The average wage of a high-skilled machinist in America is $3,000 to $4,000 a month. The average wage for a factory worker in China is about $150 a month. In addition, ASIMCO is required to participate in a Chinese government-sponsored pension plan covering heath care, housing, and retirement benefits. Between 35 and 45 percent of a Chinese worker's monthly wage goes directly to the local labor bureau to cover these benefits. The fact that health insurance in China is so much cheaper-because of lower wages, much more limited health service offerings, and no malpractice suits-“certainly makes China an attractive place to expand and add employees,” explained Perkowski. “Anything which can be done to reduce a U.S. company's liability for medical coverage would be a plus in keeping jobs in the U.S.”

By taking advantage of the flat world to collaborate this way— between onshore and offshore factories, and between high-wage, high-skilled American workers close to their market and low-wage Chinese workers close to theirs-said Perkowski, “we make our American company more competitive, so it is getting more orders and we are actually growing the business. And that is what many in the U.S. are missing when they talk about offshoring. Since the acquisition, for example, we have doubled our business with Cummins, and our business with Caterpillar has grown significantly. All of our customers are exposed to global competition and really need their supply base to the do the right thing as far as cost competitiveness. They want to work with suppliers who understand the flat world. When I went to visit our U.S. customers to explain our strategy for the camshaft business, they were very positive about what we were doing, because they could see that we were aligning our business in a way that was going to enable them to be more competitive.”

This degree of collaboration has been possible only in the last couple of years. “We could not have done what we have done in China in 1983 or 1993,” said Perkowski. “Since 1993, a number of things have come together. For example, people always talk about how much the Internet has benefited the U.S. The point I always make is that China has benefited even more. What has held China back in the past was the inability of people outside China to get information about the country, and the inability of people inside China to get information about the rest of the world. Prior to the Internet, the only way to close that information gap was travel. Now you can stay home and do it with the Internet. You could not operate our global supply chain without it. We now just e-mail blueprints over the Internet-we don't even need FedEx.”

The advantages for manufacturing in China, for certain industries, are becoming overwhelming, added Perkowski, and cannot be ignored. Either you get flat or you'll be flattened by China. “If you are sitting in the U.S. and don't figure out how to get into China,” he said, “in ten or fifteen years from now you will not be a global leader.”

Now that China is in the WTO, a lot of traditional, slow, inefficient, and protected sectors of the Chinese economy are being exposed to some withering global competition-something received as warmly in Canton, China, as in Canton, Ohio. Had the Chinese government put WTO membership to a popular vote, “it never would have passed,” said Pat Powers, who headed the U.S.-China Business Council office in Beijing during the WTO accession. A key reason why China's leadership sought WTO membership was to use it as a club to force China's bureaucracy to modernize and take down internal regulatory walls and pockets for arbitrary decision making. China's leadership “knew that China had to integrate globally and that many of their existing institutions would simply not change and reform, and so they used the WTO as leverage against their own bureaucracy. And for the last two and half years they've been slugging it out.”

Over time, adherence to WTO standards will make China's economy even flatter and more of a flattener globally. But this transition will not be easy, and the chances of a political or economic crackup that disrupts or slows this process are not insignificant. But even if China implements all the WTO reforms, it won't be able to rest. It will soon be reaching a point where its ambitions for economic growth will require more political reform. China will never root out corruption without a free press and active civil society institutions. It can never really become efficient without a more codified rule of law. It will never be able to deal with the inevitable downturns in its economy without a more open political system that allows people to vent their grievances. To put it another way, China will never be truly flat until it gets over that huge speed bump called “political reform.”

It seems to be heading in that direction, but it still has a long way to go. I like the way a U.S. diplomat in China put it to me in the spring of 2004: “China right now is doing titillation, not privatization. Reform here is translucent-and sometimes it is quite titillating, because you can see the shapes moving behind the screen-but it is not transparent. [The government still just gives] the information [about the economy] to a few companies and designated interest groups.” Why only translucent? I asked. He answered, “Because if you are fully transparent, what do you do with the feedback? They don't know how to deal with that question. They cannot deal [yet] with the results of transparency.”

