The World is Flat

Already, according to the World Bank, sixteen of the twenty most polluted cities in the world are in China, and that pollution and environmental degradation together cost China $170 billion a year (The Economist, August 21, 2004).

And we have not seen anything yet. China, with its own oil and gas reserves, was once a net exporter. Not anymore. In 2003 China surged ahead of Japan as the second largest importer of oil in the world, after the United States. Right now about 700 to 800 million of China's 1.3 billion people live in the countryside, but they are heading for the flat world, and roughly half are expected to try to migrate to the cities over the next two decades, if they can find work. This will spur a huge surge in demand for cars, houses, steel beams, power plants, school buildings, sewage plants, electricity grids-the energy implications of which are unprecedented in the history of Planet Earth, round or flat.

At the business conference I was attending in Beijing, I kept hearing references to the Strait of Malacca-the narrow passage between Malaysia and Indonesia that is patrolled by the U.S. Navy and controls all the oil tanker traffic from the Middle East to China and Japan. I hadn't heard anyone talking about the Strait of Malacca since the 1970s oil crises. But evidently Chinese strategic planners have begun to grow increasingly concerned that the United States could choke off China's economy at any time by just closing the Strait of Malacca, and this threat is now being increasingly and openly discussed in Chinese military circles. It is just a small hint of the potential struggle for power-energy power-that could ensue if the Great American Dream and the Great Chinese Dream and the Great Indian Dream and the Great Russian Dream come to be seen as mutually exclusive in energy terms.

China's foreign policy today consists of two things: preventing Taiwan from becoming independent and searching for oil. China is now obsessed with acquiring secure oil supplies from countries that would not retaliate against China if it invaded Taiwan, and this is driving China to get cozy with some of the worst regimes in the world. The Islamic fundamentalist government in Sudan now supplies China with 7 percent of its oil supplies and China has invested $3 billion in oil drilling infrastructure there.

In September 2004, China threatened to veto a move by the United Nations to impose sanctions on Sudan for the genocide that it is perpetrating in its Darfur province. China followed by opposing any move to refer Iran's obvious attempts to develop nuclear-weapons-grade fuel to the United Nations Security Council. Iran supplies 13 percent of China's oil supplies. Meanwhile, as the Daily Telegraph reported (November 19, 2004), China has begun drilling for gas in the East China Sea, just west of the line that Japan regards as its border: “Japan protested, to no avail, that the project should be a joint one. The two are also set to clash over Russia's oil wealth. China is furious that Japan has outbid it in their battle to determine the route of the pipeline that Russia intends to build to the Far East.” At the same time it was reported that a Chinese nuclear submarine had accidentally strayed into Japanese territorial waters. The Chinese government apologized for the “technical error.” If you believe that, I have an oil well in Hawaii I would like to sell you...

In 2004, China began competing with the United States for oil exploration opportunities in Canada and Venezuela. If China has its way, it will stick a straw into Canada and Venezuela and suck out every drop of oil, which will have the side effect of making America more dependent on Saudi Arabia.

I interviewed the Japanese manager of a major U.S. multinational that was headquartered in Dalian, in northeastern China. “China is following the path of Japan and Korea,” said the executive, on the condition that he and his company not be quoted by name, “and the big question is, Can the world afford to have 1.3 billion people following that path and driving the same cars and using the same amount of energy? So I see the flattening, but the challenge of the twenty-first century is, Are we going to hit another oil crisis? The oil crisis in the 1970s coincided with Japan and Europe rising. [There was a time] when the U.S. was the only big consumer of oil, but when Japan and Europe came in, OPEC got the power. But when China and India come into being the consumers, it will be a huge challenge that is an order of magnitude different. It is megapolitics. The limits of growth in the 1970s were overcome with technology. We got smarter than before, equipment became more efficient, and energy consumption per head was lower. But now [with China, India, and Russia all coming on strong] it is multiplied by a factor of ten. There is something we really need to be serious about. We cannot restrict China, [Russia,] and India. They will grow and they must grow.”

