Containerization
Containerization
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The Truck Driver Who Reinvented Shipping
This introduction is by Anthony J. Mayo and Nitin Nohria from the Harvard Business School
Malcolm P. McLean, a truck driver, fundamentally transformed the centuries-old shipping industry, an industry that had long decided that it had no incentive to change. By developing the first safe, reliable, and cost effective approach to transporting containerized cargo, McLean made a contribution to maritime trade so phenomenal that he has been compared to the father of the steam engine, Robert Fulton.
As a youth growing up on a farm in a small town of Maxton, North Carolina, McLean learned early on about the value of hard work and determination: His father was a farmer who also worked as a mail carrier to supplement the family's income. Even so, when young Malcolm graduated from high school in 1931, the country was in the midst of the Depression and further schooling was simply not an option. Pumping gas at a service station near his hometown, McLean saved enough money by 1934 to buy a second-hand truck for $120. This purchase set McLean on his lifelong career in the transportation industry.
McLean soon began hauling dirt, produce, and other odds and ends for the farming community in Maxton, where reliable transportation was hardly commonplace. Eventually, he purchased five additional trucks and hired a team of drivers, a move that enabled him to get off the road and look for new customers. For the next two years, his business thrived, but when poor economic conditions forced many of his newly won customers to withdraw their contracts, McLean scaled down his operation and got behind the wheel again.
McLean's Idea
During this setback in his life, when he almost lost his business, McLean came across the idea that changed his destiny. The year was 1937, and McLean was delivering cotton bales from Fayetteville, North Carolina, to Hoboken, New Jersey. Arriving in Hoboken, McLean was forced to wait hours to unload his truck trailer. He recalled: "I had to wait most of the day to deliver the bales, sitting there in my truck, watching stevedores load other cargo. It struck me that I was looking at a lot of wasted time and money. I watched them take each crate off the truck and slip it into a sling, which would then lift the crate into the hold of the ship." It would be nineteen years before McLean converted his thought into a business proposition.
(Levinson asserts that McLean's reminiscence is apocryphal)
For the next decade and a half, Mclean concentrated on his trucking business, and by the early 1950s, with 1,776 trucks and thirty-seven transport terminals along the eastern seaboard, he had built his operation into the largest trucking fleet in the South and the fifth-largest in the country. As the trucking business matured, states adopted a new series of weight restrictions and levying fees. Truck trailers passing through multiple states could be fined for excessively heavy loads. It became a balancing act for truckers to haul as much weight as possible without triggering any fees. McLean knew that there must be a more efficient way to transport cargo, and his thoughts returned to the shipping vessels that ran along the U.S. coastline. He believed "that ships would be a cost effective way around shoreside weight restrictions . . . no tire, no chassis repairs, no drivers, no fuel costs . . . Just the trailer, free of its wheels. Free to be lifted unencumbered. And not just one trailer, or two of them, or five, or a dozen, but hundreds, on one ship (2). In many ways, McLean's vision was nothing new. As far back as 1929, Seatrain had carried railroad boxcars on its sea vessels to transport goods between New York and Cuba. In addition, it was not uncommon for ships to randomly carry large boxes on board, but no shipping business was dedicated to a systematic process of hauling boxed cargo.
Developing Containerization
Seeing the feasibility of these types of operations may have inspired McLean to take the concept to a new level. Transporting "containerized cargo" seemed to be a natural, cost-effective extension of his business. McLean initially envisioned his trucking fleet as an integral part of an extended transportation network. Instead of truckers traversing the eastern coastline, a few strategic trucking hubs in the South and North would function as end points, delivering and receiving goods at key port cities. The ship would be responsible for the majority of the travel—leaving the trucks to conduct short, mostly intrastate runs generally immune from levying fees.
With the concept in mind, McLean redesigned truck trailers into two parts—a truck bed on wheels and an independent box trailer, or container. He had not envisioned a Seatrain type of business, in which the boxcar is rolled onto the ship through the power of its own wheels. On the contrary, McLean saw several stackable trailers in the hull of the ship. The trailers would need to be constructed of heavy steel so that they could withstand rough seas and protect their contents. They would also have to be designed without permanent wheel attachments and would have to fit neatly in stacks. McLean patented a steel-reinforced corner-post structure, which allowed the trailers to be gripped for loading from their wheeled platforms and provided the strength needed for stacking. At the same time, McLean acquired the Pan-Atlantic Steamship Company, which was based in Alabama and had shipping and docking rights in prime eastern port cities.
