Friday, March 03, 2006

The Box That Changed Asia and the World

Marc Levinson,

Malcom McLean’s efforts during the Vietnam War led to the container revolution.

Fifty years ago, an American trucking firm owner, Malcom McLean, set off a revolution in international trade with the inauguration of his Sea-Land Service. On Apr. 26, 1956, his converted tanker ship, the Ideal-X, set sail from Newark, New Jersey for Houston, Texas, carrying 58 aluminum truck bodies in frames installed atop its deck. McLean’s vision: create a way in which cargo could be shifted seamlessly from trucks to ships to trains, without loss or delay.

Sea-Land itself foundered after a later sale to the diversifying R.J. Reynolds Co. and would ultimately be swallowed up by the Maersk shipping empire. (McLean himself died in relative obscurity in 2001.) But the revolution known as containerization would sweep the world. It made shipping cheap, and changed societies in the process. Manufacturers and consumers half a world away would be drawn together. The armies of ill-paid, ill-treated workers who once made their living loading and unloading ships by muscle and pulley in every port would be no more, their tight-knit waterfront communities now just memories.

Containerization would have enormous consequences for Asia’s economies. But it first made its mark on Asia through war. In early 1965, the U.S. government began a rapid buildup of military forces in Vietnam. In the process, it created what may have been the greatest logistical mess in the history of the U.S. armed forces. Few places on earth were less suited to supporting a modern military force than South Vietnam, which had primitive roads, a single rail line that was largely inoperative, and only one deep- water port.

Malcom McLean’s persistence in pushing containerization was vital to the U.S. war effort in Vietnam. The U.S. military had never used container shipping, and many officers wanted no part of it. Against much resistance, McLean won contracts to build a containerport at Cam Ranh Bay and to run containerships filled with military goods from California to Vietnam. His ships delivered 1,200 containers a month to Vietnam. Containerization enabled the U.S. to sustain a well-fed and well-equipped force through years of combat in places that otherwise would have been beyond the reach of U.S. military might. Without it, the U.S. military would have experienced extreme difficulty feeding, housing and supplying the 540,000 soldiers, sailors, marines and air force personnel who were in Vietnam by the start of 1969.

Containerization was vital as well to the growth of Sea-Land Service. Defense Department contracts had long been life or death matters for U.S.-flag ship lines with international routes. Until 1966 and 1967, when military transportation agencies first put their shipping needs up for competitive bidding, the military’s freight on a given route had been divided up among all the U.S.-flag lines serving that route, guaranteeing every carrier a piece of the pie. The Defense Department’s involvement with container shipping had been minimal, and it had never tendered freight to Sea-Land, even on its domestic routes to Puerto Rico and Alaska, because the military was not equipped to use its 35-foot containers. Vietnam broke the barrier. From almost nothing in 1965, Sea-Land’s Defense Department revenues rose to a total of $450 million between 1967 and 1973. In the peak year, fiscal 1971, $102 million of Vietnam-related contracts accounted for 30% of the company’s sales.

Like everything else McLean did, venturing into Vietnam entailed considerable risk in hopes of large reward. The cost and risk of reinforcing the pier at Cam Ranh Bay, assembling the cranes, floating equipment and vehicles across from the Philippines, and building the truck terminals were entirely Sea-Land’s. The U.S. government was liable only for damage to Sea-Land’s trucks and equipment caused by enemy fire. It did not furnish men or material to help Sea-Land get its operations up and running. In a place where replacement parts could not simply be ordered from a nearby distributor, the chance that something would go wrong, blowing budgets and cost calculations, was very high. McLean was running a commercial operation in a war zone, and betting that he could control costs well enough to make a profit from his fixed-price bid.

The gamble paid off hugely. In return for his willingness to bear risks on the cost side, McLean negotiated contracts that assured Sea-Land’s revenue. The U.S. Navy guaranteed a minimum number of containers on each trip from the U.S. West Coast to Okinawa and the Philippines. To Vietnam, the rate per container was fixed, but Sea-Land’s contract required the government to offer it “all of its containerizable cargo” outbound from Seattle and Oakland, leading to extremely high utilization: in 1968, the ships were filled to 99% of capacity.

No figures are available, but high capacity utilization must have translated into robust profitability. Each round trip from the U.S. West Coast to Cam Ranh Bay brought Sea-Land more than $20,000 per day, and each smaller vessel sailing to Danang took in about $8,000 a day, at a time when the Navy was paying $5,000 a day to lease large breakbulk ships. Sea-Land also was protected against the risk that its containers would vanish into the jungles of Vietnam. A central control office kept track of each container, and containers had to be emptied and returned within specified time limits or the unit holding them had to pay extra charges. The contracts also permitted Sea-Land to make some extra profit. The Philippines service was supposed to call at both Manila and Subic Bay, but after Sea-Land threatened to charge $500 an hour for port delays in Manila, the Air Force decided it could pick up its spare parts just as easily at Subic Bay; the contract remained unaltered, and Sea-Land was able to save $6,800 per trip by skipping the stop in Manila.

Sea-Land collected additional revenue anytime an Army unit in the field restuffed a container with material to be “retrograded” to the U.S., because its Navy contracts were westbound only. These payments for eastbound freight were pure profit, and were high enough that in March 1968 the U.S. command revoked permission to retrograde freight via container because, it was explained delicately, Sea-Land’s charges were “not rate- favorable.”

