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

by Marc Levinson

  Nor was the service quite as expected. Each port call required not just a stop at the dock but a costly, time-wasting diversion from the round-the-world route. Unless stops were severely curtailed, voyages would become impractically long. As a result, most ports were connected to the round-the-world services with feeder ships that transferred their containers at major load centers, lengthening total transit time for cargo. Evergreen’s globe-girdling ships eventually stopped visiting Britain altogether, using Le Havre, in France, as their regional load center and shuttling 200,000 containers per year to ports in England, Scotland, and Ireland. McLean’s Econships required too much depth for many ports, sometimes leaving cargo on the dock in order to depart on the high tide. Neither Evergreen nor U.S. Lines had faced the fact that their ships might not be the best way to move cargo; although shipping containers cross-country on double-stack trains cost more than sending them through the Panama Canal, American President Lines’ ship-rail service could get a container from Japan to New York in only 14 days, a transit time neither Evergreen nor U.S. Lines could come close to matching. On-time performance was a constant problem as well. With a ship sailing around the world, bad weather in the Bay of Biscay or a troublesome crane in Dubai could obliterate the schedules promised to customers at Yokohama and Long Beach.21

  Disaster was not long in coming. Instead of rising from $28 to $50 a barrel, as McLean had expected, oil prices collapsed to $14 in 1985. U.S. Lines’ slow, fuel-conserving ships were suddenly the wrong vessels for the market, and the oil sheikdoms of the Middle East could no longer afford the limitless quantities of imports that were supposed to keep the Econships filled with cargo. The competition was tougher, too: unlike the 1970s, when one mismanaged breakbulk company after another collapsed before the onslaught of container shipping, the players in the 1980s were professionally managed firms with no inclination to surrender. After posting a $62 million profit in 1984, McLean Industries reported a $67 million loss in 1985. The company missed an interest payment in early 1986 as McLean struggled to restructure his loans. It was to no avail. In the first nine months of 1986, McLean Industries lost $237 million on revenue of $854 million. Container terminals in Europe began demanding cash up front before allowing the Econships to load. Creditors tightened their terms. On November 24, staggering under $1.2 billion of debt, McLean Industries suspended all service and filed for bankruptcy.22

  The collapse of United States Lines was, at the time, the largest bankruptcy in U.S. history. It was also one of the most tangled. A total of 52 ships were arrested at ports from Singapore to Greece. The seven U.S. banks that held the mortgages on the Econships scrambled to recover what they could from vessels that no other company wanted; 16 months later, the ships were sold to Sea-Land for 28 cents on the dollar. More than 10,000 containers and 5,500 chassis were dumped back on Flexivan Leasing, which had been renting them to U.S. Lines for a few dollars a day. U.S. Lines’ $12 million annual lease for its new container terminal on Staten Island was annulled, leaving the Port Authority of New York and New Jersey liable for $60 million of dredging and construction work. First Colony Farms passed into the hands of its bankers, much of it to end up as a wildlife refuge. Unsecured creditors, who were owed $260 million, came away with almost nothing. Malcom McLean’s shareholding, representing 88 percent of McLean Industries’ common stock, was wiped out, and he and his son Malcom McLean Jr., a vice president, were ejected from the management. Thousands of people lost their jobs.23

  “Malcom never got over the U.S. Lines bankruptcy,” a longtime associate said later. He went into seclusion, shunning journalists and avoiding public appearances. His failure followed him, the knowledge that he had hurt thousands of people a constant source of shame. Yet he still was a driven man. In 1991, five years after the failure of U.S. Lines, sheer boredom led him to launch yet another shipping company at the age of seventy-seven. Former Sea-Land executives, many of them now among the shipping industry’s leading lights, prevailed upon him to return at least occasionally to public view, to accept the awards and honors that were his due. On the morning of his funeral, May 30, 2001, containerships around the world sounded their whistles in his memory.24

  Yet if the failure of United States Lines was a personal disaster for many, it was far from a catastrophe for the industry Malcom McLean had created. By 1986, the year of U.S. Lines’ collapse, ports, transportation companies, and shippers around the world had invested $76 billion in order to carry freight in containers. Another $130 billion of outlays was forecast by the end of the twentieth century, on even bigger ships, ports that could turn a vessel inside of twelve hours, cranes that could move more than one box per minute. Container shipping was becoming a very big business, and as it grew, the cost of moving a containerload of cargo was steadily coming down.25

  Chapter 13

  The Shippers’ Revenge

  Disappointing as they were for investors, the first years of international container shipping introduced an entirely new dynamism to the boring old business of moving freight. The decade-long rate war, as Karl Heinz Sager of the German carrier Hapag-Lloyd commented later, “entailed tremendous losses for shipowners, but it brought on the other hand the breakthrough of the ‘box’ with shippers.” The new container technology spread widely, and it would soon begin to penetrate deeply into the world economy.1

  The initial effects of the container were felt mainly within the narrow confines of the maritime industry, by ship lines, port agencies, and dockworkers. Carriers staggered under the enormous costs of the transition to container shipping, and some did not survive it. Ports literally had to rebuild themselves to handle containers in quantity, taking on entirely new roles developing and financing terminals of previously unimagined scale. Longshoremen almost everywhere lost their jobs in large numbers, although in many cases their unions resisted strongly enough to win compensation for acceding to the changes that would quickly reshape work on the docks.

