The World is Flat

Consider this vivid example: On December 7, 2004, IBM announced that it was selling its whole Personal Computing Division to the Chinese computer company Lenovo to create a new worldwide PC company— the globe's third largest-with approximately $12 billion in annual revenue. Simultaneously, though, IBM said that it would be taking an 18.9 percent equity stake in Lenovo, creating a strategic alliance between IBM and Lenovo in PC sales, financing, and service worldwide. The new combined company's worldwide headquarters, it was announced, would be in New York, but its principal manufacturing operations would be in Beijing and Raleigh, North Carolina; research centers would be in China, the United States, and Japan; and sales offices would be around the world. The new Lenovo will be the preferred supplier of PCs to IBM, and IBM will also be the new Lenovo's preferred supplier of services and financing.

Are you still with me? About ten thousand people will move from IBM to Lenovo, which was created in 1984 and was the first company to introduce the home computer concept in China. Since 1997, Lenovo has been the leading PC brand in China. My favorite part of the press release is the following, which identifies the new company's senior executives.

“Yang Yuanqing-Chairman of the Board. [He's currently CEO of Lenovo.] Steve Ward-Chief Executive Officer. [He's currently IBM's senior vice president and general manager of IBM's Personal Systems Group.] Fran O'Sullivan-Chief Operating Officer. [She's currently general manager of IBM's PC division.] Mary Ma-Chief Financial Officer. [She's currently CFO of Lenovo.]”

Talk about horizontal value creation: This new Chinese-owned computer company headquartered in New York with factories in Raleigh and Beijing will have a Chinese chairman, an American CEO, an American CPO, and a Chinese CFO, and it will be listed on the Hong Kong stock exchange. Would you call this an American company? A Chinese company? To which country will Lenovo feel most attached? Or will it just see itself sort of floating above a flat earth?

This question was anticipated in the press release announcing the new company: “Where will Lenovo be headquartered?” it asked.

Answer: “As a global business, the new Lenovo will be geographically dispersed, with people and physical assets located worldwide.”

Sort that out.

The cold, hard truth is that management, shareholders, and investors are largely indifferent to where their profits come from or even where the employment is created. But they do want sustainable companies. Politicians, though, are compelled to stimulate the creation of jobs in a certain place. And residents-whether they are Americans, Europeans, or Indians-want to know that the good jobs are going to stay close to home.

The CEO of a major European multinational remarked to me, “We are a global research company now.” That's great news for his shareholders and investors. He is accessing the best brains on the planet, wherever they are, and almost certainly saving money by not doing all the research in his backyard. “But ultimately,” he confided to me, “this is going to have implications down the road on jobs in my own country-maybe not this year but in five or fifteen years.” As a CEO and European Union citizen, “you might have a dialogue with your government about how we can retain capabilities in [our own country]-but day by day you have to make decisions with the shareholders in mind.”

Translation: If I can buy five brilliant researchers in China and/or India for the price of one in Europe or America, I will buy the five; and if, in the long run, that means my own society loses part of its skills base, so be it. The only way to converge the interests of the two-the company and its country of origin-is to have a really smart population that can not only claim its slice of the bigger global pie but invent its own new slices as well. “We have grown addicted to our high salaries, and now we are really going to have to earn them,” the CEO said.

But even identifying a company's country of origin today is getting harder and harder. Sir John Rose, the chief executive of Rolls-Royce, told me once, “We have a big business in Germany. We are the biggest high-tech employer in the state of Brandenburg. I was recently at a dinner with Chancellor [Gerhard] Schroeder. And he said to me, ”You are a German company, why don't you come along with me on my next visit to Russia“—to try to drum up business there for German companies.” The German chancellor, said Rose, “was recognizing that although my headquarters were in London, my business was involved in creating value in Germany, and that could be constructive in his relationship with Russia.”