If and when China gets over that political bump in the road, I think it could become not only a bigger platform for offshoring but another free-market version of the United States. While that may seem threatening to some, I think it would be an incredibly positive development for the world. Think about how many new products, ideas, jobs, and consumers arose from Western Europe's and Japan's efforts to become free-market democracies after World War II. The process unleashed an unprecedented period of global prosperity-and the world wasn't even flat then. It had a wall in the middle. If India and China move in that direction, the world will not only become flatter than ever but also, I am convinced, more prosperous than ever. Three United States are better than one, and five would be better than three.

But even as a free-trader, I am worried about the challenge this will pose to wages and benefits of certain workers in the United States, at least in the short run. It is too late for protectionism when it comes to China. Its economy is totally interlinked with those of the developed world, and trying to delink it would cause economic and geopolitical chaos that could devastate the global economy. Americans and Europeans will have to develop new business models that will enable them to get the best out of China and cushion themselves against some of the worst. As BusinessWeek, in its dramatic December 6, 2004, cover story on “The China Price,” put it, “Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s. Industries requiring huge R&D budgets and capital investment, such as aerospace, pharmaceuticals, and cars, still have strong bases in the U.S.... America will surely continue to benefit from China's expansion.” That said, unless America can deal with the long-term industrial challenge posed by the China price in so many areas, “it will suffer a loss of economic power and influence.”

Or, to put it another way, if Americans and Europeans want to benefit from the flattening of the world and the interconnecting of all the markets and knowledge centers, they will all have to run at least as fast as the fastest lion-and I suspect that lion will be China, and I suspect that will be pretty darn fast.

I had never seen what a supply chain looked like in action until I visited Wal-Mart headquarters in Bentonville, Arkansas. My Wal-Mart hosts took me over to the 1.2-million-square-foot distribution center, where we climbed up to a viewing perch and watched the show. On one side of the building, scores of white Wal-Mart trailer trucks were dropping off boxes of merchandise from thousands of different suppliers. Boxes large and small were fed up a conveyor belt at each loading dock. These little conveyor belts fed into a bigger belt, like streams feeding into a powerful river. Twenty-four hours a day, seven days a week, the suppliers' trucks feed the twelve miles of conveyor streams, and the conveyor streams feed into a huge Wal-Mart river of boxed products. But that is just half the show. As the Wal-Mart river flows along, an electric eye reads the bar codes on each box on its way to the other side of the building. There, the river parts again into a hundred streams. Electric arms from each stream reach out and guide the boxes-ordered by particular Wal-Mart stores— off the main river and down its stream, where another conveyor belt sweeps them into a waiting Wal-Mart truck, which will rush these particular products onto the shelves of a particular Wal-Mart store somewhere in the country. There, a consumer will lift one of these products off the shelf, and the cashier will scan it in, and the moment that happens, a signal will be generated. That signal will go out across the Wal-Mart network to the supplier of that product-whether that supplier's factory is in coastal China or coastal Maine. That signal will pop up on the supplier's computer screen and prompt him to make another of that item and ship it via the Wal-Mart supply chain, and the whole cycle will start anew. So no sooner does your arm lift a product off the local Wal-Mart's shelf and onto the checkout counter than another mechanical arm starts making another one somewhere in the world. Call it “the Wal-Mart Symphony” in multiple movements-with no finale. It just plays over and over 24/7/365: delivery, sorting, packing, distribution, buying, manufacturing, reordering, delivery, sorting, packing...

Just one company, Hewlett-Packard, will sell four hundred thousand computers through the four thousand Wal-Mart stores worldwide in one day during the Christmas season, which will require HP to adjust its supply chain, to make sure that all of its standards interface with Wal-Mart's, so that these computers flow smoothly into the Wal-Mart river, into the Wal-Mart streams, into the Wal-Mart stores.

