The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Key Takeaways

  1. The Box, I hope, has contributed to public understanding that inadequate port, road, and rail infrastructure can cause economic harm by raising the cost of moving freight.
  2. Malcom McLean’s real contribution to the development of containerization, in my view, had to do not with a metal box or a ship, but with a managerial insight. McLean understood that transport companies’ true business was moving freight rather than operating ships or trains. That understanding helped his version of containerization succeed where so many others had failed.
  3. 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 tin 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. The container made shipping cheap, and by doing so changed the shape of the world economy. 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.
  4. 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. 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.
  5. When transport costs are high, manufacturers’ main concern is to locate near their customers, even if this requires undesirably small plants or high operating costs. As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs, which come to loom larger. 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.
  6. The solution to the high cost of freight handling was obvious: instead of loading, unloading, shifting, and reloading thousands of loose items, why not put the freight into big boxes and just move the boxes?
  7. Interest in such a remedy was widespread. 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. The solution came from an outsider who had no experience with ships.
  8. It was easy enough to conclude that containers would change the business, but it was not obvious that they would revolutionize it. Containers, said Jerome L. Goldman, a leading naval architect, were “an expedient” that would do little to reduce costs. Many experts considered the container a niche technology, useful along the coast and on routes to U.S. island possessions, but impractical for international trade. The risk of placing multimillion-dollar bets on what might prove to be the wrong technology was high.
  9. 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 on for large amounts of freight were worth a visit, and all others would be served by truck or barge. By the late 1950s, the lesson for public officials already was clear. As container shipping expanded, maritime traffic would be drawn to a small number of very large ports. Many established centers of maritime commerce would no longer be needed, and ports would have to compete to be among the survivors.
  10. Behind this frenzied expansion of long-neglected ports was the emergence of an entirely new line of thought about economic growth. Manufacturing was almost universally regarded as the bedrock of a healthy local economy in the 1960s, and much of the value of a port, aside from jobs on the docks, was that transportation-conscious manufacturers would locate nearby. As early as 1966, though, public officials in Seattle were sensing that their remote city, with little industry, might be able to develop a new economy based on distribution rather than on factories. The lack of population close at hand would be no obstacle; Seattle could become not merely a local port for western Washington but the center of a distribution network stretching from Asia to the U.S. Midwest. “Commodity distribution has grown out of the dependent sector to link production and consumption,” port planner Ting-Li Cho wrote presciently. “It has become an independent sector that, in return, determines the economy of production and consumption.
  11. The container contributed to a fundamental shift in the geography of British ports. In the precontainer era, London and Liverpool had dominated Britain’s international trade, their docks and warehouses filled with goods headed to or from factories located nearby. The two ports each loaded one-quarter of Britain’s exports, with no other port handling more than 5 percent. The container stripped Liverpool of its competitive advantages. Its costs per ton of cargo were too high, and it was on the wrong side of an island that was reorienting its trade toward continental Europe.
  12. “Unless a container terminal is available in Hong Kong to serve these ships the trading position of the Colony will be affected detrimentally.” And no government anywhere was more aggressive in preparing for the container age than Singapore’s. Immediately upon independence, the new government launched a crash effort to build the economy by drawing foreign investment, especially in manufacturing. Amid a general government crackdown on dissent, the Port of Singapore Authority was able to slash the size of longshore gangs from twenty-seven to twenty-three, institute a second shift, and boost by half the amount of cargo handled per man-hour. It put forth a plan in 1965 to build four berths for conventional ships at a site known as the East Lagoon, which had a breakwater but no major docks. Within months, the plan was scrapped. The containerships that were about to cross the Atlantic had captured the interest of port officials. They announced in 1966 that instead of conventional berths, they would build a port for containers. Singapore’s strategy was to use containers to become the commercial hub of Southeast Asia. With a $15 million World Bank loan covering nearly half the cost, the port authority began work on a terminal at which long-distance vessels from Japan, North America, and Europe could hand off containers to smaller ships serving regional ports. Singapore’s containerport grew beyond all expectations. In 1971, before the new terminal opened, the Port of Singapore Authority forecast 190,000 containers after a decade in operation. Instead, it handled more than a million boxes in 1982 and was the world’s sixth-largest containerport. By 1986, Singapore had more container traffic than all the ports of France combined. In 1996, more containers passed through Singapore than through Japan. In 2005 Singapore became the world’s largest port for general cargo, pulling ahead of Hong Kong, and some 5,000 international companies were using the island-state as a warehousing and distribution hub. By 2014, the equivalent of 17 million truck-sized containers moved across Singapore’s docks and the government-owned port management company had itself become a multinational enterprise, operating container terminals around the world and turning Singapore’s logistical know-how into a major export—testimony to the power of transportation to reshape the flow of trade.
