Authors: Thomas L. Friedman
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.”
If you follow the evolution of supply chains, added Neland, you see the prosperity and stability they promoted first in Japan, and then in Korea and Taiwan, and now in Malaysia, Singapore, the Philippines, Thailand, and Indonesia. Once countries get embedded in these global supply chains, “they feel part of something much bigger than their own businesses,” he said. Osamu Watanabe, the CEO of the Japan External Trade Organization (JETRO), was explaining to me one afternoon in Tokyo how Japanese companies were moving vast amounts of low- and middle-range technical work and manufacturing to China, doing the basic fabrication there, and then bringing it back to Japan for final assembly. Japan was doing this despite a bitter legacy of mistrust between the two countries, which was intensified by the Japanese invasion of China in the last century. Historically, he noted, a strong Japan and a strong China have had a hard time coexisting. But not today, at least not for the moment. Why not? I asked. The reason you can have a strong Japan and a strong China at the same time, he said, “is because of the supply chain.” It is a win-win for both.
Obviously, since Iraq, Syria, south Lebanon, North Korea, Pakistan, Afghanistan, and Iran are not part of any major global supply chains, all of them remain hot spots that could explode at any time and slow or reverse the flattening of the world. As my own notebook story attests, the most important test case of the Dell Theory of Conflict Prevention is the situation between China and Taiwan-since both are deeply embedded in several of the world's most important computer, consumer electronics, and, increasingly, software supply chains. The vast majority of computer components for every major company comes from coastal China, Taiwan, and East Asia. In addition, Taiwan alone has more than $100 billion in investments in mainland China today, and Taiwanese experts run many of the cutting-edge Chinese high-tech manufacturing companies.
It is no wonder that Craig Addison, the former editor of Electronic Business Asia magazine, wrote an essay for the International Herald Tribune (September 29, 2000), headlined “A 'Silicon Shield' Protects Taiwan from China.” He argued that “Silicon-based products, such as computers and networking systems, form the basis of the digital economies in the United States, Japan and other developed nations. In the past decade, Taiwan has become the third-largest information technology hardware producer after the United States and Japan. Military aggression by China against Taiwan would cut off a large portion of the world's supply of these products... Such a development would wipe trillions of dollars off the market value of technology companies listed in the United States, Japan and Europe.” Even if China's leaders, like former president Jiang Zemin, who was once minister of electronics, lose sight of how integrated China and Taiwan are in the world's computer supply chain, they need only ask their kids for an update. Jiang Zemin's son, Jiang Mianheng, wrote Addison, “is a partner in a wafer fabrication project in Shanghai with Winston Wang of Taiwan's Grace T.H.W. Group.” And it is not just Taiwanese. Hundreds of big American tech companies now have R & D operations in China; a war that disrupted them could lead not only to the companies moving their plants elsewhere but also to a significant loss of R & D investment in China, which the Beijing government has been betting on to advance its development. Such a war could also, depending on how it started, trigger a widespread American boycott of Chinese goods-if China were to snuff out the Taiwanese democracy-which would lead to serious economic turmoil inside China.
The Dell Theory had its first real test in December 2004, when Taiwan held parliamentary elections. President Chen Shui-bian's pro-independence Democratic Progressive Party was expected to win the legislative runoff over the main opposition Nationalist Party, which favored closer ties with Beijing. Chen framed the election as a popular referendum on his proposal to write a new constitution that would formally enshrine Taiwan's independence, ending the purposely ambiguous status quo. Had Chen won and moved ahead on his agenda to make Taiwan its own motherland, as opposed to maintaining the status quo fiction that it is a province of the mainland, it could have led to a Chinese military assault on Taiwan. Everyone in the region was holding his or her breath. And what happened? Motherboards won over motherland. A majority of Taiwanese voted against the pro-independence governing party legislative candidates, ensuring that the DPP would not have a majority in parliament. I believe the message Taiwanese voters were sending was not that they never want Taiwan to be independent. It was that they do not want to upset the status quo right now, which has been so beneficial to so many Taiwanese. The voters seemed to understand clearly how interwoven they had become with the mainland, and they wisely opted to maintain their de facto independence rather than force de jure independence, which might have triggered a Chinese invasion and a very uncertain future.