Wal-Mart's ability to bring off this symphony on a global scale-moving 2.3 billion general merchandise cartons a year down its supply chain into its stores-has made it the most important example of the next great flat-tener I want to discuss, which I call supply-chaining. Supply-chaining is a method of collaborating horizontally-among suppliers, retailers, and customers-to create value. Supply-chaining is both enabled by the flattening of the world and a hugely important flattener itself, because the more these supply chains grow and proliferate, the more they force the adoption of common standards between companies (so that every link of every supply chain can interface with the next), the more they eliminate points of friction at borders, the more the efficiencies of one company get adopted by the others, and the more they encourage global collaboration.

As consumers, we love supply chains, because they deliver us all sorts of goods-from tennis shoes to laptop computers-at lower and lower prices. That is how Wal-Mart became the world's biggest retailer. But as workers, we are sometimes ambivalent or hostile to these supply chains, because they expose us to higher and higher pressures to compete, cut costs, and also, at times, cut wages and benefits. That is how Wal-Mart became one of the world's most controversial companies. No company has been more efficient at improving its supply chain (and thereby flattening the world) than Wal-Mart; and no company epitomizes the tension that supply chains evoke between the consumer in us and the worker in us than Wal-Mart. A September 30, 2002, article in Computer-world summed up Wal-Mart's pivotal role: “'Being a supplier to Wal-Mart is a two-edged sword,' says Joseph R. Eckroth Jr., CIO at Mattel Inc. 'They're a phenomenal channel but a tough customer. They demand excellence.' It's a lesson that the El Segundo, Calif.-based toy manufacturer and thousands of other suppliers learned as the world's largest retailer, Wal-Mart Stores Inc., built an inventory and supply chain man-agement system that changed the face of business. By investing early and heavily in cutting-edge technology to identify and track sales on the individual item level, the Bentonville, Ark.-based retail giant made its IT infrastructure a key competitive advantage that has been studied and copied by companies around the world. 'We view Wal-Mart as the best supply chain operator of all time/ says Pete Abell, retail research director at high-tech consultancy AMR Research Inc. in Boston.”

In pursuit of the world's most efficient supply chain, Wal-Mart has piled up a list of business offenses over the years that has given the company several deserved black eyes and that it is belatedly starting to address in a meaningful way. But its role as one of the ten forces that flattened the world is undeniable, and it was to get a handle on this that I decided to make my own pilgrimage to Bentonville. I don't know why, but on the flight in from La Guardia, I was thinking, Boy, I would really like some sushi tonight. But where am I going to find sushi in northwest Arkansas? And even if I found it, would I want to eat it? Could you really trust the eel in Arkansas?

When I arrived at the Hilton near Wal-Mart's headquarters, I was stunned to see, like a mirage, a huge Japanese steak house-sushi restaurant right next door. When I remarked to the desk clerk who was checking me in that I never expected to get my sushi fix in Bentonville, he told me, “We've got three more Japanese restaurants opening up soon.”

Multiple Japanese restaurants in Bentonville?

The demand for sushi in Arkansas is not an accident. It has to do with the fact that all around Wal-Mart's offices, vendors have set up their own operations to be close to the mother ship. Indeed, the area is known as “Vendorville.” The amazing thing about Wal-Mart's headquarters is that it is so, well, Wal-Mart. The corporate offices are crammed into a reconfigured warehouse. As we passed a large building made of corrugated metal, I figured it was the maintenance shed. “Those are our international offices,” said my host, spokesman William Wertz. The corporate suites are housed in offices that are one notch below those of the principal, vice principal, and head counselor at my daughter's public junior high school-before it was remodeled. When you pass through the lobby, you see these little cubicles where potential suppliers are pitching their products to Wal-Mart buyers. One has sewing machines all over the table, another has dolls, another has women's shirts. It feels like a cross between Sam's Club and the covered bazaar of Damascus. Attention Wal-Mart shareholders: The company is definitely not wasting your money on frills.