Buying Pan-Atlantic for $7 million, McLean noted that the acquisition would "permit us to proceed immediately with plans for construction of trailerships to supplement Pan-Atlantic's conventional cargo and passenger operations on the Atlantic and Gulf coasts (3)." He believed that his strong trucking company, combined with newly redesigned cargo ships, would become a formidable force in the transportation industry. Commenting on McLean's controversial business plan, the Wall Street Journal reported: "One of the nation's oldest and sickest industries is embarking on a quiet attempt to cure some of its own ills. The patients are the operators of coastwise and intercoastal ships that carry dry cargoes."4 The cure, the article noted, was business operators like McLean who were breathing new life into the shipping industry.
Though McLean had resigned from the presidency of McLean Trucking and placed his ownership in trust, seven railroads accused him of violating the Interstate Commerce Act. The accusers attempted to block McLean from "establishing a coastwise sea-trailer transportation service."5 A section of the Interstate Commerce Act stated that it "was unlawful for anyone to take control or management in a common interest of two or more carriers without getting ICC's approval."6 Ultimately unable to secure ICC's endorsement, McLean was forced to choose between his ownership of his well-established trucking fleet or a speculative shipping venture. Though he had no experience in the shipping industry, McLean gave up everything he had worked for to bet on intermodal transportation. He sold his 75 percent interest in McLean Trucking for $6 million in 1955 and became the owner and president of Pan-Atlantic, which he renamed SeaLand Industries.
The Ideal X
The maiden voyage for McLean's converted oil tanker, the Ideal X, carried fifty-eight new box trailers or containers from Port Newark, New Jersey, to Houston in April 1956. Industry followers, railroad authorities, and government officials watched the voyage closely. When the ship docked in Houston, it unloaded the containers onto trailer beds attached to non-McLean owned trucking fleets and its cargo was inspected. The contents were dry and secure.
McLean's venture had passed its first hurdle, yet it was just one of many obstacles that he encountered. He needed to convince lots of customers to rely less on his former business, trucking. McLean also needed to persuade port authorities to redesign their dockyards to accommodate the lifting and storage of trailers, and he needed to rapidly expand the scope of his operations to ensure a steady and reliable revenue stream. Securing new clients proved the least difficult, since McLean's SeaLand service could transport goods at a 25 percent discount off the price of conventional travel, and it eliminated several steps in the transport process. In addition, since McLean's trailers were fully enclosed and secure, they were safe from pilferage and damage, which were considered costs of business in the traditional shipping industry. The safety of McLean's trailers also enabled customers to negotiate lower insurance rates for their cargo.
McLean's next challenge was convincing port authorities to redesign their sites to accommodate the new intermodal transport operation. Although he received his first big break with the backing of the New York Port Authority chairman, McLean continued to run into resistance. The tide did not change until the older ports witnessed the financial resurgence of port cities that had adopted containerization. His business got an additional boost when the Port of Oakland, California, invested $600,000 to build a new container-ship facility in the early 1960s, believing that the new facility would "revolutionize trade with Asia."7
The labor savings associated with McLean's intermodal transportation business was a major victory for shippers and port authorities, but it was a huge threat to entrenched dockside unions. The traditional break-bulk process of loading and unloading ships and trucks necessitated huge armies of shore workers. For some ports, the real threat to the industry was not McLean but other modes of transportation that were making ship transport obsolete. By endorsing McLean's business strategy, port officials believed that they were protecting the future of their business. If that meant fewer workers, so be it. They reasoned that it was better to have fewer workers in a prosperous enterprise than many in a declining one.
Standardization
To achieve the dramatic reductions in labor and dock servicing time, McLean was vigilant about standardization. His efforts to increase efficiency resulted in standardized container designs that were awarded patent protection. Believing that standardization was also the path to overall industry growth, McLean chose to make his patents available by issuing a royalty-free lease to the Industrial Organization for Standardization (ISO) (8).
The standard container size is 40 feet long by eight feet wide by eight and a half feet tall.