One thing we will not be able to do is tell young Indians, Russians, Poles, or Chinese that just when they are arriving on the leveled playing field, they have to hold back and consume less for the greater global good. While giving a talk to students at the Beijing College of Foreign Affairs, I spoke about the most important issues that could threaten global stability, including the competition for oil and other energy resources that would naturally occur as China, India, and the former Soviet Union began to consume more oil. No sooner did I finish than a young Chinese woman student shot up her hand and asked basically the following question: “Why should China have to restrain its energy consumption and worry about the environment, when America and Europe got to consume all they energy they wanted when they were developing?” I did not have a good answer. China is a high-pride country. Telling China, India, and Russia to consume less could have the same geopolitical impact that the world's inability to accommodate a rising Japan and Germany had after World War I.

If current trends hold, China will go from importing 7 million barrels of oil today to 14 million a day by 2012. For the world to accommodate that increase it would have to find another Saudi Arabia. That is not likely, which doesn't leave many good options. “For geopolitical reasons, we cannot tell them no, we cannot tell China and India, it is not your turn,” said Philip K. Verleger Jr., a leading oil economist. “And for moral reasons, we have lost the ability to lecture anyone.” But if we do nothing, several things will likely result. First, gasoline prices will continue to trend higher and higher. Second, we will be strengthening the very worst political systems in the world-like Sudan, Iran, and Saudi Arabia. And third, the environment will be damaged more and more. Already, the newspaper headlines in China every day are about energy shortages, blackouts, and brownouts. U.S. officials estimate that twenty-four out of China's thirty-one provinces are now experiencing power shortages.

We are all stewards of the planet, and the test for our generation is whether we will pass on a planet in as good or better shape than we found it. The flattening process is going to challenge that responsibility. “Aldo Leopold, the father of wildlife ecology, once said: 'The first rule of intelligent tinkering is save all the pieces,'” remarked Glenn Prickett, senior vice president of Conservation International. “What if we don't? What if the 3 billion new entrants start gobbling up all the resources? Species and ecosystems can't adapt that fast, and we will lose a major portion of the earth's remaining biological diversity.” Already, noted Prickett, if you look at what is happening in the Congo Basin, the Amazon, the rain forest of Indonesia-the last great wilderness areas-you find that they are being devoured by China's rising appetite. More and more palm oil is being extracted from Indonesia and Malaysia, soybeans out of Brazil, timber out of central Africa, and natural gas out of all of the above to serve China-and, as a result, threatening all sorts of natural habitats. If these trends go on unchecked, with all the natural habitats being converted to farmland and urban areas, and the globe getting warmer, many of the currently threatened species will be condemned to extinction.

The move to sharply reduce energy consumption has to come from within China, as the Chinese confront what the need for fuel is doing to their own environment and growth aspirations. The only thing-and the best thing-we in the United States and Western Europe can do to nudge China toward that understanding is set an example by changing our own consumption patterns. That would give us some credibility to lecture others. “Restoring our moral standing on energy is now a vital national security and environmental issue,” said Verleger. That requires doing everything more seriously-more serious government funding for alternatives, a real push by the federal government to promote conservation, a gasoline tax that will drive more consumers to buy hybrid vehicles and smaller cars, legislation to force Detroit to make more fuel-efficient vehicles, and yes, more domestic exploration. Together, added Verleger, that could help stabilize the price at around $25 a barrel, “which seems to be the ideal range for sustainable global growth.”

In sum, we in the West have a fundamental interest in keeping the American dream alive in Beijing and Boise and Bangalore. But we have to stop fooling ourselves that it can be done in a flat world with 3 billion potential new consumers-if we don't find a radical new approach to energy usage and conservation. If we fail to do so, we will be courting both an environmental and geopolitical whirlwind. If there was ever a time for some big collaboration, it is now, and the subject is energy. I would love to see a grand China-United States Manhattan Project, a crash program to jointly develop clean alternative energies, bringing together China's best scientists and its political ability to implement pilot projects, with America's best brains, technology, and money. It would be the ideal model and the ideal project for creating value horizontally, with each side contributing its strength. Said Scott Roberts, the Cambridge Energy Research Associates analyst in China, “When it comes to renewable technology and sustainable energy, China could be the laboratory of the world-not just the workshop of the world.” Why not?

