning to expand sales overseas, said Chris Zhao, the company's acting president.

"The industrial market is our major focus this year and next year," Zhao said. "A lot of enterprise customers have been moving from Unix and Windows to Linux so that's our major focus." The enterprise focus marks a change from Red Flag's client and embedded Linux focus of the last two years, he said.

Linux makes up a small but growing part of the Chinese operating system market, according to market-research company IDC. Revenue totalled $8.1 million last year on shipments of 2.1 million units. Almost all of those shipments were client operating systems and Red Flag dominated that market with shipments of 1.3 million units, according to IDC's estimate. Server operating system shipments came to just 24,000 units, accounting for $5.9 million in revenue, IDC said.

From the talk of several years ago about using Linux, government and private enterprises are now starting to act and Red Flag has already won some enterprise contracts, Zhao said.

"We have had success to enter the government sector and enter China Post, education, energy, communication and financial services area and also we entered the telecommunications sector. There is a lot of adoption of Red Flag Linux in Chinese industry."

In attacking the enterprise sector, the company will be going up against TurboLinux. Despite leading TurboLinux by around four shipments to one in the client market, Red Flag trailed the Tokyo company in the server market in 2003, according to IDC. TurboLinux shipped 14,600 units of its server operating system in China in 2003, which was more than double that of Red Flag, IDC said.

Red Flag won't be fighting this battle alone. Earlier this year the company formed a tie-up with Japan's Miracle Linux and its majority shareholder, Oracle, to develop a standard Linux distribution for enterprise customers in Asia. The first version of the software, called Asianux, was released in June and a 64-bit version for Intel's Itanium II processor is scheduled for release this month.

With Asianux as a base, Red Flag and Miracle will develop their own distributions for their respective markets. The Asianux software is being developed to support Chinese, Japanese, Korean and English languages, and a Korean partner is also about to sign on to the project, Zhao said. "We will announce a Korean partner in one month."

Red Flag is also hoping to use Asianux as a base for its expansion into English-speaking markets, Zhao said.

"We've got a lot of support from the market and the government and in the past years our major focus has been on mainland China market and we hope we can extend our market outside the country," he said.

The company is planning to promote the English version to companies in southeast Asian nations where English is widely used, such as Singapore, Malaysia and Thailand, he said.

An English version of its Red Flag Linux Desktop software is also due out soon. The package was originally due to be launched in late 2003 but earlier this year the company announced a delay in its release until the third quarter this year. That schedule remains more or less intact as the software should be out within the next two months, said Zhao.

James Governor, principal analyst at Red Monk, commented, "In areas across technology spectrum, we will see China and India defining rather than just adopting standards. As Microsoft and IBM have shown in the US, this is the way forward so China is adopting a strategy that it is in a position to define standards. After all, China is a huge market and it can use the US model to define standards within its own borders and then expand outwards.

"In terms of the UK, we are a very insignificant market in comparison but people want to move on from Red Hat and SuSE because of their ownership. However, I don't believe this is an issue people need to strongly concern themselves with."

And with its new focus on enterprise customers, Red Flag remains confident it can also retain its share of the Chinese client operating system market, which IDC estimated at 63.5 per cent by shipment and 47.2 per cent by revenue.

"We hope we can keep the market share," Zhao said. "Competition will be more and more but we are very confident that we can have more than half of the market share."

Red Flag Software was established in June 2000 by the Software Research Institute of the Chinese Academy of Sciences (CAS) and NewMargin Venture Capital. It received investment from the Ministry of Information Industry's CCID Capital in March 2001. Today CAS and CCID Capital are the company's two largest shareholders and together hold more than 60 percent of the company, Zhao said.

"We are not a public company yet," he said. Asked if the company has plans to list its shares, he replied, "Of course, but maybe two years later."