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Friday, October 3, 2014

Reading List: The Box

Levinson, Marc. The Box. Princeton: Princeton University Press, [2006] 2008. ISBN 978-0-691-13640-0.
When we think of developments in science and technology which reshape the world economy, we often concentrate upon those which build on fundamental breakthroughs in our understanding of the world we live in, or technologies which employ them to do things never imagined. Examples of these are electricity and magnetism, which gave us the telegraph, electric power, the telephone, and wireless communication. Semiconductor technology, the foundation of the computer and Internet revolutions, is grounded in quantum mechanics, elaborated only in the early 20th century. The global positioning satellites which you use to get directions when you're driving or walking wouldn't work if they did not compensate for the effects of special and general relativity upon the rate at which clocks tick in moving objects and those in gravitational fields.

But sometimes a revolutionary technology doesn't require a scientific breakthrough, nor a complicated manufacturing process to build, but just the realisation that people have been looking at a problem all wrong, or have been earnestly toiling away trying to solve some problem other than the one which people are ready to pay vast sums of money to have solved, once the solution is placed on the market.

The cargo shipping container may be, physically, the one of the least impressive technological achievements of the 20th century, right up there with the inanimate carbon rod, as it required no special materials, fabrication technologies, or design tools which did not exist a century before, and yet its widespread adoption in the latter half of the 20th century was fundamental to the restructuring of the global economy which we now call “globalisation”, and changed assumptions about the relationship between capital, natural resources, labour, and markets which had existed since the start of the industrial revolution.

Ever since the start of ocean commerce, ships handled cargo in much the same way. The cargo was brought to the dock (often after waiting for an extended period in a dockside warehouse for the ship to arrive), then stevedores (or longshoremen, or dockers) would load the cargo into nets, or onto pallets hoisted by nets into the hold of the ship, where other stevedores would unload it and stow the individual items, which might consist of items as varied as bags of coffee beans, boxes containing manufactured goods, barrels of wine or oil, and preserved food items such as salted fish or meat. These individual items were stored based upon the expertise of the gangs working the ship to make the most of the irregular space of the ship's cargo hold, and if the ship was to call upon multiple ports, in an order so cargo could be unloaded with minimal shifting of that bound for subsequent destinations on the voyage. Upon arrival at a port, this process was reversed to offload cargo bound there, and then the loading began again. It was not unusual for a cargo ship to spend 6 days or more in each port, unloading and loading, before the next leg on its voyage.

Shipping is both capital- and labour-intensive. The ship has to be financed and incurs largely fixed maintenance costs, and the crew must be paid regardless of whether they're at sea or waiting in port for cargo to be unloaded and loaded. This means that what engineers call the “duty cycle” of the ship is critical to its cost of operation and, consequently, what the shipowner must charge shippers to make a profit. A ship operating coastal routes in the U.S., say between New York and a port in the Gulf, could easily spend half its time in ports, running up costs but generating no revenue. This model of ocean transport, called break bulk cargo, prevailed from the age of sail until the 1970s.

Under the break bulk model, ocean transport was very expensive. Further, with cargos sitting in warehouses waiting for ships to arrive on erratic schedules, delivery times were not just long but also unpredictable. Goods shipped from a factory in the U.S. midwest to a destination in Europe would routinely take three months to arrive end to end, with an uncertainty measured in weeks, accounting for trucking, railroads, and ocean shipping involved in getting them to their destination. This meant that any importation of time-sensitive goods required keeping a large local inventory to compensate for unpredictable delivery times, and paying the substantial shipping cost included in their price. Economists, going back to Ricardo, often modelled shipping as free, but it was nothing of the kind, and was often the dominant factor in the location and structure of firms.

When shipping is expensive, firms have an advantage in being located in proximity to both their raw materials (or component suppliers) and customers. Detroit became the Motor City in large part because its bulk inputs: iron ore and coal, could be transported at low cost from mines to factories by ships plying the Great Lakes. Industries dependent on imports and exports would tend to cluster around major ports, since otherwise the cost of transporting their inputs and outputs overland from the nearest port would be prohibitive. And many companies simply concentrated on their local market, where transportation costs were not a major consideration in their cost structure. In 1964, when break bulk shipping was the norm, 40% of exports from Britain originated within 25 miles of their port of export, and two thirds of all imports were delivered to destinations a similar distance from their port of arrival.