Warning: What I said when I put forth the McDonald's theory, I would repeat even more strenuously with the Dell Theory: It does not make wars obsolete. And it does not guarantee that governments will not engage in wars of choice, even governments that are part of major supply chains. To suggest so would be naive. It guarantees only that governments whose countries are enmeshed in global supply chains will have to think three times, not just twice, about engaging in anything but a war of self-defense. And if they choose to go to war anyway, the price they will pay will be ten times higher than it was a decade ago and probably ten times higher than whatever the leaders of that country think. It is one thing to lose your McDonald's. It's quite another to fight a war that costs you your place in a twenty-first-century supply chain that may not come back around for a long time.
While the biggest test case of the Dell Theory is China versus Taiwan, the fact is that the Dell Theory has already proved itself to some degree in the case of India and Pakistan, the context in which I first started to think about it. I happened to be in India in 2002, when its just-in-time services supply chains ran into some very old-time geopolitics-and the supply chain won. In the case of India and Pakistan, the Dell Theory was working on only one party-India-but it still had a major impact. India is to the world's knowledge and service supply chain what China and Taiwan are to the manufacturing ones. By now readers of this book know all the highlights: General Electric's biggest research center outside the United States is in Bangalore, with seventeen hundred Indian engineers, designers, and scientists. The brain chips for many brand-name cell phones are designed in Bangalore. Renting a car from Avis online? It's managed in Bangalore. Tracing your lost luggage on Delta or British Airways is done from Bangalore, and the backroom accounting and computer maintenance for scores of global firms are done from Bangalore, Mumbai, Chennai, and other major Indian cities. Here's what happened: On May 31, 2002, State Department spokesman Richard Boucher issued a travel advisory saying, “We urge American citizens currently in India to depart the country,” because the prospect of a nuclear exchange with Pakistan was becoming very real. Both nations were massing troops on their borders, intelligence reports were suggesting that they both might be dusting off their nuclear warheads, and CNN was flashing images of people flooding out of India. The global American firms that had moved their back rooms and R & D operations to Bangalore were deeply unnerved.
“I was actually surfing on the Web, and I saw a travel advisory come up on India on a Friday evening/' said Vivek Paul, president of Wipro, which manages backroom operations from India of many American multinationals. ”As soon as I saw that, I said, 'Oh my gosh, every customer that we have is going to have a million questions on this.' It was the Friday before a long weekend, so over the weekend we at Wipro developed a fail-safe business continuity plan for all of our customers.“ While Wipro's customers were pleased to see how on top of things the company was, many of them were nevertheless rattled. This was not in the plan when they decided to outsource mission-critical research and operations to India. Said Paul, ”I had a CIO from one of our big American clients send me an e-mail saying, I am now spending a lot of time looking for alternative sources to India. I don't think you want me doing that, and I don't want to be doing it.' I immediately forwarded his message to the Indian ambassador in Washington and told him to get it to the right person.“ Paul would not tell me what company it was, but I have confirmed through diplomatic sources that it was United Technologies. And plenty of others, like American Express and General Electric, with back rooms in Bangalore, had to have been equally worried.
For many global companies, “the main heart of their business is now supported here,” said N. Krishnakumar, president of MindTree, another leading Indian knowledge outsourcing firm based in Bangalore. “It can cause chaos if there is a disruption.” While not trying to meddle in foreign affairs, he added, “What we explained to our government, through the Confederation of Indian Industry, is that providing a stable, predictable operating environment is now the key to India's development.” This was a real education for India's elderly leaders in New Delhi, who had not fully absorbed how critical India had become to the world's knowledge supply chain. When you are managing vital backroom operations for American Express or General Electric or Avis, or are responsible for tracing all the lost luggage on British Airways or Delta, you cannot take a month, a week, or even a day off for war without causing major disruptions for those companies. Once those companies have made a commitment to outsource business operations or research to India, they expect it to stay there. That is a major commitment. And if geopolitics causes a serious disruption, they will leave, and they will not come back very easily. When you lose this kind of service trade, you can lose it for good.