TWELVE: The Dell Theory of Conflict Prevention, Old-Time Versus Just-in-Time

Free Trade is God's diplomacy. There is no other certain way of uniting people in the bonds of peace.

—British politician Richard Cobden, 1857

Before I share with you the subject of this chapter, I have to tell you a little bit about the computer that I wrote this book on. It's related to the theme I am about to discuss. This book was largely written on a Dell Inspiron 600m notebook, service tag number 9ZRJP41. As part of the research for this book71 visited with the management team at Dell near Austin, Texas. I shared with them the ideas in this book and in return I asked for one favor: I asked them to trace for me the entire global supply chain that produced my Dell notebook. Here is their report: My computer was conceived when I phoned Dell's 800 number on April 2, 2004, and was connected to sales representative Mujteba Naqvi, who immediately entered my order into Dell's order management system. He typed in both the type of notebook I ordered as well as the special features I wanted, along with my personal information, shipping address, billing address, and credit card information. My credit card was verified by Dell through its work flow connection with Visa, and my order was then released to Dell's production system. Dell has six factories around the world-in Limerick, Ireland; Xiamen, China; Eldorado do Sul, Brazil; Nashville, Tennesee; Austin, Texas; and Penang, Malaysia. My order went out by e-mail to the Dell notebook factory in Malaysia, where the parts for the computer were immediately ordered from the supplier logistics centers (SLCs) next to the Penang factory. Surrounding every Dell factory in the world are these supplier logistics centers, owned by the different suppliers of Dell parts. These SLCs are like staging areas. If you are a Dell supplier anywhere in the world, your job is to keep your SLC full of your specific parts so they can constantly be trucked over to the Dell factory for just-in-time manufacturing.

“In an average day, we sell 140,000 to 150,000 computers,” explained Dick Hunter, one of Dell's three global production managers. “Those orders come in over Dell.com or over the telephone. As soon these orders come in, our suppliers know about it. They get a signal based on every component in the machine you ordered, so the supplier knows just what he has to deliver. If you are supplying power cords for desktops, you can see minute by minute how many power cords you are going to have to deliver.” Every two hours, the Dell factory in Penang sends an e-mail to the various SLCs nearby, telling each one what parts and what quantities of those parts it wants delivered within the next ninety minutes-and not one minute later. Within ninety minutes, trucks from the various SLCs around Penang pull up to the Dell manufacturing plant and unload the parts needed for all those notebooks ordered in the last two hours. This goes on all day, every two hours. As soon as those parts arrive at the factory, it takes thirty minutes for Dell employees to unload the parts, register their bar codes, and put them into the bins for assembly. “We know where every part in every SLC is in the Dell system at all times,” said Hunter.

So where did the parts for my notebook come from? I asked Hunter. To begin with, he said, the notebook was codesigned in Austin, Texas, and in Taiwan by a team of Dell engineers and a team of Taiwanese notebook designers. “The customer's needs, required technologies, and Dell's design innovations were all determined by Dell through our direct relationship with customers,” he explained. “The basic design of the motherboard and case-the basic functionality of your machine-was designed to those specifications by an ODM [original design manufacturer] in Taiwan. We put our engineers in their facilities and they come to Austin and we actually codesign these systems. This global teamwork brings an added benefit-a globally distributed virtually twenty-four-hour-per-day development cycle. Our partners do the basic electronics and we help them design customer and reliability features that we know our customers want. We know the customers better than our suppliers and our competition, because we are dealing directly with them every day.” Dell notebooks are completely redesigned roughly every twelve months, but new features are constantly added during the year— through the supply chain-as the hardware and software components advance.

It happened that when my notebook order hit the Dell factory in Penang, one part was not available-the wireless card-due to a quality control issue, so the assembly of the notebook was delayed for a few days. Then the truck full of good wireless cards arrived. On April 13, at 10:15 a.m., a Dell Malaysia worker pulled the order slip that automatically popped up once all my parts had arrived from the SLCs to the Penang factory. Another Dell Malaysia employee then took out a “traveler”-a special carrying tote designed to hold and protect parts-and started plucking all the parts that went into my notebook.