But all of this was based upon the cost structure of break bulk ocean cargo shipping, and a similarly archaic way of handling rail and truck cargo. A manufacturing plant in Iowa might pack its goods destined for a customer in Belgium into boxes which were loaded onto a truck, driven to a terminal in Chicago where they were unloaded and reloaded into a boxcar, then sent by train to New Jersey, where they were unloaded and put onto a small ship to take them to the port of New York, where after sitting in a warehouse they'd be put onto a ship bound for a port in Germany. After arrival, they'd be transported by train, then trucked to the destination. Three months or so later, plus or minus a few, the cargo would arrive—at least that which wasn't stolen en route.

These long delays, and the uncertainty in delivery times, required those engaging in international commerce to maintain large inventories, which further increased the cost of doing business overseas. Many firms opted for vertical integration in their own local region.

Malcom McLean started his trucking company in 1934 with one truck and one driver, himself. What he lacked in capital (he often struggled to pay bridge tolls when delivering to New York), he made up in ambition, and by 1945, his company operated 162 trucks. He was a relentless cost-cutter, and from his own experience waiting for hours on New York docks for his cargo to be unloaded onto ships, in 1953 asked why shippers couldn't simply put the entire truck trailer on a ship rather than unload its cargo into the ship's hold, then unload it piece by piece at the destination harbour and load it back onto another truck. War surplus Liberty ships were available for almost nothing, and they could carry cargo between the U.S. northeast and south at a fraction of the cost of trucks, especially in the era before expressways.

McLean immediately found himself in a tangled web of regulatory and union constraints. Shipping, trucking, and railroads were all considered completely different businesses, each of which had accreted its own, often bizarre, government regulation and union work rules. The rate a carrier could charge for hauling a ton of cargo from point A to point B depended not upon its mass or volume, but what it was, with radically different rates for say, coal as opposed to manufactured goods. McLean's genius was in seeing past all of this obstructionist clutter and realising that what the customer—the shipper—wanted was not to purchase trucking, railroad, and shipping services, but rather delivery of the shipment, however accomplished, at a specified time and cost.

The regulatory mess made it almost impossible for a trucking company to own ships, so McLean created a legal structure which would allow his company to acquire a shipping line which had fallen on hard times. He then proceeded to convert a ship to carry containers, which would not be opened from the time they were loaded on trucks at the shipper's location until they arrived at the destination, and could be transferred between trucks and ships rapidly. Working out the details of the construction of the containers, setting their size, and shepherding all of this through a regulatory gauntlet which had never heard of such concepts was daunting, but the potential payoff was enormous. Loading break bulk cargo onto a ship the size of McLean's first container vessel cost US$ 5.83 per ton. Loading freight in containers cost US$ 0.16 per ton. This reduction in cost, passed on to the shipper, made containerised freight compelling, and sparked a transformation in the global economy.

Consider Barbie. Her body is manufactured in China, using machines from Japan and Europe and moulds designed in the U.S. Her hair comes from Japan, the plastic for her body from Taiwan, dyed with U.S. pigments, and her clothes are produced in other factories in China. The final product is shipped worldwide. There are no large inventories anywhere in the supply chain: every step depends upon reliable delivery of containers of intermediate products. Managers setting up such a supply chain no longer care whether the products are transported by truck, rail, or sea, and since transportation costs for containers are so small compared to the value of their contents (and trade barriers such as customs duties have fallen), the location of suppliers and factories is based almost entirely upon cost, with proximity to resources and customers almost irrelevant. We think of the Internet as having abolished distance, but the humble ocean cargo container has done so for things as much as the Internet has for data.

This is a thoroughly researched and fascinating look at how the seemingly most humble technological innovation can have enormous consequences, and also how the greatest barriers to restructuring economies may be sclerotic government and government-enabled (union) structures which preserve obsolete models long after they have become destructive of prosperity. It also demonstrates how those who try to freeze innovation into a model fixed in the past will be bypassed by those willing to embrace a more efficient way of doing business. The container ports which handle most of the world's cargo are, for the most part, not the largest ports of the break bulk era. They are those which, unencumbered by history, were able to build the infrastructure required to shift containers at a rapid rate.

The Kindle edition has some flaws. In numerous places, spaces appear within words which don't belong there (perhaps words hyphenated across lines in the print edition and not re-joined?) and the index is just a list of searchable terms, not linked to references in the text.

Posted at October 3, 2014 23:46