  The sweeping changes within the maritime world initially had very few wider consequences. Ocean transportation itself accounted for only a very small share of the world economy, and, except in dockside communities, longshore work was a tiny percentage of total employment. 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.

  This did not happen quickly. As late as 1975, after containership lines had been crossing oceans on regular schedules for nearly a decade, a United Nations agency could declare that “[f]ew shippers have benefited from long-term reductions in liner transport costs.” A decade later, the situation would look very different.2

  The first years of international container shipping, up through the early 1970s, brought large reductions in ship lines’ costs. The most important was the saving in loading and unloading vessels, which had been the greatest single expense in precontainer days. Capital costs, although higher than for traditional ships, were not exorbitant, because old vessels refitted with cells to hold containers made up most of the container fleet. Container berths at ports cost ten times as much to build as conventional berths, but they could handle twenty times as much cargo per man-hour, so the cost per ton was lower. The early containerships were cheaper to operate than breakbulk ships on a per-ton basis, because each ship carried more freight. Adding it all up, the United Nations Conference on Trade and Development (UNCTAD) concluded in 1970 that ship lines’ costs of moving freight on containerships were less than half those on conventional ships.3

  Shippers shared part of
these initial cost reductions from containerization. The complexity of commodity-by-commodity rate structures makes it hard to estimate average rates, but anecdotal evidence suggests strongly that the introduction of international container shipping immediately brought lower rates than were available on breakbulk vessels. The rate decline, however, was probably less than justified by shipowners’ large savings, because the same conferences that set rates for containers also set rates for traditional shipping. Many conference members were carrying containers inefficiently on breakbulk ships until their new containerships were built. They wanted to keep container rates close to breakbulk rates in order to protect their profits, and to slow the growth of containerization until their new vessels arrived.

  The result was that the early rates for containers were based not on the cost of container shipping, but on the cost of breakbulk freight. If a container held mixed freight, each item was charged only slightly less than if it were moving in a breakbulk ship. Containers filled with a single product received discounts that were larger, but not generous. At the start of service from Europe to Australia in 1969, for example, a Welsh refrigerator plant could save only 11 percent from breakbulk rates by shipping full containers of its product, and almost nothing by sending small shipments that would travel in mixed containers along with other cargo. Full refrigerated containers of Australian meat went to Britain at a fairly meager 8.65 percent discount from the breakbulk rate.4

  From the containership operators’ point of view, offering lower rates for full containers than for mixed containers made perfect sense. A box fully loaded with a single commodity, sealed at the factory and not opened until it arrived at its final destination, was the most economical sort of cargo to handle, whereas mixed freight had to be consolidated by a freight forwarder or a ship line, using expensive longshore labor. In the 1960s, however, manufacturers were not accustomed to doing business by the containerload. Often, they would produce goods as orders came in and send out each order as it was finished. A 1968 study of 235 shipments of manufactured goods between North America and Western Europe found that 40 percent weighed less than one ton and 84 percent less than ten tons. These loads were too small to fill a single container and would not have qualified for the cheapest rates.5

  Cost structures changed dramatically with the arrival of second-generation containerships starting in 1969. The new vessels had been designed with ease of loading and unloading foremost in their architects’ minds, and their cost for handling cargo was very low. Quite unlike either breakbulk ships or first-generation containerships, though, the second-generation ships came with obligations payable regardless of the business situation. Interest and principle on money borrowed to buy ships, chassis, and containers loomed large. Instead of port fees that varied with time at the dock and the amount of cargo loaded or unloaded, there were long-term leases for wharves, cranes, and marshaling yards, with rent owed even if traffic was down. Transporting empty containers back across the ocean was a burden with no corollary in the breakbulk world, and it could be heavy: more than half the 100,000 containers passing through the port of Antwerp in 1969 were empty. The computer systems to keep track of the containers and prepare loading plans for ships were a major new fixed cost.6

  The new ships’ larger sizes and higher speeds allowed them to move far more freight over the course of a year than earlier vessels. Ships purchased in the early 1970s by European lines sailing to the Far East, for example, had four times the cargo capacity of the breakbulk ships they replaced, and their higher speeds and faster port turnaround times let them make six round trips each year rather than 31/3. Over the course of a year, each one of these new ships could carry six or seven times as much cargo as a conventional vessel. Profitability required that at least three-quarters of the container cells be filled; beyond that point, the fixed costs could be spread widely and the cost per container would be low. Profits thus depended not only on the number of vessels competing for cargo, but on the business cycle. A global recession would hit shipowners twice over: the lack of freight would cause their fixed cost per container to increase at the same time as it would weaken their ability to hold rates at profitable levels.7