Here you have the quintessential British company, Rolls-Royce, which, though still headquartered in England, now operates through a horizontal global supply chain, and its CEO, a British citizen knighted by the queen, is being courted by the chancellor of Germany to help him drum up business in Russia, because one link in the Rolls-Royce supply chain happens to run through Brandenburg.

Sort that out.

From Command and Control to Collaborate and Connect

Before Colin Powell stepped down as secretary of state, I went in for an interview, which was also attended by two of his press advisers, in his seventh-floor State Department suite. I could not resist asking him about where he was when he realized the world had gone flat. He answered with one word: “Google.” Powell said that when he took over as secretary of state in 2001, and he needed some bit of information-say, the text of a UN resolution -he would call an aide and have to wait for minutes or even hours for someone to dig it up for him.

“Now I just type into Google 'UNSC Resolution 242' and up comes the text,” he said. Powell explained that with each passing year, he found himself doing more and more of his own research, at which point one of his press advisers remarked, “Yes, now he no longer comes asking for information. He already has the information. He comes asking for action.”

Powell, a former member of the AOL board, also regularly used e-mail to contact other foreign ministers and, according to one of his aides, kept up a constant instant-messaging relationship with Britain's foreign secretary, Jack Straw, at summit meetings, as if they were a couple of college students. Thanks to the cell phone and wireless technology, said Powell, no foreign minister can run and hide from him. He said he had been looking for Russia's foreign minister the previous week. First he tracked him down on his cell phone in Moscow, then on his cell phone in Iceland, and then on his cell phone in Vientiane, Laos. “We have everyone's cell phone number,” said Powell of his fellow foreign ministers.

The point I take away from all this is that when the world goes flat, hierarchies are not being leveled just by little people being able to act big. They are also being leveled by big people being able to act really small—in the sense that they are enabled to do many more things on their own. It really hit me when Powell's junior media adviser, a young woman, walked me down from his office and remarked along the way that because of e-mail, Powell could get hold of her and her boss at any hour, via their BlackBerrys-and did.

“I can't get away from the guy,'' she said jokingly of his constant e-mail instructions. But in the next breath she added that on the previous weekend, she was shopping at the mall with some friends when she got an instant message from Powell asking her to do some public affairs task. ”My friends were all impressed,“ she said. ”Little me, and I'm talking to the secretary of state!“

This is what happens when you move from a vertical (command and control) world to a much more horizontal (connect and collaborate) flat world. Your boss can do his job and your job. He can be secretary of state and his own secretary. He can give you instructions day or night. So you are never out. You are always in. Therefore, you are always on. Bosses, if they are inclined, can collaborate more directly with more of their staff than ever before-no matter who they are or where they are in the hierarchy. But staffers will also have to work much harder to be better informed than their bosses. There are a lot more conversations between bosses and staffers today that start like this: “I know that already! I Googled it myself. Now what do I do about it?”

Sort that out.

Multiple Identity Disorder

It is not only communities and companies that have multiple identities that will need sorting out in a flat world. So too will individuals. In a flat world, the tensions among our identities as consumers, employees, citizens, taxpayers, and shareholders are going to come into sharper and sharper conflict.

“In the nineteenth century,” said business consultant Michael Hammer, “the great conflict was between labor and capital. Now it is between customer and worker, and the company is the guy in the middle. The consumer turns to the company and says, 'Give me more for less.' And then companies turn to employees and say, 'If we don't give them more for less, we are in trouble. I can't guarantee you a job and a union steward can't guarantee you a job, only a customer can.'”

The New York Times reported (November 1, 2004) that Wal-Mart spent about $1.3 billion of its $256 billion in revenue in 2003 on employee health care, to insure about 537,000 people, or about 45 percent of its workforce. Wal-Mart's biggest competitor, though, Costco Wholesale, insured 96 percent of its eligible full-time or part-time employees. Costco employees become eligible for health insurance after three months working full-time or six months working part-time. At Wal-Mart, most full-time employees have to wait six months to become eligible, while part-timers are not eligible for at least two years. According to the Times, full-time employees at Wal-Mart make about $1,200 per month, or $8 per hour. Wal-Mart requires employees to cover 33 percent of the cost of their benefits, and it plans to reduce that employee contribution to 30 percent. Wal-Mart-sponsored health plans have monthly premiums for family coverage ranging as high as $264 and out-of-pocket expenses as high as $13,000 in some cases, and such medical costs make health coverage unaffordable even for many Wal-Mart employees who are covered, the Times said.