But how did so much innovative thinking-thinking that has reshaped the world's business landscape in many ways-come out of such a Li'l Abner backwater? It is actually a classic example of a phenomenon I point to often in this book: the coefficient of flatness. The fewer natural resources your country or company has, the more you will dig inside yourself for innovations in order to survive. Wal-Mart became the biggest retailer in the world because it drove a hard bargain with everyone it came in contact with. But make no mistake about one thing: Wal-Mart also became number one because this little hick company from northwest Arkansas was smarter and faster about adopting new technology than any of its competitors. And it still is.

David Glass, the company's CEO from 1988 to 2000, oversaw many of the innovations that made Wal-Mart the biggest and most profitable retailer on the planet. Fortune magazine once dubbed him “the most underrated CEO ever” for the quiet way he built on Sam Walton's vision. David Glass is to supply-chaining what Bill Gates is to word processing. When Wal-Mart was just getting started in northern Arkansas in the 1960s, explained Glass, it wanted to be a discounter. But in those days, every five-and-dime got its goods from the same wholesalers, so there was no way to get an edge on your competitors. The only way Wal-Mart could see to get an edge, he said, was for it to buy its goods in volume directly from the manufacturers. But it wasn't efficient for manufacturers to ship to multiple Wal-Mart stores spread all over, so Wal-Mart set up a distribution center to which all the manufacturers could ship their merchandise, and then Wal-Mart got its own trucks to distribute these goods itself to its stores. The math worked like this: It cost roughly 3 percent more on average for Wal-Mart to maintain its own distribution center. But it turned out, said Glass, that cutting out the wholesalers and buying direct from the manufacturers saved on average 5 percent, so that allowed Wal-Mart to cut costs on average 2 percent and then make it up on volume.

Once it established that basic method of buying directly from manufacturers to get the deepest discounts possible, Wal-Mart focused relentlessly on three things. The first was working with the manufacturers to get them to cut their costs as much as possible. The second was working on its supply chain from those manufacturers, wherever they were in the world, to Wal-Mart's distribution centers, to make it as low-cost and fric-tionless as possible. The third was constantly improving Wal-Mart's information systems, so it knew exactly what its customers were buying and could feed that information to all the manufacturers, so the shelves would always be stocked with the right items at the right time.

Wal-Mart quickly realized that if it could save money by buying directly from the manufacturers, by constantly innovating to cut the cost of running its supply chain, and by keeping its inventories low by learning more about its customers, it could beat its competitors on price every time. Sitting in Bentonville, Arkansas, it didn't have much choice.

“The reason we built all our own logistics and systems is because we are in the middle of nowhere,” said Jay Allen, Wal-Mart's senior vice president of corporate affairs. “It really was a small town. If you wanted to go to a third party for logistics, it was impossible. It was pure survival. Now with all the attention we are getting there is an assumption that our low prices derive from our size or because we're getting stuff from China or being able to dictate to suppliers. The fact is the low prices are derived from efficiencies Wal-Mart has invested in-the system and the culture. It is a very low-cost culture.” Added Glass, “I wish that I could say we were brilliant and visionary, [but] it was all born out of necessity.”

The more that supply chain grew, the more Walton and Glass understood that scale and efficiency were the keys to their whole business. Put simply, the more scale and scope their supply chain had, the more things they sold for less to more customers, the more leverage they had with suppliers to drive prices down even more, the more they sold to more customers, the more scale and scope their supply chain had, the more profit they reaped for their shareholders...

Sam Walton was the father of that culture, but necessity was its mother, and its offspring has turned out to be a lean, mean supply-chain machine. In 2004, Wal-Mart purchased roughly $260 billion worth of merchandise and ran it through a supply chain consisting of 108 distribution centers around the United States, serving the some 3,000 Wal-Mart stores in America.

In the early years, “we were small-we were 4 or 5 percent of Sears and Kmart,” said Glass. “If you are that small, you are vulnerable, so what we wanted to do more than anything else was grow market share. We had to undersell others. If I could reduce from 3 percent to 2 percent the cost of running my distribution centers, I could reduce retail prices and grow my market share and then not be vulnerable to anyone. So any efficiency we generated we passed on to the consumer.”