The move toward greater standardization helped broaden the possibilities for intermodal transportation. In less than fifteen years, McLean had built the largest cargo-shipping business in the world. By the end of the 1960s, McLean's SeaLand Industries had twenty-seven thousand trailer-type containers, thirty-six trailer ships, and access to over thirty port cities (9). With a top market position, SeaLand was an attractive acquisition candidate, and in 1969, R.J. Reynolds purchased the company for $160 million.
When he set out to gamble on his idea of containerized cargo, McLean probably did not realize that he was revolutionizing an industry. McLean's vision gave the shipping industry the jolt that it needed to survive for the next fifty years. By the end of the century, container shipping was transporting approximately 90 percent of the world's trade cargo (10). Though we have coded McLean as a leader in our research, some of his approaches and characteristics have more of an entrepreneurial flavor. There is often a fine line between creation and reinvention, and though the lines sometimes blur, we have generally tended to cite individuals as leaders when their innovations help restructure or reinvent an industry rather than create an entirely new one. For this reason, we see McLean as a leader.
Chapter 1: The World the Box Made
The folowing is excerpted from Marc Levinson's 2006 book The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger.
What is it about the container that is so important? Surely not the thing itself. A soulless aluminum or steel box held together with welds and rivets, with a wooden floor and two enormous doors at one end: the standard Container has all the romance of a oil can. The value of this utilitarian object lies not in what it is, but in how it is used. The container is at the core of a highly automated system for moving goods from anywhere, to anywhere, with a minimum of cost and complication on the way.
Creative Destruction
The container made shipping cheap, and by doing so changed the shape of the world economy. The armies of ill-paid, ill-treated workers who once made their livings loading and unloading ships in every port are no more, their tight-knit waterfront communities now just memories. Cities that had been centers of maritime commerce for centuries, such as New York and Liverpool, saw their waterfronts decline with startling speed, unsuited to the container trade or simply unneeded, and the manufacturers that endured high costs and antiquated urban plants in order to be near their suppliers and their customers have long since moved away. Venerable ship lines with century-old pedigrees were crushed by the enormous cost of adapting to container shipping. Merchant mariners, who had shipped out to see the world, had their traditional days-long shore leave in exotic harbors replaced by a few hours ashore at a remote parking lot for containers, their vessel ready to weigh anchor the instant the high-speed cranes finished putting huge metal boxes off and on the ship.
Even as it helped destroy the old economy, the container helped build a new one. Sleepy harbors such as Busan and Seattle moved into the front ranks of the world's ports, and massive new ports were built in places like Felixstowe, in England, and Tanjung Pelepas, in Malaysia, where none had been before. Small towns, distant from the great population centers, could take advantage of their cheap land and low wages to entice factories freed from the need to be near a port to enjoy cheap transportation. Sprawling industrial complexes where armies of thousands manufactured products from start to finish gave way to smaller, more specialized plants that shipped components and half-finished goods to one another in ever lengthening supply chains. Poor countries, desperate to climb the rungs of the ladder of economic development, could realistically dream of becoming suppliers to wealthy countries far away. Huge industrial complexes mushroomed in places like Los Angeles and Hong Kong, only because the cost of bringing raw materials in and sending finished goods out had dropped like a stone. (1)
This new economic geography allowed firms whose ambitions had been purely domestic to become international companies, exporting their products almost as effortlessly as selling them nearby. If they did, though, they soon discovered that cheaper shipping benefited manufacturers in Thailand or Italy just as much. Those who had no wish to go international, who sought only to serve their local clientele, learned that they had no choice: like it or not, they were competing globally because the global market was coming to them. Shipping costs no longer offered shelter to high-cost producers whose great advantage was physical proximity to their customers; even with customs duties and time delays, factories in Malaysia could deliver blouses to Macy's in Herald Square more cheaply than could blouse manufacturers in the nearby lofts of New York's garment district.
Multinational manufacturers-companies with plants in different countries transformed themselves into international manufacturers, integrating once isolated factories into networks so that they could choose the cheapest location in which to make a particular item, yet still shift production from one place to another as costs or exchange rates might dictate. In 1956, the world was full of small manufacturers selling locally; by the end of the twentieth century, purely local markets for goods of any sort were few and far between.