But the same article went on to say this: “If there is any place where Wal-Mart's labor costs find support, it is Wall Street, where Costco has taken a drubbing from analysts who say its labor costs are too high.” Wal-Mart has taken more fat and friction out than Costco, which has kept more in, because it feels a different obligation to its workers. Costco's pretax profit margin is only 2.7 percent of revenue, less than half Wal-Mart's margin of 5.5 percent.

The Wal-Mart shopper in all of us wants the lowest price possible, with all the middlemen, fat, and friction removed. And the Wal-Mart shareholder in us wants Wal-Mart to be relentless about removing the fat and friction in its supply chain and in its employee benefits packages, in order to fatten the company's profits. But the Wal-Mart worker in us hates the benefits and pay packages that Wal-Mart offers its starting employees. And the Wal-Mart citizen in us knows that because Wal-Mart, the biggest company in America, doesn't cover all its employees with health care, some of them will just go to the emergency ward of the local hospital and the taxpayers will end up picking up the tab. The Times reported that a survey by Georgia officials found that “more than 10,000 children of Wal-Mart employees were in the state's health program for children at an annual cost of nearly $10 million to taxpayers.” Similarly, it said, a “North Carolina hospital found that 31 percent of 1,900 patients who described themselves as Wal-Mart employees were on Medicaid, while an additional 16 percent had no insurance at all.”

In her 2004 book, Selling Women Short: The Landmark Battle for Workers' Rights at Wal-Mart, journalist Liza Featherstone followed the huge women's discrimination suit against Wal-Mart. In an interview about the book with Salon.com (November 22, 2004), she made the following important point: “American taxpayers chip in to pay for many full-time Wal-Mart employees because they usually require incremental health insurance, public housing, food stamps -there are so many ways in which Wal-Mart employees are not able to be self-sufficient. This is very ironic, because Sam Walton is embraced as the American symbol of self-sufficiency. It is really troubling and dishonest that Wal-Mart supports Republican candidates in the way that they do: 80 percent of their corporate campaign contributions go to Republicans. But Republicans tend not to support the types of public assistance programs that Wal-Mart depends on. If anything, Wal-Mart should be crusading for national health insurance. They should at least be acknowledging that because they are unable to provide these things for their employees, we should have a more general welfare state.”

As you sort out and weigh your multiple identities-consumer, employee, citizen, taxpayer, shareholder-you have to decide: Do you prefer the Wal-Mart approach or the Costco approach? This is going to be an important political issue in a flat world: Just how flat do you want corporations to be when you factor in all your different identities? Because when you take the middleman out of business, when you totally flatten your supply chain, you also take a certain element of humanity out of life.

The same question applies to government. How flat do you want government to be? How much friction would you like to see government remove, through deregulation, to make it easier for companies to compete on Planet Flat?

Said Congressman Rahm Emanuel, an Illinois Democrat who was a senior adviser to President Clinton, “When I served in the White House, we streamlined the FDA's drug approval process in response to concerns about its cumbersome nature. We took those steps with one objective in mind: to move drugs to the marketplace more quickly. The result, however, has been an increasingly cozy relationship between the FDA and the pharmaceutical industry, which has put public health at risk. The Vioxx debacle [over an anti-inflammatory drug that was found to lead to an increased risk for heart attacks and strokes] shows the extent to which drug safety has taken a backseat to speedy approval. A recent Senate hearing on Vioxx's recall revealed major deficiencies in the FDA's ability to remove dangerous drugs from the market.”

