An EeePc 701 has higher specs, has XP, and costs about the same.
So, no.
Linux is a good idea, but underspeccing those laptops only makes them more expensive!
Meaning, as a manufacturer's costs it doesn't cost much more to plug in a 256MB sodimm RAM chip, as it would to plug in a 2GB stick.
The only thing more expensive is the hardware.
So the same with building in a flash SSD of 1GB versus 4/8/16/32/64GB, and with the mounting of a 6" 800x480 or 9" 1280x768 screen; or equipping the laptop with a single or dual core CPU.
I'd advise the company to do exactly what they are doing right now, and focus for some good specs,like:
ARM Dual Core 900Mhz processor, 2GB RAM, HD video decoder chip, Linux, 8, 12 or 16GB SSD, and they might end up with a mininotebook costing perhaps $50 more to the current one.
Especially if they make contracts to do large batches, and can get the hardware cheaper as in retail stores.
The only thing I wish to push is a 720P screen, to be at least be able to watch 720P HD video on a mininotebook without downscaling! It's almost seen as a standard!