Labor Impacts
For workers, of course, this has all been a mixed blessing. As consumers, they enjoy infinitely more choices thanks to the global trade the container has stimulated. By one careful study, the United States imported four times as many varieties of goods in 2002 as in 1972, generating a consumer benefit-not counted in official statistics-- equal to nearly 3 percent of the entire economy. The competition that came with increased trade has diffused new products with remarkable speed and has held down prices so that average households can partake. The ready availability of inexpensive imported consumer goods has boosted living standards around the world. (2)
As wage earners, on the other hand, workers have every reason to be ambivalent. In the decades after World War II, wartime devastation created vast demand while low levels of international trade kept competitive forces under control.
In this exceptional environment, workers and trade unions in North America, Western Europe, and Japan were able to negotiate nearly continuous improvements in wages and benefits, while government programs provided ever stronger safety nets. The workweek grew shorter, disability pay was made more generous, and retirement at sixty or sixty-two became the norm. The container helped bring an end to that unprecedented advance. Low shipping costs helped make capital even more mobile, increasing the bargaining power of employers against their far less mobile workers. In this highly integrated world economy, the pay of workers in Shenzhen sets limits on wages in South Carolina, and when the French government ordered a shorter workweek with no cut in pay, it discovered that nearly frictionless, nearly costless shipping made it easy for manufacturers to avoid the higher cost by moving abroad. (3)
Seamless Transport
Every day at every major port, thousands of containers arrive and depart by truck and train. Loaded trucks stream through the gates, where scanners read the unique number on each container and computers compare it against ships' manifests before the trucker is told where to drop his load. Tractor units arrive to hook up chassis and haul away containers that have just come off the ship. Trains carrying nothing but double-stacked containers roll into an intermodal terminal close to the dock, where giant cranes straddle the entire train, working their way along as they remove one container after another. Outbound container trains, destined for a rail yard two thousand miles away with only the briefest of stops en route, are assembled on the same tracks and loaded by the same cranes.
The result of all this hectic activity is a nearly seamless system for shipping freight around the world. A 25-ton container of Coffeemakers can leave a factory in Malaysia, be loaded aboard a ship, and cover the 9,000 miles to Los Angeles in 16 days. A day later, the container is on a unit train to Chicago, where it is transferred immediately to a truck headed for Cincinnati. The 11,000-mile trip from the factory gate to the Ohio warehouse can take as little as 22 days, a rate of 500 miles per day, at a cost lower than that of a single first-class air ticket. More than likely, no one has touched the contents, or even opened the container, along the way.
This high-efficiency transportation machine is a blessing for exporters and importers, but it has become a curse for customs inspectors and security officials. Each container is accompanied by a manifest listing its contents, but neither ship lines nor ports can vouch that what is on the manifest corresponds to what is inside. Nor is there any easy way to check: opening the doors at the end of the box normally reveals only a wall of paperboard cartons. With a single ship able to disgorge 3,000 40-foot-long containers in a matter of hours, and with a port such as Long Beach or Tokyo handling perhaps 10,000 loaded containers on the average workday, and with each container itself holding row after row of boxes stacked floor to ceiling, not even the most careful examiners have a remote prospect of inspecting it all. Containers can be just as efficient for smuggling undeclared merchandise, illegal drugs, undocumented immigrants, and terrorist bombs as for moving legitimate cargo. (5)
Getting from the Ideal-X to a system that moves tens of millions of boxes each year was not an easy voyage. Both the container's promoters and its opponents sensed from the very beginning that this was an invention that could change the way the world works. That first container voyage of 1956, an idea turned into reality by the ceaseless drive of an entrepreneur who knew nothing about ships, unleashed more than a decade of battle around the world. Many titans of the transportation industry sought to stifle the container.
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.
Economic Impacts of the Container
How much the container matters to the world economy is impossible to quantify. In the ideal world, we would like to know how much it cost to send one thousand men's shirts from Bangkok to Geneva in 1955, and to track how that cost changed as containerization came into use. Such data do not exist, but it seems clear that the container brought sweeping reductions in the cost of moving freight. From a tiny tanker laden with a few dozen containers that would not fit on any other vessel, container shipping matured into a highly automated, highly standardized industry on a global scale.