As consumers we want the cheapest drugs that the global supply chains can offer, but as citizens we want and need government to oversee and regulate that supply chain, even if it means preserving or adding friction.

Sort that out.

Who Owns What?

Something else is absolutely going to have to be sorted out in a flat world: Who owns what? How do we build legal barriers to protect an innovator's intellectual property so he or she can reap its financial benefits and plow those profits into a new invention? And from the other side, how do we keep walls low enough so that we encourage the sharing of intellectual property, which is required more and more to do cutting-edge innovation?

“The world is decidedly not flat when it comes to uniform treatment of intellectual property,” said Craig Mundie, Microsoft's chief technology officer. It is wonderful, he noted, to have a world where a single innovator can summon so many resources by himself or herself, assemble a team of partners from around the flat world, and make a real breakthrough with some product or service. But what does that wonderful innovative engineer do, asked Mundie, “when someone else uses the same flat-world platform and tools to clone and distribute his wonderful new product?” This happens in the world of software, music, and pharma-ceuticals every day. And the technology is reaching a point now where “you should assume that there isn't anything that can't be counterfeited quickly”-from Microsoft Word to airplane parts, he added. The flatter the world gets, the more we are going to need a system of global governance that keeps up with all the new legal and illegal forms of collaboration.

We can also see this in the case of patent law as it has evolved inside the United States. Companies can do one of three things with an innovation. They can patent the widget they invent and sell it themselves; they can patent it and license it to someone else to manufacture; and they can patent it and cross-license with several other companies so that they all have freedom of action to make a product-like a PC-that comes from melding many different patents. American patent law is technically neutral on this. But the way established case law has evolved, experts tell me, it is decidedly biased against cross-licensing and other arrangements that encourage collaboration or freedom of action for as many players as possible; it is more focused on protecting the rights of individual firms to manufacture their own patents. In a flat world, companies need a patent system that encourages both. The more your legal structure fosters cross-licensing and standards, the more collaborative innovation you will get. The PC is the product of a lot of cross-licensing between the company that had the patent on the cursor and the company that had the patent on the mouse and the screen.

The free-software person in all of us wants no patent laws. But the innovator in all of us wants a global regime that protects against intellectual property piracy. The innovator in us also wants patent laws that encourage cross-licensing with companies that are ready to play by the rules. “Who owns what?” is sure to emerge as one of the most contentious political and geopolitical questions in a flat world-especially if more and more American companies start feeling ripped off by more and more Chinese companies. If you are in the business of selling words, music, or pharmaceuticals and you are not worried about protecting your intellectual property, you are not paying attention.

And while you are sorting that out, sort this out as well. On November 13, 2004, Lance Cpl. Justin M. Ellsworth, twenty, was killed by a roadside bomb during a foot patrol in Iraq. On December 21, 2004, the Associated Press reported that his family was demanding that Yahoo! give them the password for their deceased son's e-mail account so they could have access to all his e-mail, including notes to and from others. “I want to be able to remember him in his words. I know he thought he was doing what he needed to do. I want to have that for the future,” John Ellsworth, Justin's father, told the AP. “It's the last thing I have of my son.” We are moving into a world where more and more communication is in the form of bits traveling through cyberspace and stored on servers located all over the world. No government controls this cyber-realm. So the question is: Who owns your bits when you die? The AP reported that Yahoo! denied the Ellsworth family their son's password, citing the fact that Yahoo! policy calls for erasing all accounts that are inactive for ninety days and the fact that all Yahoo! users agree at sign-up that rights to a member's ID or account contents terminate upon death. “While we sympathize with any grieving family, Yahoo! accounts and any contents therein are nontransferable” even after death, Karen Mahon, a Yahoo! spokeswoman told the AP. As we get rid of more and more paper and communicate through more and more digitized formats, you better sort out before you die, and include in your will, to whom, if anyone, you want to leave your bits. This is very real. I stored many chapters of this book in my AOL account, feeling it would be safest in cyberspace. If something had happened to me during my writing, my family and publisher would have had to sue AOL to try to get this text. Somebody, please, sort all this out.

