The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (36 page)

The second crisis of container shipping was made worse by the carriers’ own choices. The hundreds of containerships built in the first half of the 1970s had been designed for the world of the late 1960s. High speed was important because of the closure of the Suez Canal in the 1967 Arab-Israeli war, which forced ship traffic between Europe and Asia and Australia to take a much longer route around the tip of Africa. High fuel consumption—the inevitable result of high speed—did not much matter, because oil was cheap. The world of the mid-1970s was totally different. The price of fuel quadrupled. On the North Atlantic, fuel went from one-fourth of operating costs in 1972 to half in 1975. On the Europe-Far East route, the unexpectedly fast reopening of the Suez Canal in June 1975 eliminated the reason for having fuel-guzzling high-speed ships to sail around Africa. Many carriers were stuck with the wrong vessels for the times.
³³

Prominent among them was the Sea-Land division of R. J. Reynolds Industries. Malcom McLean, acting, per usual, on intuition rather than cautious analysis, had overridden objections from Sea-Land’s board to move ahead with the SL-7 in 1968, and Reynolds had agreed to build eight of the ships when it bought the ship line in 1969. The costliest merchant ships ever built were also the thirstiest, each burning five hundred tons of fuel per day. At full speed, they consumed three times as much fuel per container as competitors’ vessels. When the price of bunker fuel jumped from $22 per ton to $70 within a matter of months, the SL-7s became a crushing burden. Although R. J. Reynolds boasted to its shareholders that the SL-7s “provide the fastest container shipping service in the world,” the ships consistently missed their ambitious schedules and could not make money.
³⁴

A settling of scores was inevitable. McLean, unhappy with Reynolds’s bureaucratic ways, began selling his stock in 1975 and left the board in 1977. Reynolds, frustrated with its inability to control the extraordinary volatility of the steamship business, reorganized Sea-Land to put the ship line under tighter corporate control. The changes did not help. In 1980, Reynolds finally took a $150 million loss on the SL-7s, which had been in service for less than eight years, and dumped them on the U.S. navy for rebuilding as fast supply ships. Four years later, it got out of the shipping business altogether and spun off Sea-Land as an independent company. As R. J. Reynolds’s new management explained to investment analysts, “investors who might be interested in owning RJR stock were not the type who ordinarily would be interested in a capital-intensive, cyclical transportation company.”
³⁵

Quite so. For R. J. Reynolds, and for the other corporations that had chased fast growth by buying into container shipping in the late 1960s, their investments brought little but disappointment. Sea-Land and its competitors were not at all like Polaroid or Xerox, companies whose proprietary technology and constant stream of innovations provided inordinately high profits for decades. Ship lines’ end product was basically a commodity. Just like farmers and steelmakers, they would always be hostage to external forces, their prices and profit margins depending mainly on economic growth and on their competitors’ decisions to build new ships. The go-go years were over. By 1976, less than a decade after container shipping became an international business, the
Financial Times
could declare that “the revolutionary impact of containerization, the biggest advance in freight movement for generations, has largely worked itself out.”
³⁶

Except that the
Financial Times
got it wrong. The revolutionary impact of containerization, as it turned out, was yet to come.

M
alcom McLean sold
his stock and quietly left the board of R. J. Reynolds Industries in February 1977. By all accounts, the marriage had not been a happy one. McLean was frustrated by the tobacco giant’s bureaucracy and bewildered by its repeated changes of strategy. Most of all, though, he was restless. “I am a builder, and they are runners,” McLean explained. “You cannot put a builder in with a bunch of runners. You just throw them out of kilter.”
¹

After giving up day-to-day responsibility for Sea-Land Service in 1970, he had spent $9 million to buy Pinehurst, the famed golf resort in central North Carolina, not far from his birthplace in Maxton. He acquired a small life insurance company, an estate in Alabama, a trading company. Then, in 1973, he started First Colony Farms on 440,000 acres in the swamps of eastern North Carolina. Modeled after his friend Daniel Ludwig’s plantation in the Amazon, First Colony was probably the largest agricultural development in U.S. history. McLean spent millions draining wetlands to start a massive peat-harvesting operation, then built a plant to turn the peat into methanol. Nearby he planned the world’s largest hog farm, where the hogs would be raised mechanically to slaughter weight and then shipped to a slaughterhouse he would build on-site. The peat scheme, though, was blocked by one of the earliest environmentalist campaigns, and the hog farm, able to raise 100,000 animals a year, never made money. When he got an offer for the hog farm in 1977, McLean sold—for $12 million plus 40 percent of the profits for twenty years—and looked around for something new.
²

In October 1977, he found it. To the surprise of almost everyone, he arranged to buy United States Lines.

U.S. Lines was not exactly a prize. It had long since been supplanted by Sea-Land as the largest American-flag ship line, and its owner, the conglomerate Walter Kidde & Co., had been trying to unload it almost since the day it purchased the company in 1969. Its famous flagship, the luxury liner
United States
, had been sold off to the U.S. government. U.S. Lines had lost money through most of the 1970s. Nonetheless, McLean spotted value. For an investment of $160 million, of which $50 million went to pay off debts, he got thirty ships; $50 million in cash; a huge new terminal on Staten Island, in New York Harbor; and an important network of routes to Europe and Asia. U.S. Lines, unlike Sea-Land, was entitled to operating subsidies from the U.S. government on its international routes. The subsidies were a curse as well as a blessing: the ship line was assured a source of revenue, but the Maritime Administration got to dictate where and how often its ships sailed.

