The Shipping Container Revolution

In late December 2013, Bill Gates posted a list of his Best Books of 2013, and featured The Box by Marc Levinson as one of his selections:

You might think you don’t want to read a whole book about shipping containers. And Levinson is pretty self-aware about what an unusual topic he chose. But he makes a good case that the move to containerized shipping had an enormous impact on the global economy and changed the way the world does business. And he turns it into a very readable narrative. I won’t look at a cargo ship in quite the same way again.

His recommendation intrigued me to order this book, read it and share with you.

As with any innovation, the ascent of containerization was faced with fierce opposition:

Powerful labor leaders pulled out all the stops to block its ascent, triggering strikes in dozens of harbors. Some ports spent heavily to promote it, while others spent huge sums for traditional piers and warehouses in the vain hope that the container would prove a passing fad. Governments reacted with confusion, trying to figure out how to capture its benefits without disturbing the profits, jobs, and social arrangements that were tied to the status quo. Even seemingly simple matters, such as the design of the steel fitting that allows almost any crane in any port to lift almost any container, were settled only after years of contention. In the end, it took a major war, the United States’ painful campaign in Vietnam, to prove the merit of this revolutionary approach to moving freight.

The impact of containerization was not merely one of more economic transport, it had deeper reaching impact on logistics and enabled other innovations such as just-in-time manufacturing:

Transport efficiencies, though, hardly begin to capture the economic impact of containerization. The container not only lowered freight bills, it saved time. Quicker handling and less time in storage translated to faster transit from manufacturer to customer, reducing the cost of financing inventories sitting unproductively on railway sidings or in pierside warehouses awaiting a ship. The container, combined with the computer, made it practical for companies like Toyota and Honda to develop just-in-time manufacturing, in which a supplier makes the goods its customer wants only as the customer needs them and then ships them, in containers, to arrive at a specified time. Such precision, unimaginable before the container, has led to massive reductions in manufacturers’ inventories and correspondingly huge cost savings. Retailers have applied those same lessons, using careful logistics management to squeeze out billions of dollars of costs.

Containerization also developed a strong feedback loop with global trade growth. The more efficient transport became, the more the volume of international trade rose.

Some scholars have argued that reductions in transport costs are at best marginal improvements that have had negligible effects on trade flows. This book disputes that view. In the decade after the container first came into international use, in 1966, the volume of international trade in manufactured goods grew more than twice as fast as the volume of global manufacturing production, and two and a half times as fast as global economic output. Something was accelerating the growth of trade even though the economic expansion that normally stimulates trade was weak. Something was driving a vast increase in international commerce in manufactured goods even though oil shocks were making the world economy sluggish. While attributing the vast changes in the world economy to a single cause would be foolhardy, we should not dismiss out of hand the possibility that the extremely sharp drop in freight costs played a major role in increasing the integration of the global economy.

Another consequence of containerization and perhaps the deepest reaching, is as an enabler of globalization – more specifically decoupling of economic activity from national boundaries:

The third intellectual stream feeding into this book is the connection between transportation costs and economic geography, the question of who makes what where…Globalization, the diffusion of economic activity without regard for national boundaries, is the logical end point of this process. As transport costs fall to extremely low levels, producers move from high-wage to low-wage countries, eventually causing wage levels in all countries to converge. These geographic shifts can occur quickly and suddenly, leaving long-standing industrial infrastructure underutilized or abandoned as economic activity moves on.

Marc recounts the history of the shipping container, first, the environment at the time, was ripe for the picking:

Shippers wanted cheaper transport, less pilferage, less damage, and lower insurance rates. Shipowners wanted to build bigger vessels, but only if they could spend more time at sea, earning revenue, and less time in port. Truckers wanted to be able to deliver to and pick up from the docks without hour upon hour of waiting. Business interests in port cities were praying for almost anything that would boost traffic through their harbors. Yet despite all the demands for change, and despite much experimentation, most of the industry’s efforts to improve productivity centered on such timeworn ideas as making drafts heavier so that longshoremen would have to work harder. No one had found a better way to ease the gridlock on the docks.

