McDonald's and Dell - Beyond Burgers And Computers

Thomas Friedman's The World is Flat is easily one of the best books of '05. While the whole book is insightful, opinionated and punchy, its also very comprehensible and relevant, for, its about the Globalized world in the 21st century. The theme of the book as such are the forces that are flattening our world and the effects that they will have, in the context of today's globalized world. The explosion of advanced technologies now means that suddenly knowledge-pools and resources have connected people all over the planet leveling the playing field as never before, so that each of us is potentially an equal and a competitor of the other.

One of the insights that Friedman provides in the book is extremely interesting and worth understanding in quite an obvious way. He puts forth two compelling theories called The Golden Arches Theory of Conflict Prevention and The Dell Theory of Conflict Prevention.

One of the more traditional forces that could stop or even reverse the flattening of the world is a good old-fashioned war that could affect the world and destroy economies of countries. China may have had enough of Taiwan trying to become an independent state and may decide to set things straight once and for all; North Korea may decide to use nuclear weapons against South Korea or Japan, out of fear or insanity; Israel and Iran may have a go at each other; or India and Pakistan may finally nuke it out. Any of these geopolitical situations could erupt at any time.

These conflicts could be moderated or influenced by a new form of collaboration fostered and demanded by the flat world, Supply-chaining. The flattening of the world is too young for us to draw any definitive conclusions. But as the world flattens, what will be interesting to watch is the interplay between the traditional global threats and the emerging global supply chains. Like the interplay between old-time threats (China versus Taiwan) and just-in-time supply chains (China plus Taiwan).

The extent to which countries tie their economies and futures to global integration and trade would act as a restraint on going to war. No two countries that both have McDonald's have ever fought a war against each other since each got its McDonald's. However, border skirmishes and civil wars don't count here. Friedman calls this the Golden Arches Theory of Conflict Prevention. According to the Golden Arches theory, 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 its people didn't like to fight wars anymore, they would rather stand in line for their burgers! As countries got woven into the fabric of global trade and rising standards of living, which is symbolized by the network of McDonald's franchises, the cost of war became prohibitively high for both the victor and the vanquished.

The Golden Arches theory held up pretty well until almost every country in the world got it's own McDonald's, except rogues like North Korea, Iran and Iraq. But now there was need for a revision and Friedman offers The Dell Theory of Conflict Prevention. According to this theory, 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 rising standard of living that McDonald's symbolized. The Dell theory stipulates that no two countries that are both part of a major global supply chain, like that of Dell, will ever fight a war against each other as long as they are both part of the same supply chain. Because people involved in these supply chains don't want to fight wars anymore, they want to make just-in-time deliveries and enjoy the better standard of living that follows.

Michael Dell himself has a good feel of this theory. He says that the countries now realize the risk premium they have and want to protect their equity. The people have tasted economic independence, better lifestyle, good lives for their children; and they don't want to give it up. Any war or prolonged instability in any of these countries will have a huge chilling effect on their economic progress and will undo a lot of good work. These countries cannot take time off for war without disrupting industries and economies around the world and thereby risk losing their place in that supply chain for a very long time to come. For a country with little natural resources it would be a big loss, because being part of such a global supply chain is like striking oil that never runs out, unless someone throws concrete in those wells.

Japanese technology companies are moving a lot of low-range manufacturing work to China despite a legacy of mistrust between the two countries. Historically a strong China and a strong Japan have had problems co-existing, but not anymore as it's a win-win situation now. China and Taiwan have had problems between them, but now both of them are deeply connected in many computer, electronics and software supply chains. The vast majority of the world's computer components comes from coastal China, Taiwan and East Asia. Taiwan has over $100b invested in mainland China and its exports run many high-tech manufacturing companies in China. So a Silicon Shield protects Taiwan from China. Taiwan has become the third-largest computer hardware manufacturer after the United States (US) and Japan. Any military aggression by China would cut off a large portion of the world's supply of computer hardware wiping trillions of dollars off the market value of technology companies listed in the US, Europe, Japan and elsewhere. Even if the politicians don't realize this, their kids can remind them. Former President Jiang Zemin's son is a partner in a wafer fabrication firm in Shanghai with a Taiwanese group. And its not just Taiwan that would be hard up in such a situation, even China would suffer with huge investments moving out of the country to other more stable parts of the world.