An enormous containership can be loaded with a minute fraction of the labor and time required to handle a small conventional ship half a century ago. A few crew members can manage an oceangoing vessel longer than three football fields. A trucker can deposit a trailer at a customer's loading dock, hook up another trailer, and drive on immediately, rather than watching his expensive rig stand idle while the contents are removed. All of those changes are consequences of the container revolution. Transportation has become so efficient that for many purposes, freight costs do not much effect economic decisions. As economists Edward L. Glaeser and Janet E. Kohlhase suggest, "It is better to assume that moving goods is essentially costless than to assume that moving goods is an important component of the production process." Before the container, such a statement was unimaginable. (6)
In 1961, before the container was in international use, ocean freight costs alone accounted for 12 percent of the value of U.S. exports and 10 percent of the value of U.S. imports. "These costs are more significant in many cases than governmental trade barriers," the staff of the Joint Economic Committee of Congress advised, noting that the average U.S. import tariff was 7 percent. And ocean freight, dear as it was, represented only a fraction of the total cost of moving goods from one country to another. A pharmaceutical company would have paid approximately $2,400 to ship a truckload of medicines from the U.S. Midwest to an interior city in Europe in 1960. This might have included payments to a dozen different vendors: a local trucker in Chicago, the railroad that carried the truck trailer on a flatcar to New York or Baltimore, a local trucker in the port city, a port warehouse, a steamship company, a Warehouse and a trucking company in Europe, an insurer, a European customs service, and the freight forwarder who put all the pieces of this complicated journey together. Half the total outlay went for port costs. (7)
This process was so expensive that in many cases selling internationally was not worthwhile. "For some commodities, the freight may be as much as 25 per cent of the cost of the product," two engineers concluded after a careful study of data from 1959.
Shipping steel pipe from New York to Brazil cost an average of $57 per ton in 1962, or 13 percent of the average cost of the pipe being exported--a figure that did not include the cost of getting the pipe from the steel mill to the dock. Shipping refrigerators from London to Capetown cost the equivalent of 68 US cents per cubic foot, adding $20 to the wholesale price of a midsize unit. No wonder that, relative to the size of the economy, U.S. international trade was smaller in 1960 than it had been in 1950, or even in the Depression year of 1930. The cost of conducting trade had gotten so high that in many cases trading made no sense. (8)
By far the biggest expense in this process was shifting the cargo from land transport to ship at the port of departure and moving it back to truck or train at the other end of the ocean voyage. As one expert explained, "a four thousand mile voyage for a shipment might consume 50 percent of its costs in covering just the two ten-mile movemennt through two ports." These were the costs that the container affected first, as the elimination of piece-by-piece freight handling brought lower expenses for longshore labor, insurance, pier rental, and the like. Containers were quickly adopted for land transportation, and the reduction in loading time and transshipment cost lowered rates for goods that moved entirely by land. As ship lines built huge vessels specially designed to handle containers, ocean freight rates plummeted. And as container shipping became intermodal, with a seamless shifting of containers among ships and trucks and trains, goods could move in a never-ending stream from Asian factories directly to the stockrooms of retail stores in North America or Europe, making the overall cost of transporting goods little more than a footnote in a company's cost analysis. (9)
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.
These savings in freight costs, in inventory costs, and in time to market have encouraged ever longer supply chains, allowing buyers in one country to purchase from sellers halfway around the globe with little fear that the gaskets will not arrive when needed or that the dolls will not be on the toy store shelf before Christmas. The more reliable these supply chains become, the further retailers, wholesalers, and manufacturers are willing to reach in search of lower production costs-and the more likely it becomes that workers will feel the sting of dislocation as their employers find distant sources of supply.
Chapter 14: Just in Time
Barbie was conceived as the all-American girl. In truth, she never was: at her inception, in 1959, Mattel Corp arranged to make her at a factory in Japan. A few years later it added a plant in Taiwan, along with a large cadre of Taiwanese women who sewed Barbie's clothes in their homes. By the middle of the 1990s, Barbie's citizenship had become even less distinct. Workers in China produced her statuesque figure, using molds from the United States and other machines from Japan and Europe. Her nylon hair was Japanese, the plastic in her body from Taiwan, the pigments American, the cotton clothing from China. Barbie, simple girl though she is, had developed her very own global supply chain. (1)
Supply chains like Barbie's are a direct result of the changes wrought by the rise of container shipping. They were unheard-of back in 1956, when Malcom McLean placed his first containers on board the Ideal-X, and in 1976, when high oil prices brought sky-high freight costs that stifled the flow of world trade. Until then, vertical integration was the noun in manufacturing: a company would obtain raw materials, sometimes from its own mines or oil wells; move them to its factories, sometimes with its own trucks or ships or railroad; and put them through a series of processes to turn them into finished products.