  13. The launch of so many vessels resulted in a quantum jump in capacity. The basic economics of containerization dictated as much. Once a ship line had made the decision to introduce containerships on a particular route, other carriers in the trade normally followed swiftly lest they be left behind. The capital-intensive nature of container shipping put a premium on size; quite unlike breakbulk shipping, in which an owner of “tramp” ships could eke out a profit picking up freight wherever it could be found, a container line needed enough ships, containers, and chassis to run a high-frequency service between major ports on a regular schedule. When a ship line decided to enter a trade, it had to do so in a large way—which meant that on every major route, several competitors were entering with several vessels apiece. Capacity on the largest international routes increased fourteen times over between 1968 and 1974.
  14. United States Lines would achieve what it took to succeed in container shipping: scale. Scale was the holy grail of the maritime industry by the late 1970s. Bigger ships lowered the cost of carrying each container. Bigger ports with bigger cranes lowered the cost of handling each ship. Bigger containers—the 20-foot box, shippers’ favorite in the early 1970s, was yielding to the 40-footer—cut down on crane movements and reduced the time needed to turn a vessel around in port, making more efficient use of capital. A virtuous circle had developed: lower costs per container permitted lower rates, which drew more freight, which supported yet more investments in order to lower unit costs even more. If ever there was a business in which economies of scale mattered, container shipping was it.
  15. The equation was simple: the bigger the port, the bigger the vessels it could handle and the faster it could empty them, reload them, and send them back out to sea. Bigger ports were likely to have deeper berths, more and faster cranes, better technology to keep track of all the boxes, and better road and rail services to move freight in and out. The more boxes a port was equipped to handle, the lower its cost per box was likely to be. As one study concluded bluntly, “Size matters.”
  16. The true importance of the revolution in freight transportation would be found not in its effect on ship lines and dockworkers, but later, as the impact of containerization resonated among the hundreds of thousands of factories and wholesalers and commodity traders and government agencies with goods to ship. For most shippers, except perhaps government agencies, the cost of transporting goods was decisive in determining what products they would make, where they would manufacture and sell them, and whether importing or exporting was worthwhile. The container would reshape the world economy only when it changed shippers’ costs in a significant way.
  17. Many nonfreight costs undoubtedly fell with the growth of container shipping. Packing full containers at the factory eliminated the need for custom-made wooden crates to protect merchandise from theft or damage. The container itself served as a mobile warehouse, so the traditional costs of storage in transit warehouses fell away. Cargo theft dropped sharply, and claims of damage to goods in transit fell by up to 95 percent; after insurers were persuaded that container shipping in fact had fewer property losses, premiums fell by up to 30 percent. Faster ships and reductions in the time needed to load and unload vessels at ports resulted in lower costs for inventory in shipment. As Malcom McLean had understood back in 1955, it is the sum of these costs, not just the published rate of a ship line or railroad, that matters to shippers.
  18. Until then, vertical integration was the norm 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. These possibilities
  19. 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 justin-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 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.
  20. Container shipping thrives on volume: the more containers moving through a port or traveling on a ship or train, the lower the cost per box. Places with lower demand or poorer infrastructure will face higher transport costs and will be far less attractive manufacturing sites for the global market. In the 1970s and 1980s, when many U.S. industrial centers were dying, Los Angeles thrived as a factory location because it was home to the nation’s busiest containerport, and Los Angeles thrived as a port because it was well located to handle import volume from Asia, not just for California, but for the entire United States. 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:
  21. The container has enabled logistics centers such as these to prosper by adding value to global supply chains, capturing jobs that were once performed elsewhere, or not at all.
  22. 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 up the container, most of them treated it 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 more prescient.
  23. Whether containerships and containerports have reached their maximum efficient size, or even larger and costlier ships and ports could give rise to yet more economies of scale, making it still cheaper and easier to move goods around the globe, is a question of considerable consequence for the world economy.

What I got out of it

  1. Amazing how big of an impact the simple container had – lowering transportation costs by orders of magnitude which reshaped the global economy, leading to globalization, and cheaper and better products for everyone due to specialization.