In December '04, Taiwan had its parliamentary elections and the two main contenders were pro-independence Democratic Progressive Party and the opposition Nationalist Party, which favored better relations with China. The elections turned out to be a virtual referendum on whether Taiwan should declare itself independent from China ending the deliberately ambiguous status quo. Eventually, motherboards won over motherland. The Taiwanese voted against the pro-independence party thereby opting for de facto independence over de jure independence and avoiding an uncertain future.

There is a caveat to both the Golden Arches and the Dell theories though, they do not guarantee there will be no more wars between these countries. But what they will guarantee is that the governments will think many times over before starting a war for any reason other than self-defense. It is one thing to lose a diet of the McDonald's burger, but its quite another to lose a position in the global supply chain which may not come back for a very long time.

Another case where the Dell Theory proved itself was that of India and Pakistan in '02. But in this case, the theory was working only on the Indian side as Pakistan wasn't (and still isn't) integrated into the world economy in a big way. India is a key member of the world's knowledge and services supply chain; General Electric's biggest research center outside the US is in Bangalore; chips for many major cell-phone brands are designed in Bangalore; tracing lost airline luggage and processing work for major car-rentals is done in Bangalore. India is the back-office for many global accounting and computer maintenance companies. In May '02, the US State Department issued a travel advisory urging American citizens to leave the region as the prospect of a nuclear exchange was very real. Both India and Pakistan were massing armies on their borders and the American companies that had moved their operations to India were unnerved. Many of India's information technology firms explained to their government that a stable and a predictable operating environment is the key to India's development. This situation was a real education to India's elderly leaders who had not fully comprehended how critical India had become to the world's knowledge supply chain. Eventually, India acted with a sense of responsibility, mostly with a desire for self-preservation in today's global economy. India opted for a better future over more territory and avoided an ego-satisfying war with Pakistan. Even the US needs to keep this reality in mind. Although one should not advocate shipping jobs to India just to maintain peace, but if this happens driven by its own economic logic, then it will have a net positive geopolitical effect. India would still do whatever it takes in self-defense, but only if imposed by the reckless behavior of other nations like Pakistan.

Unfortunately, the forces that flatten the world not always lead to good things. Friedman explains how the Al-Qaeda is using the same flattening forces of the globalized world to its advantage and to spread terror. The new paradigm in information diffusion, the Internet, will make no distinction in transmitting irrationality as against rationality. The ease of reaching people and propagating fundamentalist ideologies has helped terrorist organizations in recruiting suicide bombers through a well-oiled supply chain similar to the global supply chains discussed earlier. Investigations have revealed that Al-Qaeda used the Internet in a big way in planning and coordinating the 9/11 attacks. Much of the fund raising for donations to such causes also happens on the Internet though decoy organizations. Hell hath no fury like a terrorist with a satellite dish and an interactive website.

According to the Bible, the Tower of Babel was a tower built by a united humanity in order to reach the heavens. This was heresy and so to prevent the humans from succeeding, God confused them by making each of them speak a different language, so they couldn't communicate with one another and they did not succeed. After that, those people moved away to different parts of the world. If we do something similar today to prevent communication between all people, to prevent such ill-effects of globalization and technology, we would be doing so at our own peril. We must use the new ability to communicate and collaborate for the right ends. If building a tower to usurp God's power was megalomaniacal, Osama Bin Laden's attempt to flatten the towers that symbolize the globalized world is also megalomaniacal. Collaboration must be used to achieve mankind's full potential.

It was constructive collaboration among other things that prevented the Indo-Pak nuclear crisis from precipitating in '02. That cease-fire was brought upon not by General Powell but by General Electric. We bring good things to life.