Sun Sets On Red Flag Operating System

by: Doug Young

The final death knell for one of China's oldest software developers is casting a spotlight on just how difficult it is for companies to break into the global market for computer operating systems (OS). The end for Red Flag Software also bodes poorly for a number of more recent Chinese initiatives to create a mobile OS to rival Google's (NASDAQ:GOOG) wildly popular Android and Apple's (OTC:APPL) own iOS. No specific reasons were given in the reports for Red Flag Software's final demise, though I suspect defections by the company's core state-run customers and a broader decline in the traditional desktop PC market were both factors.

All that said, I do think that China could eventually develop a mobile or desktop OS to truly compete with established rivals like iOS, Android and Microsoft's (NASDAQ:MSFT) Windows. After all, China is the largest producer and consumer of both the PCs and smartphones that use such systems, making it fertile ground for the emergence of the world's next major OS. But I also believe that such a system is unlikely to come from Red Flag or any other government-backed entity, and instead is more likely to come from one of the country's more recently minted tech giants like Tencent (OTCPK:TCEHY), Alibaba or Huawei.

The final death knell for Red Flag didn't come as a huge surprise for anyone who worked there, according to a detailed report on its closure. The company stopped paying workers in April last year, citing a cash crunch. (Chinese article) Faithful employees received another ominous sign when the electricity and water were cut off in their suburban Beijing headquarters in December. The official end finally came early this week when Red Flag formally posted a notice on its door informing the world that it was officially disbanding.

Red Flag's closure becomes the latest case of a failed attempt by Beijing to develop homegrown technology products that can compete with global rivals like Windows and Android. The company was launched with fanfare in 1999, using a product based on the free Linux open-source system as its basis. It apparently was profitable for a few years at its height, though I suspect that much of its business came from big state-owned enterprises that were under pressure from Beijing to buy the company's signature OS.

I've followed China tech for quite a while now, and Red Flag's closure follows a broader trend of similar failures by other state-backed entities. Beijing tried to develop a globally competitive wi-fi standard about a decade ago that ultimately got scrapped, and its more recent attempt to develop wireless mobile standards called TD-SCDMA and TD-LTE have also had difficulty. Last year, Beijing launched yet another major attempt to enter the field with its development of Ubuntu Kylin, a mobile OS based on a foreign-developed Linux-based system. (previous post)

I predicted Ubuntu Kylin would ultimately fail, mostly based on my belief that state-run entities can't develop globally competitive products. But I still do believe one of China's private tech firms could be a strong contender to develop a globally competitive OS over the next decade. One commentator said last year that Huawei and smartphone maker Xiaomi were 2 of the most likely candidates (previous post) to develop such a system, but I think Tencent, Alibaba and Baidu (NASDAQ:BIDU) could all also be strong contenders. The only other thing I can say with relative certainty is that the product won't come from a state-run entity, and Beijing should shelve such initiatives in the future and instead encourage such development from its more dynamic private sector.

Bottom line: The failure of Red Flag Software shows new technology innovation is unlikely to come from state-run firms, and Beijing should instead encourage such development from the private sector.