Death of the Salesmen

In the fall of 2004, I went out to Minneapolis to visit my mother and had three world-is-flat encounters right in a row. First, before I left home in Washington, I dialed 411 -directory assistance-to try to get a friend's phone number in Minneapolis. A computer answered and a computerized voice asked me to pronounce the name of the person whose number I was requesting. For whatever reason, I could not get the computer to hear me correctly, and it kept saying back to me in a computerized voice, “Did you say...?” I kept having to say the family name in a voice that masked my exasperation (otherwise the computer never would have understood me). “No, I didn't say that... I said...” Eventually, I was connected to an operator, but I did not enjoy this friction-free encounter with directory information. I craved the friction of another human being. It may be cheaper and more efficient to have a computer dispense phone numbers, but for me it brought only frustration.

When I arrived in Minneapolis, I had dinner with family friends, one of whom has spent his life working as a wholesaler in the Midwest, selling goods to the biggest retailers in the region. He is a natural salesman. When I asked him what was new, he sighed and said that business just wasn't what it used to be. Everything was now being sold at 1 percent margins, he explained. No problem. He was selling mostly commodity items so that, given his volumes, he could handle the slim profit margin. But what bothered him, he mentioned, was the fact that he no longer had human contact with some of his biggest accounts. Even commodities and low-cost goods have certain differentiating elements that need to be sold and highlighted. “Everything is by e-mail now,” he said. “I am dealing with a young kid at [one of the biggest retailers in the nation], and he says, 'Just e-mail me your bid.' I've never met him. Half the time he doesn't get back to me. I am not sure how to deal with him... In the old days, I used to stop by the office, give the buyers a few Vikings tickets. We were friends... Tommy, all anyone cares about today is price.”

Fortunately, my friend is a successful businessman and has a range of enterprises. But as I reflected later on what he was saying, I was drawn back to that scene in Death of a Salesman in which Willy Loman says that, unlike his colleague Charley, he intends to be “well liked.” He tells his sons that in business and in life, character, personality, and human connections are more important than smarts. Says Willy, “The man who makes an appearance in the business world, the man who creates personal interest, is the man who gets ahead. Be liked and you will never want.”

Not when the world goes flat. It's hard to create a human bond with e-mail and streaming Internet. The next day, I had dinner with my friend Ken Greer, who runs a media company that I discuss in greater detail later. Ken had a similar lament: So many contracts were going these days to the advertising firms that were selling just numbers, not creative instinct. Then Ken said something that really hit home with me: “It is like they have cut all the fat out of the business” and turned everything into a numbers game. “But fat is what gives meat its taste,” Ken added. “The leanest cuts of meat don't taste very good. You want it marbled with at least a little fat.”

The flattening process relentlessly trims the fat out of business and life, but, as Ken noted, fat is what gives life taste and texture. Fat is also what keeps us warm.

Yes, the consumer in us wants Wal-Mart prices, with all the fat gone. But the employee in us wants a little fat left on the bone, the way Costco does it, so that it can offer health care to almost all its employees, rather than just less than half of them, as Wal-Mart does. But the shareholder in us wants Wal-Mart's profit margins, not Costco's. Yet the citizen in us wants Costco's benefits, rather than Wal-Mart's, because the difference ultimately may have to be paid for by society. The consumer in me wants lower phone bills, but the human being in me also wants to speak to an operator when I call 411. Yes, the reader in me loves to surf the Net and read the bloggers, but the citizen in me also wishes that some of those bloggers had an editor, a middleman, to tell them to check some of their facts one more time before they pressed the Send button and told the whole world that something was wrong or unfair.