Where did those parts come from? Dell uses multiple suppliers for most of the thirty key components that go into its notebooks. That way if one supplier breaks down or cannot meet a surge in demand, Dell is not left in the lurch. So here are the key suppliers for my Inspiron 600m notebook: The Intel microprocessor came from an Intel factory either in the Philippines, Costa Rica, Malaysia, or China. The memory came from a Korean-owned factory in Korea (Samsung), a Taiwanese-owned factory in Taiwan (Nanya), a German-owned factory in Germany (Infineon), or a Japanese-owned factory in Japan (Elpida). My graphics card was shipped from either a Taiwanese-owned factory in China (MSI) or a Chinese-run factory in China (Foxconn). The cooling fan came from a Taiwanese-owned factory in Taiwan (CCI or Auras). The motherboard came from either a Korean-owned factory in Shanghai (Samsung), a Taiwanese-owned factory in Shanghai (Quanta), or a Taiwanese-owned factory in Taiwan (Compal or Wistron). The keyboard came from either a Japanese-owned company in Tianjin, China (Alps), a Taiwanese-owned factory in Shenzen, China (Sunrex), or a Taiwanese-owned factory in Suzhou, China (Darfon). The LCD display was made in either South Korea (Samsung or LG.Philips LCD), Japan (Toshiba or Sharp), or Taiwan (Chi Mei Optoelectronics, Hannstar Display, or AU Optronics). The wireless card came from either an American-owned factory in China (Agere) or Malaysia (Arrow), or a Taiwanese-owned factory in Taiwan (Askey or Gemtek) or China (USI). The modem was made by either a Taiwanese-owned company in China (Asustek or Liteon) or a Chinese-run company in China (Foxconn). The battery came from an American-owned factory in Malaysia (Motorola), a Japanese-owned factory in Mexico or Malaysia or China (Sanyo), or a South Korean or Taiwanese factory in either of those two countries (SDI or Simplo). The hard disk drive was made by an American-owned factory in Singapore (Seagate), a Japanese-owned company in Thailand (Hitachi or Fujitsu), or a Japanese-owned factory in the Philippines (Toshiba). The CD/DVD drive came from a South Korean-owned company with factories in Indonesia and the Philippines (Samsung); a Japanese-owned factory in China or Malaysia (NEC); a Japanese-owned factory in Indonesia, China, or Malaysia (Teac); or a Japanese-owned factory in China (Sony). The notebook carrying bag was made by either an Irish-owned company in China (Tenba) or an American-owned company in China (Targus, Samsonite, or Pacific Design). The power adapter was made by either a Thai-owned factory in Thailand (Delta) or a Taiwanese, Korean, or American-owned factory in China (Liteon, Samsung, or Mobility). The power cord was made by a British-owned company with factories in China, Malaysia, and India (Volex). The removable memory stick was made by either an Israeli-owned company in Israel (M-System) or an American-owned company with a factory in Malaysia (Smart Modular).

This supply chain symphony-from my order over the phone to production to delivery to my house-is one of the wonders of the flat world.

“We have to do a lot of collaborating,” said Hunter. “Michael [Dell] personally knows the CEOs of these companies, and we are constantly working with them on process improvements and real-time demand/supply balancing.” Demand shaping goes on constantly, said Hunter. What is “demand shaping”? It works like this: At 10 a.m. Austin time, Dell discovers that so many customers have ordered notebooks with 40-gigabyte hard drives since the morning that its supply chain will run short in two hours. That signal is automatically relayed to Dell's marketing department and to Dell.com and to all the Dell phone operators taking orders. If you happen to call to place your Dell order at 10:30 a.m., the Dell representative will say to you, “Tom, it's your lucky day! For the next hour we are offering 60-gigabyte hard drives with the notebook you want-for only $10 more than the 40-gig drive. And if you act now, Dell will throw in a carrying case along with your purchase, because we so value you as a customer.” In an hour or two, using such promotions, Dell can reshape the demand for any part of any notebook or desktop to correspond with the projected supply in its global supply chain. Today memory might be on sale, tomorrow it might be CD-ROMs.