As is the case with many innovations, this one was primarily driven by an outsider to the industry – Malcom McLean:

The solution came from an outsider who had no experience with ships…McLean reconsidered his plan. He had realized that carrying trailers on ships was inefficient: the wheels beneath each trailer would waste a lot of precious shipboard space. Pondering that problem, McLean came up with a still more radical idea. A government maritime-promotion program made leftover World War II tankers available to ship lines very cheaply. Pan-Atlantic would buy two and convert them to haul truck trailer bodies—trailers detached from their steel beds, axles, and wheels. Subtracting the frames and wheels would reduce the space occupied by each trailer by one-third. Even better, the trailer bodies could be stacked, whereas trailers with wheels could not be. As McLean envisioned it, a truck would pull the trailer alongside the ship, where the trailer body, filled with twenty tons of freight, would be detached from its steel chassis and fitted aboard ship. At the other end of the voyage, the trailer body would be lowered onto an empty chassis and hauled to its destination…The concept that became container shipping was Malcom McLean’s…McLean understood that reducing the cost of shipping goods required not just a metal box but an entire new way of handling freight. Every part of the system—ports, ships, cranes, storage facilities, trucks, trains, and the operations of the shippers themselves—would have to change. In that understanding, he was years ahead of almost everyone else in the transportation industry. His insights ushered in change so dramatic that even the experts at the International Container Bureau, people who had been pushing containers for decades, were astonished at what he had wrought. As one of that organization’s leaders confessed later, “we did not understand that at that time a revolution was taking place in the U.S.A”.

Then came the creative destruction – that is the innovation of the shipping container:

By the middle of the 1970s, the New York docks were mostly a memoryThe revolutionary changes in cargo handling had far more dire implications for off-dock workers in transportation and distribution. Between 1964 and 1976, the number of trucking and warehousing workers rose nationally, but the number in New York fell sharply after 1970. With fewer vessels calling at New York City, fewer trucks were needed to deliver and collect cargo at the piers. Transit warehouses were abandoned or put to far less labor-intensive uses, such as parking…The changes in transport costs induced by containerization hit manufacturing, too, eliminating not only factory-floor jobs but also related trucking and distribution work as plants moved out of New York…There can be no doubt, however, that containerization eliminated one of the key reasons for operating a factory in New York City: ease of shipment…The container was not the sole cause of the surprising and painful economic changes of the 1960s and 1970s, but it was an important cause. Container technology developed far more quickly and affected transportation industries far more significantly than even its most ardent proponents had imagined. New York was only the first established shipping center whose economy would be transformed in ways that were unimaginable before the container arrived on the scene.

Which left some tough questions to be answered, as far as how displaced workers should be treated/compensated:

Despite these discontents, the longshore unions’ tenacious resistance to automation appeared to establish the principle that long-term workers deserved to be treated humanely as businesses embraced innovations that would eliminate their jobs. That principle was ultimately accepted in very few parts of the American economy and was never codified in law. Years of bargaining by two very different union leaders made the longshore industry a rare exception, in which employers that profited from automation were forced to share the benefits with the individuals whose work was automated away.

For this innovation to be universally adopted, some conformity was required. It wasn’t until some standardization for containers was introduced, that international container shipping took off:

Yet after 1966, as truckers, ship lines, railroads, container manufacturers, and governments reached compromises on issue after issue, a fundamental change could be seen in the shipping world. The plethora of container shapes and sizes that had blocked the development of containerization in 1965 gave way to the standard sizes approved internationally. Leasing companies began to feel confident investing large sums in containers and moved into the field in a big way, soon owning more boxes than the ship lines themselves…Finally, it was becoming possible to fill a container with freight in Kansas City with a high degree of confidence that almost any trucks, trains, ports, and ships would be able to move it smoothly all the way to Kuala Lumpur. International container shipping could now become a reality.

On the domestic end, it was not until containers were transported by trucks or train that adoption took off:

Most big shippers had no pressing need to use coastal shipping services, whether containerized or not. They used ocean freight for exporting or importing—but only a handful of containers were being carried on international ships. Most freight shipments were domestic, going cross-country by truck or train. Not until container technology affected land-based transportation costs would the container revolution take firm hold.

As the industry matured, so did the associated costs of maintaining the required infrastructure, leading to higher concentrations on specific ports:

These two unrelated developments—the rise of New York, the neglect of Tampa and Mobile—revealed the economics that would affect seaports as container shipping grew. For ports, capturing container traffic was going to be expensive, requiring investments out of all proportion to what had come before. For ship lines, the days when vessels meandered along the coast, calling at every port in search of cargo, would soon be over. Every stop would mean tying up an expensive containership that could generate revenue and profit only when it was on the move. Only ports that could be relied upon for large amounts of freight were worth a visit, and all others would be served by truck or barge.

