By Maria Trombly | Securities Industry News | June 6, 2005

The last couple of years have seen one disaster after another in China's troubled financial sector: financial corruption, record losses, a stock market at six-year lows. The fact is that the industry's existing technology infrastructure can't meet the urgent need for better customer service, oversight and compliance, much less the crash program in process improvement needed to compete globally.

One technology manager at a leading Shanghai brokerage, however, sees a way out: By migrating to the open-source operating system Linux, the firm has found a low-cost way to improve processes and eliminate data silos.

The manager, who prefers to remain anonymous, says that the Linux pilot project began a year ago. The goal is to move operations from the front office to the back office, he says. This is an issue not just for brokerages in China, but for the entire financial system. When business is conducted in retail branches, opportunities for error, corruption and fraud multiply. For example, without a good records management system, a customer who defaults on a loan at one bank branch can simply walk over to another branch and open a new account.

"When we finish this process, the only function left for the business department will be sales," says the brokerage manager. "Under the old model, every business department had its own server. It harmed our capital transfers and risk controls."

Today, he says, the majority of his company's departments use Novell NetWare, which dates back to the 1990s. Novell was the only choice the firm had back then, he notes. Today, in cooperation with a group of several other brokerages and with government support, an open-source push has begun to modernize the industry.

Novell Sees a Market

Novell, which includes personal and enterprise versions of the SuSE Linux distribution--originally developed in Germany--among its product offerings, is doing what it can to help the process along.

Novell has upped its research and development into Linux specifically in order to expand its business in the Chinese market, says Wei Luo, Novell's senior marketing manager in Beijing. Novell's acquisition of SuSE Linux last year made it one of the largest Linux vendors in the world. It's not pure open source--Novell licenses selected Windows components needed to attract users who are used to them, for example--but concessions to rent-seeking behavior are kept to a bare minimum.

Luo reports that Novell has also come out with its Linux-based Open Enterprise Server recently and will help its old clients transfer from NetWare to the new system.

"Chinese clients demand an upgrade of Unix and the replacement of Windows," says Luo. "This has been Novell's area of expertise for 20 years."

NetWare used to be a dominant operating system for servers but now accounts for less than 6 percent of all installations, according to the International Data Corp. (IDC), and the number is expected to continue dropping.

Luo notes that discussion and planning of Linux strategy have passed well beyond a simple comparison of Unix and Windows systems. Instead, customers are now asking to see how specific applications will run on the Linux platform. Not coincidentally, Chinese software vendors are taking advantage of the Linux platform to develop products for the local financial sector.

Luo is pleased to see the emergence of local software developers, given that China has lagged in this area. Instead, Europe and the U.S. have dominated the open-source community.

But, given the rapid pace of growth in China's information technology sector, this may change quickly. In April, IDC predicted that the Asia-Pacific region will surpass North America in the overall number of professional developers beginning in 2006. China in particular will see compound annual growth rates of 25.6 percent in the number of developers in the next three years, predicts IDC analyst Stephen Hendrick.

Brokerage customers look for reliability, security and scalability, says Xiaoyue Chen, general manager of technology at Fudan Kingstar Group, a local software vendor specializing in the financial sector.

Soochow Securities Co., for example, recently tested the performance of one application on a Linux system and Windows NT and found that Linux can support three employees to every one employee supported by Windows NT.

Linux systems can also run in large-scale parallel cluster environments, says Shouqun Lu, president of China's Open-Source Software Federation. "It can meet all the requirements of a brokerage company," he says. "Definitely, the financial sector is a major area for Linux applications."

Lu, who has significant experience working in China's finance industry and was an informatization consultant for the Bank of China, says there are many reasons for financial firms to use Linux. Security, for example, is a huge concern. In fact, the China Securities Regulatory Commission, China's version of the U.S. Security and Exchange Commission, is expected to issue new rules regulating IT management at brokerage companies.

Linux has an edge in security over Windows, says Lu, because of its open-source nature. That is one reason why many governments, including China, some European countries and Brazil, are opting for Linux.

Since Linux doesn't require user licenses, it's also a way to combat software piracy, which is epidemic in China.

Under pressure from the world community and from local technology companies and other industry sectors, China has started thinking about cleaning up its act.

