Software has long been the poor relation of Chinese technology.

But with an big increase in domestic spending in prospect and adoption of the Linux open source operating system as a platform for building local software talent, most international observers expect a more organised local industry to emerge.

Software and services will account for 35 per cent of Chinese technology spending in 2009, up from 26 per cent five years earlier, estimates IDC, the technology research company.

While foreigners have dominated the market so far, the jump in spending should also stimulate the growth of Chinese software companies, many observers say.

“There are thousands of local companies that are below the radar,” says Charles Wu, director of emerging market strategy at IBM. “Over time, some of those will grow up and catch international attention.”

Until now, China’s software industry has been overshadowed by India’s booming export market. That partly reflects the different nature of the two markets, says Mr Wu. While India has become an exporter of software, China has a far bigger domestic market. Foreign companies may dominate, but local players – such as producers of enterprise applications Kingdee and Ufsoft, and software and services company Neusoft – have also carved out a size-able share of the market.

Piracy of desktop software, which has hit both Microsoft and local software companies, has not helped.

Kingsoft, a Chinese company known for its own office productivity software, lost sales to piracy and now relies mainly on selling software as a service over the internet instead. “You have to give credit to piracy as the world’s most successful distribution system,” one observer comments ruefully.

Despite the lack of significant domestic software companies and the low international visibility, big tech companies report no shortage of talent.

More than half the 1,800 researchers who work for Lucent in China are software engineers, says John Giere, the company’s chief marketing officer. “A lot of the capabilities in next-generation applications are coming from there,” he says.

Official efforts are now under way to try to harness more of that talent to create a more significant local software industry.

While China has backed down on a proposed “local content” rule that would have favoured domestic companies, Beijing is pushing government offices to use officially licensed software by the end of the year.

Ironically, while potentially reducing the widespread piracy of Microsoft’s Windows and Office software, that could also prompt greater adoption of open source alternatives, weakening Microsoft’s position as the de facto setter of standards for desktop software in China.

Government adoption of Linux on desktop PCs has grown strongly in the past year, according to Chris Zhao, executive president of Red Flag Software, a local Linux distributor.

Open-source office productivity software is also shipped on more than half of all new machines, he adds, although western critics complain that computers sold with open source software are quickly loaded with illicit versions of Windows and Office as well.

As its use grows, though, Linux is starting to assume a more central position. “Open source was once seen as anti-Microsoft: but finally, China is beginning to see it as something more than that – a good way to develop software,” says Philippe de Marcillac, senior vice-president, international business units at IDC.

Most Chinese software companies, however, still lack much of the capital, management and marketing skills to compete with established international giants, says Jamie Popkin, a research fellow at Gartner. “They need to build critical mass,” he says.

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