For instance, after the manufacturers dropped off their goods at the Wal-Mart distribution center, Wal-Mart needed to deliver those goods in small bunches to each of its stores. It meant that Wal-Mart had trucks going all over America. Walton quickly realized if he connected his drivers by radios and satellites, after they dropped off at a certain Wal-Mart store, they could go a few miles down the road and pick up goods from a manufacturer so they wouldn't come back empty and so Wal-Mart could save the delivery charges from that manufacturer. A few pennies here, a few pennies there, and the result is more volume, scope, and scale.

In improving its supply chain, Wal-Mart leaves no link untouched. While I was touring the Wal-Mart distribution center in Bentonville, I noticed that some boxes were too big to go on the conveyor belts and were being moved around on pallets by Wal-Mart employees driving special minilift trucks with headphones on. A computer tracks how many pallets each employee is plucking every hour to put onto trucks for different stores, and a computerized voice tells each of them whether he is ahead of schedule or behind schedule. “You can choose whether you want your computer voice to be a man or a woman, and you can choose English or Spanish,” explained Rollin Ford, Wal-Mart's executive vice president, who oversees the supply chain and was giving me my tour.

A few years ago, these pallet drivers would get written instructions for where to pluck a certain pallet and what truck to take it to, but Wal-Mart discovered that by giving them headphones with a soothing computer voice to instruct them, drivers could use both hands and not have to carry pieces of paper. And by having the voice constantly reminding them whether they were behind or ahead of expectations, “we got a boost in productivity,” said Ford. It is a million tiny operational innovations like this that differentiate Wal-Mart's supply chain.

But the real breakthrough, said Glass, was when Wal-Mart realized that while it had to be a tough bargainer with its manufacturers on price, at the same time the two had to collaborate to create value for each other horizontally if Wal-Mart was going to keep driving down costs. Wal-Mart was one of the first companies to introduce computers to track store sales and inventory and was the first to develop a computerized network in order to share this information with suppliers. Wal-Mart's theory was that the more information everyone had about what customers were pulling off the shelves, the more efficient Wal-Mart's buying would be, the quicker its suppliers could adapt to changing market demand.

In 1983, Wal-Mart invested in point-of-sale terminals, which simultaneously rang up sales and tracked inventory deductions for rapid resup-ply. Four years later, it installed a large-scale satellite system linking all of the stores to company headquarters, giving Wal-Mart's central computer system real-time inventory data and paving the way for a supply chain greased by information and humming down to the last atom of efficiency. A major supplier can now tap into Wal-Mart's Retail Link private extranet system to see exactly how its products are selling and when it might need to up its production.

“Opening its sales and inventory databases to suppliers is what made Wal-Mart the powerhouse it is today, says Rena Granofsky, a senior partner at J. C. Williams Group Ltd., a Toronto-based retail consulting firm,” in the 2002 Computerworld article on Wal-Mart. “While its competition guarded sales information, Wal-Mart approached its suppliers as if they were partners, not adversaries, says Granofsky. By implementing a collaborative planning, forecasting, and replenishment (CPFR) program, Wal-Mart began a just-in-time inventory program that reduced carrying costs for both the retailer and its suppliers. 'There's a lot less excess inventory in the supply chain because of it/ Granofsky says.” Thanks to the efficiency of its supply chain alone, Wal-Mart's cost of goods is estimated to be 5 to 10 percent less than that of most of its competitors.

Now Wal-Mart, in its latest supply-chain innovation, has introduced RFID-radio frequency identification microchips, attached to each pallet and merchandise box that comes into Wal-Mart, to replace bar codes, which have to be scanned individually and can get ripped or soiled. In June 2003, Wal-Mart informed its top one hundred suppliers that by January 1, 2005, all pallets and boxes that they ship to Wal-Mart distribution centers have to come equipped with RFID tags. (According to the RFID Journal, “RFID is a generic term for technologies that use radio waves to automatically identify people or objects. There are several methods of identification, but the most common is to store a serial number that identifies a person or object, and perhaps other information, on a microchip that is attached to an antenna-the chip and the antenna together are called an RFID transponder or an RFID tag. The antenna enables the chip to transmit the identification information to a reader. The reader converts the radio waves reflected back from the RFID tag into digital information that can then be passed on to computers that can make use of it.”) RFID will allow Wal-Mart to track any pallet or box at each stage in its supply chain and know exactly what product from which manufacturer is inside, with what expiration date. If a grocery item has to be stored at a certain temperature, the RFID tag will tell Wal-Mart when the temperature is too high or too low. Because each of these tags costs around 200, Wal-Mart is reserving them now for big boxes and pallets, not individual items. But this is clearly the wave of the future.

