History of the shipping container, and how it affected the world economy. Also for ambitious entrepreneurs, Malcom McLean is a damn good role model. Great read.
Inadequate port, road, and rail infrastructure can cause economic harm by raising the cost of moving freight.
The intricate movements required to service a vessel is choreographed by a computer long before the ship arrives.
Computers, and the vessel planners who use them, determine the order in which the containers are to be discharged, to speed the process without destabilizing the ship.
The actions of the container cranes and the equipment in the yard all are programmed in advance.
New technology, by itself, has little economic benefit.
Innovations in their early stages are usually exceedingly ill-adapted to the wide range of more specialised uses to which they are eventually put.
The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use - and most critically, from the organizational changes through which businesses reshape themselves to take advantage of the new technology.
Malcom McLean was not one to pass up an opportunity for profit. Now, an obvious one awaited. He had six ships, three large and three small, sailing between the U.S. West Coast and Vietnam. Westbound, they were loaded nearly full with military freight. East-bound, they carried little but empty containers. The rates paid by the U.S. government for the westbound haul covered all costs for the entire voyage. If Sea-Land could find freight to carry from the Pacific back to the United States, the revenue would be almost entirely profit. Thinking the situation through, McLean had another of his brainstorms: why not stop in Japan? Japan was the world’s fastest-growing economy during the 1960s.
Ship lines make decisions based entirely on which combination of vessel operating costs, port charges, and ground transport rates would lead to the lowest total cost per box.
This new maritime geography brought decidedly non-traditional trade patterns.
Japanese cargo headed for San Francisco Bay might well be imported through Seattle rather than Oakland, with the ship line’s saving of one day’s steaming time in each direction outweighing the cost of putting some of the cargo on a train from Seattle to California.
Ports such as Tokyo and London, with populous markets close at hand, were not guaranteed to prosper.
They moved traffic to Seattle. Seattle, in turn, lost out in 1985, when Tacoma, a few miles south on Puget Sound, built a $44 million terminal and lured Sea-Land away.
Inevitably, much of the investment in port facilities went to waste
Margaret Thatcher broke the ice by selling off twenty-one ports to a private company in 1981.
Governments retreated to the role of landlords, renting out waterfront land to private companies.
By the end of the twentieth century, nearly half the world’s trade in containers would be passing through privately controlled ports.
Instead of rising from $28 to $50 a barrel, as McLean had expected, oil prices collapsed to $14 in 1985.
After posting a $62 million profit in 1984, McLean Industries reported a $67 million loss in 1985, suspended all service and filed for bankruptcy.
What happened to make shipping cheaper?
And why did it start to happen around 1977 rather than with the onset of international container shipping a decade earlier?
The answers have to do with a group that has received little attention in these pages: shippers.
Containerization required the buyers of transportation to learn a whole new way of thinking about managing their freight costs.
As they became more knowledgeable, more sophisticated, and more organized, they began to drive down the cost of shipping.
It was in Australia, where farmers were almost totally dependent on exports, that shippers began to flex their muscles.
In 1971, four groups representing sheep farmers and wool buyers formed a joint organization to oppose rises in freight rates.
A year later, rubber traders in Singapore responded to conference surcharges by finding a nonconference carrier to move their product to Europe for 40 percent less.
Nonconference carriers had always played a role in the major trades, but a small one. The biggest shippers rarely used them.
Independents, as the nonconference lines were known, offered discounts of 10 to 20 percent from conference rates, but most of them were too small to provide frequent service on the routes they plied.
If a shipper used an independent carrier and then required service that the independent could not provide, it would end up paying a conference line more than if it had signed an agreement with the conference in the first place.
Shippers that had a highly predictable flow of cargo could handle that risk.
For manufacturers, who might have a sudden need to ship an unanticipated order, sticking with the large conference carriers, even at higher cost, was the safer strategy.
Shippers deserted the conference carriers in droves.
The cost of shipping a 40-foot box from Europe to New York, $2,000 in the middle of 1979, was below $1,000 by the summer of 1980.
The bankruptcy of the Penn Central, the largest railroad in the United States. The Penn Central’s failure, followed in short order by a half dozen other rail bankruptcies, drew attention to the regulations that kept the railroads from adapting to truck competition.
The container became a poster child for the inefficiency caused by outdated regulation.
The basic concept of the container was that cargo could move seamlessly among trains, trucks, and ships.
Two decades after Malcom McLean’s first containership, though, container shipping was anything but seamless.
Deregulation changed everything.
In two separate laws passed in 1980, Congress freed interstate truckers to carry almost anything almost anywhere at whatever rates they could negotiate.