Picking up the story of my notebook, on April 13, at 11:29 a.m., all the parts had been plucked from the just-in-time inventory bins in Penang, and the computer was assembled there by A. Sathini, a team member “who manually screwed together all of the parts from kitting as well as the labels needed for Tom's system,” said Dell in their production report to me. “The system was then sent down the conveyor to go to burn, where Tom's specified software was downloaded.” Dell has huge server banks stocked with the latest in Microsoft, Norton Utilities, and other popular software applications, which are downloaded into each new computer according to the specific tastes of the customer.

“By 2:45 p.m., Tom's software had been successfully downloaded, and [was] manually moved to the boxing line. By 4:05 p.m., Tom's system [was] placed in protective foam and a shuttle box, with a label, which contains his order number, tracking code, system type, and shipping code. By 6:04 p.m., Tom's system had been loaded on a pallet with a specified manifest, which gives the Merge facility visibility to when the system will arrive, what pallet it will be on (out of 75+ pallets with 152 systems per pallet), and to what address Tom's system will ship. By 6:26 p.m., Tom's system left [the Dell factory] to head to the Penang, Malaysia, airport.”

Six days a week Dell charters a China Airlines 747 out of Taiwan and flies it from Penang to Nashville via Taipei. Each 747 leaves with twenty-five thousand Dell notebooks that weigh altogether 110,000 kilograms, or 50,000 pounds. It is the only 747 that ever lands in Nashville, except Air Force One, when the president visits. “By April 15, 2004, at 7:41 a.m., Tom's system arrived at [Nashville] with other Dell systems from Penang and Limerick. By 11:58 a.m., Tom's system [was] inserted into a larger box, which went down the boxing line to the specific external parts that Tom had ordered.”

That was thirteen days after I'd ordered it. Had there not been a parts delay in Malaysia when my order first arrived, the time between when I phoned in my purchase, when the notebook was assembled in Penang, and its arrival in Nashville would have been only four days. Hunter said the total supply chain for my computer, including suppliers of suppliers, involved about four hundred companies in North America, Europe, and primarily Asia, but with thirty key players. Somehow, though, it all came together. As Dell reported: On April 15, 2004, at 12:59 p.m., “Tom's system had been shipped from [Nashville] and was tenured by UPS shipping LTL (3-5-day ground, specified by Tom), with UPS tracking number 1Z13WA374253514697. By April 19, 2004, at 6:41 p.m., Tom's system arrived in Bethesda, MD, and was signed for.”

I am telling you the story of my notebook to tell a larger story of geopolitics in the flat world. To all the forces mentioned in the previous chapter that are still holding back the flattening of the world, or could actually reverse the process, one has to add a more traditional threat, and that is an outbreak of a good, old-fashioned, world-shaking, economy-destroying war. It could be China deciding once and for all to eliminate Taiwan as an independent state; or North Korea, out of fear or insanity, using one of its nuclear weapons against South Korea or Japan; or Israel and a soon-to-be-nuclear Iran going at each other; or India and Pakistan finally nuking it out. These and other classic geopolitical conflicts could erupt at any time and either slow the flattening of the world or seriously unflatten it.

The real subject of this chapter is how these classic geopolitical threats might be moderated or influenced by the new forms of collaboration fostered and demanded by the flat world-particularly supply-chaining. The flattening of the world is too young for us to draw any definitive conclusions. What is certain, though, is that as the world flattens, one of the most interesting dramas to watch in international relations will be the interplay between the traditional global threats and the newly emergent global supply chains. The interaction between old-time threats (like China versus Taiwan) and just-in-time supply chains (like China plus Taiwan) will be a rich source of study for the field of international relations in the early twenty-first century.