Eventually, and as with any rising industry, growth gave in to a bust, and to a new reality of depressed margins. This lead to further consolidation within the industry (note the modern parallel to the airline industry):

Demand, robust through it was, could not possibly keep up with this explosion of supply. The result was a new and painful experience for the shipping industry: a rate war. Overcapacity was an old story in ocean shipping. The flow of cargo had always been volatile, based on economic growth, changes in tariffs and trade restrictions, and political factors such as wars and embargoes…Far fewer independent companies were left, and they had no illusions about the future. Rate wars would obviously be a permanent feature of the container shipping industry, recurring every time the world economy turned down or ship lines expanded their fleets. Shippers would pay according to the distance their containers traveled, regardless of the weight or the nature of the contents, and in difficult times rates would dip so low that carriers would barely cover their operating costs. Ship lines would be under constant pressure to build bigger ships and faster cranes to reduce the cost of handling each container, because at some point overcapacity would return, and when rates collapsed the carrier with the lowest cost would have the best chance of survival.

The deregulation in the 80s both on land and sea, helped pave the way for further cost reductions for the consumer:

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, except for a few commodities such as coal and chemicals…Perhaps no part of the freight industry was altered more than the container shipping. The ability to sign long-term contracts gave railroads an incentive to develop a business that had languished for two decades, with assurance that their investment would not go to waste….Rail rates fell so steeply that by 1987, more than one-third of the containers headed from Asia to the U.S. East Coast crossed the United States by rail to international trade had given way…The Shipping Act of 1984 rewrote the rules governing international shipping through U.S. ports. Shippers could now sign long-term contracts with ship lines. In return for guaranteeing a minimum amount of cargo, a shipper could negotiate a low rate and specific terms of service, such as the frequency of ships…Shippers’ newfound power put enormous downward pressure on freight rates.

Containerization played and continues to pay a significant role in changing companies’ strategies particularly as it relates to vertical integration and supply chain management:

As freight costs plummeted starting in the late 1970s and as the rapid exchange of cargo from one transportation carrier to another became routine, manufacturers discovered that they no longer needed to do everything themselves. They could contract with other companies for raw materials and components. locking in supplies, and then sign transportation contracts to assure that their inputs would arrive when needed. Integrated production yielded to disintegrated production. Each supplier, specializing in a narrow range of products, could take advantage of the latest technological developments in its industry and gain economies of scale in its particular product lines.

While the primary lesson from The Box is one on innovation, Marc also conveys another more subtle lesson in this book on the unpredictability of the impact the shipping container has had when it was first conceived:

How innovation really works is certainly one of the lessons of The Box, but for me there is another that looms even larger: the role of unintended consequences. Economists, myself included, are in the business of predicting events; we like to think that we can analyze what has happened and draw insight into what will occur in the days to come. Business school students take a similar approach, learning to apply quantitative analysis to historical data in order to draw conclusions about the future. In the business world, this way of looking at the world through a spreadsheet is treated as modern management thinking. It’s the bread and butter of some of the world’s most famous, and expensive, consulting firms. The story of containerization attests to the limits of this sort of rational analysis, for the developments recounted in The Box turned out not at all as expected…Absolutely no one anticipated that containerization would open the way to vast changes in where and how goods are manufactured, that it would provide a major impetus to transport deregulation, or that it would help integrate East Asia into a world economy that previously had centered on the North Atlantic.

Along the same lines, hindsight is 20/20, but at the time it was nearly impossible to predict the colossal impact the shipping container has had on modern economy:

The history of the shipping container is humbling. Careful planning and thorough analysis have their place, but they provide little guidance in the face of abrupt changes that alter an industry’s very fundamentals. Flexibility is a virtue in such a situation. Resistance can be a vice, but so can a rush to action. In this kind of situation “expect the unexpected” may be as good a motto as any…That simple metal box was what we today label a disruptive technology. Even now, more than half a century after it came into use, it continues to affect our world in unexpected ways.

On a closing note:

Perhaps the most remarkable fact about the remarkable history of the box is that time and again, even the most knowledgeable experts misjudged the course of events. The container proved to be such a dynamic force that almost nothing it touched was left unchanged, and those changes often were not as predicted.

The Box is a must read in the areas of innovation, logistics and trade. Looking back it is astounding to learn how the shipping container has and continues to have such an impact on driving our modern economy. Within the container’s history, there are numerous innovation lessons that are transferable and just as applicable in today’s setting across the various industries.

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