“When you have RFID,” said Rollin Ford, the Wal-Mart logistics vice president, “you have more insights.” You can tell even faster which stores sell more of which shampoo on Fridays and which ones on Sundays, and whether Hispanics prefer to shop more on Saturday nights rather than Mondays in the stores in their neighborhoods. “When all this information is fed into our demand models, we can become more efficient on when we produce [a product] and when we ship it and then put it on the trucks in exactly the right place inside the trucks so it can flow more efficiently,” added Ford. “We used to have to count each piece, and scanning it at [the receiving end] was a bottleneck. Now [with RFID], we just scan the whole pallet under a bubble, and it says you have all thirty items you ordered and each box tells you, 'This is what I am and this is how I am feeling, this is what color I am, and am I in good shape'-so it makes receiving hugely easier.” Procter & Gamble spokesperson Jeannie Tharrington talked to Salon.com (September 20, 2004) about Wal-Mart's move to RFID: “We see this as beneficial to the entire supply chain. Right now our out-of-stock levels are higher than we'd like and certainly higher than the consumer would like, and we think this technology can help us to keep the products on the shelf more often.” RFID will also allow for quicker remixing of the supply chain in response to events.

During hurricanes, Wal-Mart officials told me, Wal-Mart knows that people eat more things like Pop-Tarts-easy-to-store, nonperishable items-and that their stores also sell a lot of kids' games that don't require electricity and can substitute for TV. It also knows that when hurricanes are coming, people tend to drink more beer. So the minute Wal-Mart's meteorologists tell headquarters a hurricane is bearing down on Florida, its supply chain automatically adjusts to a hurricane mix in the Florida stores-more beer early, more Pop-Tarts later.

Wal-Mart is constantly looking for new ways to collaborate with its customers. Lately, it has gone into banking. It found that in areas with large Hispanic populations, many people had no affiliation with a bank and were getting ripped off by check-cashing outlets. So Wal-Mart offered them payroll check cashing, money orders, money transfers, and even bill payment services for standard items like electricity bills-all for very small fees. Wal-Mart had an internal capability to do that for its own employees and simply turned it into an external business.

Unfortunately for Wal-Mart, the same factors that drove its instinct for constant innovation-its isolation from the world, its need to dig inside itself, and its need to connect remote locations to a global supply chain— also got it in trouble. It is hard to exaggerate how isolated Bentonville, Arkansas, is from the currents of global debate on labor and human rights, and it is easy to see how this insular company, obsessed with lowering prices, could have gone over the edge in some of its practices.

Sam Walton bred not only a kind of ruthless quest for efficiency in improving Wal-Mart's supply chain but also a degree of ruthlessness period. I am talking about everything from Wal-Mart's recently exposed practice of locking overnight workers into its stores, to its allowing Wal-Mart's maintenance contractors to use illegal immigrants as janitors, to its role as defendant in the largest civil-rights class-action lawsuit in history, to its refusal to stock certain magazines-like Playboy-on its shelves, even in small towns where Wal-Mart is the only major store. This is all aside from the fact that some of Wal-Mart's biggest competitors complain that they have had to cut health-care benefits and create a lower wage tier to compete with Wal-Mart, which pays less and covers less than most big companies (more on this later). One can only hope that all the bad publicity Wal-Mart has received in the last few years will force it to understand that there is a fine line between a hyperefficient global supply chain that is helping people save money and improve their lives and one that has pursued cost cutting and profit margins to such a degree that whatever social benefits it is offering with one hand, it is taking away with the other.