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. Eastbound, 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 U.S., 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: between 1960 and 1973 Japanese industrial output quadrupled. Already the second-largest source of U.S. imports, by the late 1960s Japan was quickly moving up the ladder from apparel and transistor radios to stereo systems, cars and industrial equipment. It took little imagination to envision the potential for container shipping. The Japanese government had used a typical industrial policy exercise to endorse containerization in 1966, when the Shipping and Shipbuilding Rationalization Council urged the Ministry of Transport to eliminate confusion and excessive competition in order to derive maximum national benefit from the new technology.

The council called for container service between Japan and the U.S. West Coast to begin in 1968, with services to the U.S. East Coast, Europe, and Australia to begin by 1970. It asked the government to build container terminals initially in the Tokyo/Yokohama and Osaka/Kobe areas. The government, the council said, should require Japanese and foreign shipping lines to form consortia to operate the containerships and terminals, but should structure that cooperation to avoid undermining the position of Japanese ship lines. If all went as planned, the council said, half of Japan’s exports would be containerized by 1971, traveling on 12 huge ships carrying 1,000 containers each.

The government acted with unusual speed. Delegations visited Oakland and other U.S. ports to learn how a containerport should be run. New port legislation was approved in August 1967 and Japan’s first two container cranes began operation in Tokyo and Kobe by the end of the year. Matters on the land side were not quite so easy. Standard trucks in Japan hauled loads smaller than 11 tons, and in any case highway regulations barred full-sized containers, except on a handful of new toll roads. The Japanese National Railway was not equipped to carry containers longer than 20 feet. The type of intermodal transportation being practiced in North America and since 1966 in Europe, with containers transferred almost seamlessly from a ship to a truck or rail cars to the recipient’s loading dock, would not be simple to replicate in Japan.

The first to try was Matson Navigation. In February 1966 Matson won U.S. government approval to operate an unsubsidized container service between the West Coast, Hawaii and the Far East. The company’s management had visions of fast ships racing across the Pacific with television sets and wristwatches, discharging cargo at Oakland directly to special trains that would carry it east. On the return trip, there might be military cargo for the U.S. bases in Japan and South Korea. The key assumption was that Matson would have two or three years to capture the business of Japan’s leading exporters before other ship lines entered the market. Matson used a Japanese shipyard to convert two of its C-3 breakbulk ships into self-unloading ships able to carry 464 containers and, in recognition of Japan’s rapidly growing auto exports, 49 cars. It ordered two high-speed containerships in Germany to use in Japan service from 1969. To encourage Japanese customers, it entered a joint venture with a Japanese ship line, Nippon Yusen Kaisha (N.Y.K. Line). In September 1967, before a single container crane was operating in the country, Matson began service to Japan.

Competitors were not far behind. In January 1968, four Japanese ship lines signed leases for container berths in Oakland. In March 1968, the same month that Army officers in Vietnam were ordered not to ship cargo back to the States via Sea-Land, Sea-Land announced that it would provide weekly sailings from Japan.

Like almost everything else connected with Malcom McLean, Sea-Land’s entry into Japan stemmed more from instinct than analysis. “We’ve got these empty ships coming back from Vietnam,” former Sea-Land executive Scott Morrison recalled. “So we have a meeting, and Malcom says, ‘Anybody know anybody at Mitsui?’” McLean handed around the Japanese trading company’s annual report, and announced that he wanted to fly to Tokyo to meet its president. Two weeks later, a huge delegation from Mitsui was touring Sea-Land’s docks at Elizabeth New Jersey. McLean wanted nothing to do with joint ventures, but he hired Mitsui group company to build Sea-Land a terminal in Japan. Another Mitsui company agreed to be Sea-Land’s agent, and a third agreed to handle domestic trucking within Japan. With its ship operating costs fully covered by its military contracts for Vietnam, Sea-Land could enter the Japan trade with little business and still make money.

The first Japanese containership, owned by Matson partner N.Y.K. Line, completed its maiden voyage to America in September 1968. Six weeks later, Sea-Land began six sailings a month from Yokohama to the West Coast, its ships laden with televisions and stereos produced by Japanese factories. Other Japanese carriers entered as well. The Japan-West Coast route, which had no commercial container service at all before September 1967, was suddenly crowded with ships needing to be filled. Seven different companies were competing for less than 7,000 tons of eastbound freight each month by the end of 1968, and more were about to join. The lack of business proved to be only temporary. The cargo would soon come, in a flood.

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 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 U.S. manufacturing base by making it practical to ship almost everything long distances simply did not occur to Chinitz. He 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 containers. The possibility that the container would permit a worldwide economic restructuring that would vastly increase the flow of trade was not taken seriously.

“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 McLean’s Ideal-X, the equivalent of 300 million 20-foot containers were making their way across the world’s oceans each year, with 26% of them originating in China alone. Countless more were being shipped cross-border by truck or train.

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 un-needed, 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 clean-up in Los Angeles-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 but a tiny share of containers with human cargo among the hundreds of thousands of boxes filled with legitimate goods.

These problems notwithstanding, container shipping continues to expand. Containers themselves kept getting larger, with standard 40-foot boxes yielding to 48-foot and even 53-foot boxes that allow trucks to haul more freight on each trip. The world’s fleet is expanding steadily, with the capacity of pure containerships rising 10% per year from 2001 through 2005. And ships themselves have reached incredible 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 21st-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 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.

Excerpted with permission from The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, by Marc Levinson (Princeton University Press, 2006)

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