The ICC lost its role approving rail rates.
The long-standing principle that all customers should pay the same price to transport the same product gave way to a system that yielded huge discounts for the biggest customers.
By 1988, U.S. shippers - and, ultimately, U.S. consumers - saved nearly one-sixth of their total land freight bill.
Freight rates from Asia to North America had fallen 40 to 60 percent because of the container.
Companies found that just-in-time required them to deal with transportation in a very different way.
No more would manufacturers offer a load or two to some truck line’s hungry salesman.
Now, they wanted large-scale relationships with a much smaller number of carriers able to meet stringent requirements for on-time delivery.
Customers demanded written contracts that imposed penalties for delays.
Even shipments from another continent were expected to arrive on schedule.
Scheduling production, storage, transportation, and delivery - had become a routine business function, and not just for manufacturers.
Retailers discovered that they could manage their own supply chains, cutting out the wholesalers that had stood between manufacturers and consumers.
The improvement in logistics shows up statistically in reduced inventory levels. Inventories are a cost.
In 2014, inventories in the United States were perhaps $1.2 trillion lower than they would have been had they stayed at the level of the 1980s, relative to sales.
Assume that the money needed to finance those inventories would have been borrowed at, say, 8 percent, and inventory reductions saved U.S. businesses roughly $100 billion per year.
The majority of the metal boxes moving around the world hold not televisions and dresses, but industrial products such as synthetic resins, engine parts, wastepaper, screws.
The Pacific Rim became the world’s workshop for consumer goods, in good part, because large ports for containers gave it some of the world’s lowest shipping costs.
Conversely, African countries with inefficient ports and little containership service are at such a transport-cost disadvantage that even rock-bottom labor costs will not attract investment in manufacturing.
Containerization did not create geographical disadvantage, but it has arguably made it a more serious problem.
It cost $2,500 to ship a container from Baltimore, on the U.S. Atlantic Coast, to Durban, in South Africa - and $7,500 more to haul it by road the 215 miles from Durban to Maseru, in Lesotho.
In 2014, 46 percent of world container shipments moved through just 20 ports,
Only the biggest ports are worth a time-consuming stop.
If only the port at Dar es Salaam had been as efficient as the nearby port at Mombasa, in Kenya, the average Tanzanian family in 2012 would have saved a stunning 8.5 percent of its annual expenses
As vessels grew larger, fewer came to call.
Where once a terminal might have serviced a steady stream of smaller ships, now it might see an extremely large containership only once a week, leaving costly infrastructure unused for days at a time.
Ports began to arise in places miles from the sea. Called logistics clusters or freight villages, these built-from-scratch complexes centered on rail yards, river ports, or even airports.
With several distribution centers at a single location, often owned by a single developer, a logistics cluster could support better transportation infrastructure and more frequent service than any single distribution center could have hoped for.
The economic importance of the logistics center concept, though, lay in the fact that many of those distribution centers performed work once considered to be in the manufacturing sector, processing goods before final delivery to customers rather than merely storing them.
Workers in a modern building received pharmaceuticals made abroad, stored them in temperature-controlled rooms, and then, as orders arrived, assembled them in individual consumer packages with whatever information labels, warnings, and price tags were appropriate for Colombia or Brazil.
This work no longer needed to be done at the pharmaceutical plant.
Dubai announced plans for a containerport in a village called Jebel Ali, a few miles to the southwest. The lack of a natural harbor was no obstacle: within a few years, Jebel Ali would be the largest manmade harbor in the world.
Saudi Arabia was flush with cash but lacking a modern port to handle the consumer goods that were flooding in.
Dubai quickly filled that niche.
Building on that small success, the government created a free trade zone in 1985, enabling shippers to bring merchandise into the country, store it taxfree in warehouses near the port, and then ship it onward. That move turned Jebel Ali from an import destination into a hub.
Its ascent was aided by a reputed lack of corruption as well as a reputation for efficiency. In part because it had no labor unions to deal with, Jebel Ali ranked near the very top among the world’s ports in the average number of container moves per ship per hour in 2013, and its computers allowed 9,000 over-the-road trucks to deliver and pick up containers each day with little delay.
The Jebel Ali containerport helped remake Dubai’s economy.
Dubai was an improbable entry into the ranks of the world’s largest ports. Its location, well inside the entrance to the Persian Gulf, is less than ideal, forcing vessels headed from China and Southeast Asia to the Suez Canal to steam well out of their way. It offers no natural harbor.
Instead, with careful management and a very large amount of investment, the container enabled a small sheikdom on the edge of the desert to embed itself as a crucial link in supply chains stretching around the world.