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. Low transport costs helped make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics, and American colorants, and ship them off to eager girls all over the world.
America Imports Just-In-Time
These possibilities first drew notice in the early 1980s, when the world discovered just-in-time manufacturing. Just-in-time, a concept originated by Toyota Motor Company in Japan, involves raising quality and efficiency by eliminating large inventories. Rather than making most of its own components, as competitors did, Toyota signed long-term contracts with outside suppliers. The suppliers were intimately involved with Toyota, helping design its products and knowing the details of its production plans. They were required to adopt strict quality standards, with very low rates of error, so that Toyota would not need to test the components before using them. The suppliers agreed to make their goods in small batches, as required for Toyota's assembly lines, and to deliver them within very narrow time windows for immediate use-hence the name, just-in- time. Keeping inventory to a minimum brought discipline to the entire manufacturing process. With few components in stock, there was little margin for error, forcing every firm in the supply chain to perform as required. (2)
The wonders of just-in-time were unmentioned outside Japan before 1981. In 1984, as Toyota agreed to assemble cars at a General Motors plant in California, US business publications ran thirty-four articles on just-in-time. In 1986, there were eighty-one, and companies around the world were seeking to emulate Toyota's high-profile success. In the United States, two-fifths of the Fortune 500 manufacturers had started just-in-time programs by 1987.
Overwhelmingly, these 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. Railroads, ship lines, and truck lines with large route networks and sophisticated cargo-tracking systems had the edge. (3)
Before the 1980s, logistics was a military term. By 1985, logistics management-the task of 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. With modern communications and container shipping, the retailer could design its own shirts and transmit the designs to a factory in Thailand, which used local labor to combine Chinese fabric made from American cotton, Malaysian buttons made from Taiwanese plastics, Japanese zippers, and decorations embroidered in Indonesia. The finished order, loaded into a 40-foot container, would be delivered in less than a month to a distribution center in Tennessee or a hyper-marche in France. Global supply chains became so routine that in September 2001, when U.S. customs authorities stepped up border inspections following the terrorist attack that destroyed the World Trade Center in New York, auto plants in Michigan began shutting down within three days for lack of imported parts.
The improvement in logistics shows up statistically in reduced inventory levels. Inventories are a cost: whoever owns them has had to pay for them but has yet to receive money from selling them. Better, more reliable transport has permitted companies to obtain goods closer to the time they need them, instead of weeks or months in advance, tying up less money in goods sitting uselessly on warehouse shelves. In the United States, inventories began falling in the mid-1980s, as the concepts of just-in-time manufacturing took root.
Manufacturers such as Dell and retailers such as Wal-Mart Stores have taken the concept to extremes, designing their entire business strategies around moving goods from factory floor to customer with minimal time in between. In 2004, nonfarm inventories in the United States were about $1 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 to be borrowed at 8 or 9 percent, and inventory reductions are saving U.S. businesses $80-$90 billion per year. (4)
This precision performance would have been unattainable without containerization. So long as cargo was handled one item at a time, with long delays at the docks and complicated interchanges between trucks, trains, planes, and ships, freight transportation was too unpredictable for manufacturers to take the risk that supplies from faraway places would arrive right on time. They needed to hold large stocks of components to ensure that their production lines would keep moving. The container, combined with the computer, sharply reduced that risk, opening the way to globalization. Companies can make each component, and each retail product, at the cheapest location, taking wage rates, taxes, subsidies, energy costs, and import tariffs into account, along with considerations such as transit times and security. The cost of transportation is still a factor in the cost equation, but in many cases it is no longer a large one.
McLean's Legacy
Global supply chains were not in anyone's mind in the spring of 1956. Over the next half century, freight transportation developed in ways that could not have been imagined by the dignitaries watching the Ideal-X take on those first containers at Port Newark. 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.
Malcom McLean's genius was acknowledged unanimously: almost everyone save the dockworkers' unions thought that putting freight into containers was a brilliant concept. The idea that the container would cause a revolution in shipping, though, seemed more than a little far-fetched. At best, the container was expected to help ships recover a tiny share of the domestic freight business and to benefit Hawaii and Puerto Rico, Truckers ignored it. Railroads shunned it. Even as ship lines talked it up, most of them treated the container as an adjunct to the business they knew, just another one of the many shapes and sizes of cargo that they were accustomed to storing in their holds. Labor was no better informed.