  Precisely such a lack of freight led to lower shipping rates in the early 1970s. Shipping machinery from southern Germany to New York cost one-third less by containership than by breakbulk freight, a bank study found in 1971. From whiskey distillers in Scotland to apple growers in Australia, major users of international shipping abandoned breakbulk freight as soon as regular container service was able to meet their needs. They had no reason to make this switch unless they found container shipping advantageous. Shippers’ overwhelming choice—in economic terms, their “revealed preference”—is very strong evidence that containerization on a trade route lowered the cost of shipping. The willingness of ship lines to share revenues through arrangements such as the North Atlantic Pool in 1971 indicates their desperation as freight rates tumbled.8

  Then came the oil crisis. The dramatic oil-price rises that began in 1972 and accelerated after the Yom Kippur War in October 1973 had a disproportionate impact on all transportation industries. The average price of crude oil on the world market rose from just over three dollars per barrel in 1972 to more than twelve dollars per barrel in 1974. Freight costs, whether by truck, train, or sea, rose relative to the cost of manufacturing.

  The new containerships were hit especially hard. Their high speeds meant that they consumed two or three times as much fuel for a given amount of freight as the breakbulk ships they replaced. This had not been a concern at the time the fuel-guzzling vessels had been designed; in the early 1970s, fuel accounted for only 10 to 15 percent of containerships’ operating costs. By 1974, though, fuel prices were a crushing burden, eventually to reach half the total cost of running a ship. The liner shipping conferences raised rates, slapped fuel surcharges and currency adjustment surcharges onto customers’ bills, and repeatedly raised the surcharges as fuel costs kept rising and the dollar kept falling. The cost of container shipping on long-distance routes, on which fuel mattered most as a share of total costs, rose disproportionately. Importers and exporters responded by curtailing long-distance trade in manufactured goods much more sharply than short-distance trade. To freight users around the world, container shipping no longer seemed quite such a bargain.9

  Determining exactly what happened to the cost of shipping from 1972 through the late 1970s poses an insurmountable challenge for the historian. Only short sea routes, such as those across the North Sea, had flat rates per container for most of that period. Elsewhere, charges were based not on the container but on the commodity inside. There is no reliable way to calculate an average cost, much less to track its change over time.10

  Three sources other than actual freight rates have been used to estimate the trends in shipping costs. One is the cost of leasing “tramp” ships, vessels that are chartered rather than providing regularly scheduled, or “liner,” service. The charter price per ton of tramp capacity rose sharply, as was widely reported in shipping publications during the 1960s and 1970s. Most tramps, however, carried grain or other bulk cargo rather than manufactured goods, so the rental cost sheds little light on the price of container shipping. As container shipping gained importance, tramps were increasingly relegated to carrying low-value freight that could not efficiently be containerized, making tramp prices of little relevance to the cost of containerized freight.11

  A second main source of freight-cost data is the Liner Index compiled by the German Ministry of Transport. This shows that freight rates flattened out in 1966, as container shipping arrived, but then rose steeply, trebling between 1969 and 1981. The Liner Index, though, is highly problematic as a gauge of global transport costs. It tracked rates on cargoes passing through ports in northern Germany, the Netherlands, and northern Belgium, not worldwide, and its coverage included a large proportion of noncontainer shipping. Changes in the exchange rate of the German mark seem to have had a huge influ
ence on the index’s movements. It took four German marks to buy one U.S. dollar in 1966, three in 1972, and only two by 1978. For shippers who did business in dollars, ocean freight rates as measured by the Liner Index rose well below the rate of inflation during the 1970s.12

  The third alternative is the estimate of standardized charter rates for containerships published by Hamburg ship broker Wilhelm A. N. Hansen starting in 1977. Hansen’s measure, unlike the Liner Index, shows prices falling in 1978 and 1979. However, it is drawn from charters of very small containerships, the kind most likely to be available for charter. It is not clear whether it accurately reflects rates charged by operators with larger, more efficient vessels.13

  The technical problems involved in measuring shipping rates during the 1960s and 1970s are so great that reliable measures of the container’s price impact are unlikely to be developed. International shipping rates were often set in U.S. dollars, and dramatic changes in exchange rates changed shipping costs for companies in many countries independent of changes in technology. Many conferences offered discounts of as much as 20 percent to shippers that signed “loyalty agreements” promising to use only conference members’ ships, so the published conference rates were not necessarily the rates that important shippers paid. Many large shippers demanded, and received, under-the-table rebates from ship lines in return for paying the published rate; although rebates on routes to the United States were illegal—Sea-Land was fined $4 million in 1977 for distributing $19 million in secret payments to customers between 1971 and 1975—the practice was common elsewhere. Rebates, of course, made the actual prices that shippers paid much lower than the prices ship lines claimed to charge.14