Given these conflicting emotions and pressures, there is potential here for American politics to get completely reshuffled-with workers and corporate interests realigning themselves into different parties. Think about it: Social conservatives from the right wing of the Republican party, who do not like globalization or closer integration with the world because it brings too many foreigners and foreign cultural mores into America, might align themselves with unions from the left wing of the Democratic Party, who don't like globalization for the way it facilitates the outsourcing and offshoring of jobs. They might be called the Wall Party and militate for more friction and fat everywhere. Let's face it: Republican cultural conservatives have much more in common with the steelworkers of Youngstown, Ohio, the farmers of rural China, and the mullahs of central Saudi Arabia, who would also like more walls, than they do with investment bankers on Wall Street or service workers linked to the global economy in Palo Alto, who have been enriched by the flattening of the world.

Meanwhile, the business wing of the Republican Party, which believes in free trade, deregulation, more integration, and lower taxes-everything that would flatten the world even more-may end up aligning itself with the social liberals of the Democratic Party, many of whom are East Coast or West Coast global service industry workers. They might also be joined by Hollywood and other entertainment workers. All of them are huge beneficiaries of the flat world. They might be called the Web Party, whose main platform would be to promote more global integration. Many residents of Manhattan and Palo Alto have more interests in common with the people of Shanghai and Bangalore than they do with the residents of Youngstown or Topeka. In short, in a flat world, we are likely to see many social liberals, white-collar global service industry workers, and Wall Street types driven together, and many social conservatives, white-collar local service industry workers, and labor unions driven together.

The Passion of the Christ audience will be in the same trench with the Teamsters and the AFL-CIO, while the Hollywood and Wall Street liberals and the You've Got Mail crowd will be in the same trench with the high-tech workers of Silicon Valley and the global service providers of Manhattan and San Francisco. It will be Mel Gibson and Jimmy Hoffa Jr. versus Bill Gates and Meg Ryan.

More and more, politics in the flat world will consist of asking which values, frictions, and fats are worth preserving-which should, in Marx's language, be kept solid-and which must be left to melt away into the air. Countries, companies, and individuals will be able to give intelligent answers to these questions only if they understand the real nature and texture of the global playing field and how different it is from the one that existed in the Cold War era and before. And countries, companies, and individuals will be able to make sound political choices only if they fully appreciate the flattened playing field and understand all the new tools now available to them for collaborating and competing on it. I hope this book will provide a nuanced framework for this hugely important political debate and the great sorting out that is just around the corner.

To that end, the next three sections look at how the flattening of the world and the triple convergence will affect Americans, developing countries, and companies.

Brace yourself: You are now about to enter the flat world.

America and the Flat World

FIVE: America and Free Trade

Is Ricardo Still Right?

As an American who has always believed in the merits of free trade, I had an important question to answer after my India trip: Should I still believe in free trade in a fiat world? Here was an issue that needed sorting out immediately-not only because it was becoming a hot issue in the presidential campaign of 2004 but also because my whole view of the flat world would depend on my view of free trade. I know that free trade won't necessarily benefit every American, and that our society will have to help those who are harmed by it. But for me the key question was: Will free trade benefit America as a whole when the world becomes so flat and so many more people can collaborate, and compete, with my kids? It seems that so many jobs are going to be up for grabs. Wouldn't individual Americans be better off if our government erected some walls and banned some outsourcing and offshoring?

I first wrestled with this issue while filming the Discovery Times documentary in Bangalore. One day we went to the Infosys campus around five p.m. -just when the Infosys call-center workers were flooding into the grounds for the overnight shift on foot, minibus, and motor scooter, while many of the more advanced engineers were leaving at the end of the day shift. The crew and I were standing at the gate observing this river of educated young people flowing in and out, many in animated conversation. They all looked as if they had scored 1,600 on their SATs, and I felt a real mind-eye split overtaking me.

My mind just kept telling me, “Ricardo is right, Ricardo is right, Ricardo is right.” David Ricardo (1772-1823) was the English economist who developed the free-trade theory of comparative advantage, which stipulates that if each nation specializes in the production of goods in which it has a comparative cost advantage and then trades with other nations for the goods in which they specialize, there will be an overall gain in trade, and overall income levels should rise in each trading country.