When West Coast longshore union leader Harry Bridges negotiated the 1960 contract that allowed unlimited automation of the docks, he drastically underestimated the speed with which containers would alter work on the waterfront, and demanded far too little for his members as a result. VVhen New York longshore leader Teddy Gleason warned in 1959 that the container would eliminate 30 percent of his union's jobs in New York, he was simply wrong: between 1963 and 1976, longshore hours worked in New York City fell by three-quarters.
The huge increase in long-distance trade that came in the container's wake was foreseen by no one. When he studied the role of freight in the New York region in the late 1950s, Harvard economist Benjamin Chinitz predicted that containerization would favor metropolitan New York's industrial base by letting the region's factories ship to the South more cheaply than could plants in New England or the Midwest. Apparel, the region's biggest manufacturing sector, would not be affected by changes in transport costs, because it was not "transport-sensitive." The possibility that falling transport costs could decimate much of the US manufacturing base by making it practical to ship almost everything long distances simply did not occur to him. Chinitz was hardly alone in failing to recognize the extent to which lower shipping costs would stimulate trade. Through the 1960s, study after study projected the growth of containerization by assuming that existing import and export trends would continue, with the cargo gradually being shifted into contain- ers. The prospect that the container would permit a worldwide economic restructuring that would vastly increase the How of trade was not taken seriously. (18)
"The market" got many things wrong when it came to the container, and so did "the state." Both private-sector and public-sector misjudgments slowed the growth of containerization and delayed the economic benefits it would bring. Yet in the end, the logic of shipping freight in containers was so compelling, the cost savings so enormous, that the container took the world by storm.
Half a century after the Ideal-X, the equivalent of 300 million 20-foot containers were making their way across the world's oceans each year, with 26 percent of them originating in China alone. Countless more were being shipped cross-border by truck or train. (19)
Containers had become ubiquitous--and in addition to cheap goods, they were bringing a new set of social problems. Stacks of abandoned containers, too beaten up to use, too expensive to repair, or simply unneeded, littered landscapes around the world. The exhaust of containerships and the trucks and trains serving them had become a massive environmental problem, and the endless growth of traffic in and out of expanding ports was subjecting nearby communities to congestion, noise, and high rates of cancer attributed to diesel emissions; the price tag for a cleanup in Los Angeles and Long Beach alone was estimated to be $11 billion. The flood of containers had become a major headache for security officials concerned that a single box, loaded with a radioactive "dirty" bomb timed to explode upon arrival in a major port, could contaminate an entire city and throw international commerce into chaos; radiation detectors Went up at the gates to many terminals in an effort to keep terrorist containers from being loaded aboard ships. The use of containers outfitted with mattresses and toilets to smuggle immigrants had become routine, with immigration inspectors unable to detect more than a tiny share of containers with human cargo among the hundreds of thousands of boxes filled with legitimate goods. (20)
None of these problems, serious as they were, posed the most remote threat to the growth of container shipping. Containers themselves kept getting larger, with 48-foot and even 53-foot boxes allowing trucks to haul more freight on each trip. The world's fleet expanded steadily, with the capacity of pure containerships rising 10 percent per year from 2001 through 2005. And ships themselves reached unprecedented size. Dozens of vessels able to carry 4,000 40-foot containers had joined the world's fleet by 2006, and even larger ones were on order.
Where vessel size had once been limited by the locks in the Panama Canal, containerships had grown so large that twenty-first-century naval architects were constrained by the Straits of Malacca, the busy shipping lane between Malaysia and Indonesia. If a containership ever reaches Malacca-Max, the maximum size for a vessel able to pass through the straits, it will be a quarter mile long and 190 feet wide, with its bottom some 65 feet below the waterline. If it should sink, it will take nearly $1 billion of cargo with it. Its capacity will be 18,000 TEUs, or 9,000 standard 40-foot containers, enough to fill a 68-mile line of trucks each time it arrives in port. Where it will call is a serious question, because few ports anywhere are deep enough to accommodate it. The answer may well be brand-new ports built in deep water offshore, with Malacca-Max ships linking offshore platforms and smaller vessels shuttling containers to land. If they ever come about, these enormously costly ships and ports will create yet more economies of scale, making it still cheaper and easier to move goods around the globe. (21)