In The Lexus and the Olive Tree I argued that to the extent that countries tied their economies and futures to global integration and trade, it would act as a restraint on going to war with their neighbors. I first started thinking about this in the late 1990s, when, during my travels, I noticed that no two countries that both had McDonald's had ever fought a war against each other since each got its McDonald's. (Border skirmishes and civil wars don't count, because McDonald's usually served both sides.) After confirming this with McDonald's, I offered what I called the Golden Arches Theory of Conflict Prevention. The Golden Arches Theory stipulated that when a country reached the level of economic development where it had a middle class big enough to support a network of McDonald's, it became a McDonald's country. And people in McDonald's countries didn't like to fight wars anymore. They preferred to wait in line for burgers. While this was offered slightly tongue in cheek, the serious point I was trying to make was that as countries got woven into the fabric of global trade and rising living standards, which having a network of McDonald's franchises had come to symbolize, the cost of war for victor and vanquished became prohibitively high.

This McDonald's theory has held up pretty well, but now that almost every country has acquired a McDonald's, except the worst rogues like North Korea, Iran, and Iraq under Saddam Hussein, it seemed to me that this theory needed updating for the flat world. In that spirit, and again with tongue slightly in cheek, I offer the Dell Theory of Conflict Prevention, the essence of which is that the advent and spread of just-in-time global supply chains in the flat world are an even greater restraint on geopolitical adventurism than the more general rising standard of living that McDonald's symbolized.

The Dell Theory stipulates: No two countries that are both part of a major global supply chain, like Dell's, will ever fight a war against each other as long as they are both part of the same global supply chain. Because people embedded in major global supply chains don't want to fight old-time wars anymore. They want to make just-in-time deliveries of goods and services -and enjoy the rising standards of living that come with that. One of the people with the best feel for the logic behind this theory is Michael Dell, the founder and chairman of Dell.

“These countries understand the risk premium that they have,” said Dell of the countries in his Asian supply chain. “They are pretty careful to protect the equity that they have built up or tell us why we should not worry [about their doing anything adventurous]. My belief after visiting China is that the change that has occurred there is in the best interest of the world and China. Once people get a taste for whatever you want to call it-economic independence, a better lifestyle, and a better life for their child or children-they grab on to that and don't want to give it up.”

Any sort of war or prolonged political upheaval in East Asia or China “would have a massive chilling effect on the investment there and on all the progress that has been made there,” said Dell, who added that he believes the governments in that part of the world understand this very clearly. “We certainly make clear to them that stability is important to us. [Right now] it is not a day-to-day worry for us... I believe that as time and progress go on there, the chance for a really disruptive event goes down exponentially. I don't think our industry gets enough credit for the good we are doing in these areas. If you are making money and being productive and raising your standard of living, you're not sitting around thinking, Who did this to us? or Why is our life so bad?”

There is a lot of truth to this. Countries whose workers and industries are woven into a major global supply chain know that they cannot take an hour, a week, or a month off for war without disrupting industries and economies around the world and thereby risking the loss of their place in that supply chain for a long time, which could be extremely costly. For a country with no natural resources, being part of a global supply chain is like striking oil-oil that never runs out. And therefore, getting dropped from such a chain because you start a war is like having your oil wells go dry or having someone pour cement down them. They will not come back anytime soon.

“You are going to pay for it really dearly,” said Glenn E. Neland, senior vice president for worldwide procurement at Dell, when I asked him what would happen to a major supply-chain member in Asia that decided to start fighting with its neighbor and disrupt the supply chain. “It will not only bring you to your knees [today], but you will pay for a long time-because you just won't have any credibility if you demonstrate you are going to go [off] the political deep end. And China is just now starting to develop a level of credibility in the business community that it is creating a business environment you can prosper in-with transparent and consistent rules.” Neland said that suppliers regularly ask him whether he is worried about China and Taiwan, which have threatened to go to war at several points in the past half century, but his standard response is that he cannot imagine them “doing anything more than flexing muscles with each other.” Neland said he can tell in his conversations and dealings with companies and governments in the Dell supply chain, particularly the Chinese, that “they recognize the opportunity and are really hungry to participate in the same things they have seen other countries in Asia do. They know there is a big economic pot at the end of the rainbow and they are really after it. We will spend about $35 billion producing parts this year, and 30 percent of that is [in] China.”