In 1978, as his new ship line was eking out a very modest profit, McLean hatched an audacious plan. U.S. Lines would build a series of enormous containerships, half again as large as anything else on the sea, and send them around the world. The timing was right, because shipbuilders’ order books were shrinking after the headlong expansion of the 1970s and construction prices were falling. A round-the-world route, McLean thought, would solve one of the industry’s inherent problems, the imbalanced flow of freight that left some ships sailing full in one direction and half-empty in the other. The new vessels would have the lowest construction cost per container slot of any vessel in the world and the lowest operating costs per container as well. U.S. 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.

Ship lines responded to the imperative of scale by extending their reach. The old breakbulk companies had often been content to serve a single route. In 1960, no fewer than twenty-eight carriers had sailed the North Atlantic, from the mighty Cunard Line to such one-ship minnows as American Independence Line and Irish Shipping Limited. In the container age, minnows could not survive, and the truly big fish, companies such as Sea-Land, U.S. Lines, and Hapag-Lloyd, wanted to be in every major trade, either with their own ships or with an arrangement that allowed them to book space on someone else’s. The more ships they had, the more ports they served, the more widely they could spread the fixed costs of their operations. The more far-flung their services, the easier it would be to find loads to fill their containers and containers to fill their ships. The broader their networks, the more effectively they could cultivate relationships with multinational manufacturers whose needs for freight transportation were worldwide.
³

Ocean carriers added 272 containerships to their fleets between 1976 and 1979. Four times during the 1970s, worldwide container shipping capacity increased by more than 20 percent in a single year. Total cargo capacity aboard containerships, 1.9 million tons in 1970, reached 10 million in 1980, not counting the tonnage of vessels designed for a mix of containers and other freight.
⁴

The quest for scale brought not just more ships but bigger ships. The
Fairland
, the first Sea-Land ship to cross the Atlantic in 1966, was only 469 feet long. The purpose-built containerships of the late 1960s were about 600 feet from stem to stern, and the fast vessels launched in 1972–73 were as much as 900 feet long and 80 feet wide, with drafts of 40 feet. At that point, containership design seemed to be approaching its limits. The locks of the Panama Canal, through which almost all traffic between Asia and the Atlantic coast of North America had to travel, are 1,000 feet long and 110 across, and bigger ships would not fit. The oil crisis, which caused so many financial problems for ship lines, unexpectedly brought relief. Shipowners decided to build slower vessels to save fuel: the average speed of newly delivered containerships dropped steadily from 25 knots in 1973 to 20 in 1984. Naval architects were no longer forced to design streamlined shapes to help achieve high speeds, and could concentrate instead on increasing payloads. Without getting much longer, vessels got much larger. The ships entering service by 1978 could hold up to 3,500 20-foot containers—more than had entered all U.S. ports combined during an average week in 1968.

These Panamax vessels—the maximum size that could fit through the Panama Canal—could haul a container at much lower cost than could their predecessors. The construction cost itself was lower, relative to capacity: a vessel to carry 3,000 containers did not require twice as much steel or twice as large an engine as a vessel to carry 1,500. Given the extent of automation on board the new vessels, a larger ship did not require a larger crew, so crew wages per container were much lower. Fuel consumption did not increase proportionately with the vessel’s size. By the 1980s, new ships holding the equivalent of 4,200 20-foot containers could move a ton of cargo at 40 percent less than could a ship built for 3,000 containers and at one-third the cost of a vessel designed for 1,800.
⁵

And still the vessels grew. The economies of scale were so clear, and so large, that in 1988 ship lines began buying vessels too wide to fit through the Panama Canal. These so-called Post-Panamax ships needed deeper water and longer piers than many ports could offer. They were uneconomic to run on most of the world’s shipping lanes. They offered no flexibility, but they could do one thing very well. On a busy route between two large, deep harbors, such as Hong Kong and Los Angeles or Singapore and Rotterdam, they could sail back and forth, with a brief stop at each end, moving freight more cheaply than any other vehicles ever built. By the start of the twenty-first century, ship lines were ordering vessels able to carry 10,000 20-foot containers, or 5,000 standard 40-footers, and even bigger ships were on the drawing boards.

As ships got bigger, ports got bigger. In 1970, the equivalent of 292,000 loaded 20-foot containers passed across the piers at Newark and Elizabeth, far and away the world’s largest container complex. In 1980, the wharves around New York Harbor, including the new U.S. Lines terminal on Staten Island, handled seven times that many loaded boxes, even though New York’s share of all U.S. container traffic had declined. Container traffic from Britain to points outside Europe, almost all of which passed through either Felixstowe or Tilbury, more than trebled in a decade, despite Britain’s weak economy. Deep-sea ports from Rotterdam, Antwerp, and Hamburg to Hong Kong, Yokohama, and Kaohsiung, on Taiwan, more than doubled the number of boxes they handled in the late 1970s. More and more, the biggest ports traded largely with one another: in 1976, nearly one-quarter of all U.S. containerized foreign trade went through Kobe, Japan, or Rotterdam, in the Netherlands, and another quarter went through just five Asian or European ports.
⁶

The ceaseless expansion of port capacity was driven by the same force as the ceaseless increase in ship capacity, the demand for lower cost per box. New ships sold for as much as $60 million apiece in the late 1970s, despite the depression in shipbuilding. To cover their mortgage payments, ship lines had to maximize the time that their vessels were under way, filled with revenue-generating cargo, and minimize the time spent in port. 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.”
⁷