"Recently, the Chinese government has begun the promotion of legal software," Lu says. "In the past, Linux wasn't mature enough, but now the situation has changed. It still isn't a total replacement for Microsoft, but it is an additional choice for sure. And the cost to purchase Microsoft products is very high. It will cost much less if you use Linux."

Cost is a major advantage, confirms Shuo Bai, CTO at the Shanghai Stock Exchange.

"This is a very important reason," he says, adding that the exchange currently uses Red Hat Linux for some applications, such as index analysis. The exchange also uses Sun, HP and IBM Unix and Microsoft Windows.

Bai says that China has Linux experts available to help with deployment and that the Linux operating system gives users more control.The ability to open up the software and look inside--or change it to fit local requirements--is a major selling point for Linux in China, says IDC analyst Nielse Jiang. But Linux's price point--under an open-source license like the GNU General Public License, many distributions cost you nothing--and its low operating costs don't hurt, either.

As a result, Linux server shipments in China rose to $9.3 million last year, up 20 percent from 2003, says Jiang. By 2008, IDC expects the Chinese Linux server and client-end operating system market to reach $41.9 million. The Chinese Linux market will average a compound annual growth rate of 23.9 rate for the next four years, Jiang predicts.

Mass Migration

Many banks in China that currently run Unix operating systems are considering porting to Linux because of the straightforward migration path, Jiang adds.

But brokerage firms are also looking for software to help revamp management and risk-control systems and other back-office subsystems.

According to Kingstar's Chen, two-dozen securities firms have already asked his company for help, and several projects are already under way. The securities industry is experiencing rapid changes in China, he adds, including the move to electronic trading, centralized management, and data consolidation. In addition, manual processes are being automated.

On top of that, given the stock market's six-year lows and a string of record losses in the security industry, funds are tight. "Nowadays, securities companies attach great importance to saving money," Chen says.

Linux has lots of fans in the development community and on college campuses, he adds, as well as at big technology firms like Hewlett-Packard and IBM. As a result, there is a "warm wind" blowing for Linux in China, he says, though he cautions that the primary area of Linux deployment in China in the near future is on servers, not desktops.

Software development targeting the securities industry has been a little slow off the ball, however, says China technology expert Isaac Mao, a vice president at United Capital Investment Group, a Shanghai-based venture capital firm. "The speed of development isn't high enough," he adds. "If we want to develop critical systems, it requires a lot of people, service plus maintenance, plus data transformation." As a result, Linux adoption in China isn't happening as fast as it is abroad.

That may be about to change.

100-Million-Customer Rollout

Tokyo-based TurboLinux has just announced that the Industrial & Commercial Bank of China (ICBC) will roll out Linux in all of its 20,000 retail branches. ICBC, which has 100 million customers and over 8 million corporate accounts, is the largest bank in China.

Under the deal, ICBC will buy an unrestricted user license and will integrate it throughout its entire banking operations network over the next three years. The bank plans to use it as the basis for its Web server and a new terminal platform, TurboLinux says.

And that's just the beginning, says Tony Le, deputy general manager for TurboLinux China, hinting at more customer announcements in the Chinese banking and securities industry in the next few months.

"Open source provides a great opportunity for China's software industry," he says. The Chinese government, for example, is advocating Linux use as a way to transition the country away from pirated software.

TurboLinux has already provided a payment surveillance and control system to the Bank of China, he says, and a Web-site development platform to the China Construction Bank.

Other Linux vendors are gracious about the ICBC win, describing it as an indication of growth in the overall Linux market. "ICBC is a good sign," says Chris Zhao, vice president of Beijing-based Red Flag Software, a leading Chinese Linux vendor. "We are happy to see this. It represents the rise in usage at the enterprise level, not just in the government sector."

"Other banks may follow the lead of ICBC," agrees IDC's Jiang. "I think we can see Linux grow dramatically in the financial sector."

Chinese state-owned media have already reported that the Agricultural Bank of China, another top-four bank, is expected to announce a deal similar to ICBC's. Meanwhile, the fourth major bank, the China Construction Bank, is expected to announce that it will move its IT systems to Linux sometime this year.

But Linux does face some challenges in China. Unlike U.S. firms, Chinese companies aren't used to paying for services, and Linux is an almost purely service-oriented business proposition for vendors. "The situation is tougher for Chinese Linux vendors," Jiang says.

Wendy Yu contributed to this report.