The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (40 page)

Shipper organizations had no legal status in the United States, and shippers were reluctant to negotiate jointly lest they be accused of violating antitrust law. The biggest shippers, however, began to exert influence on their own, even as they changed the way they worked in order to take advantage of the container.
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In the early days of containerization, users dealt with shipping much as they had in breakbulk days. Traffic management was decentralized, with each plant or warehouse making its own arrangements. If the company as a whole could have saved money by sending fully loaded 40-foot containers to individual customers, well, that was not the concern of the freight managers at individual locations, whose job was mainly to get the products out the door. Most shippers favored 20-foot maritime containers, which cost more per ton to ship, because they could not coordinate production of various orders well enough to fill a 40-foot box. The biggest shipper of all, the U.S. military, divided responsibilities between one agency that handled land shipping and another that dealt with sea freight, often paying extra because it had selected the wrong size container for a given load.
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In industry, the traffic department, housed in the back of the plant near the loading dock, would be given whatever the manufacturing department produced, with instructions to ship it. A tariff clerk, his desk piled high with the freight classification guidelines of various liner conferences, trucking conferences, and railroads, would try to describe the cargo in whatever way brought the lowest rate. An export manager would then call ship lines to select a vessel, balancing the desire for fast delivery with the need to keep from becoming too dependent on a particular carrier. With decentralized organizations and fairly primitive computer systems, even large, relatively sophisticated multinational corporations could end up paying dramatically different prices for the same type of cargo, depending upon what the tariff clerk and the export manager could accomplish. “In some cases we’d pay $1,600 for a 40-foot container in the North Atlantic, and in other cases we’d be paying $8,000 for the same container,” recalled a former chemical-industry executive.
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Big shippers typically signed dozens of loyalty agreements covering different routes, obtaining discounts in return for commitments to ship all of their freight with conference members, and then dealt with hundreds of individual conference carriers. The result, often enough, was unsatisfactory. A loyalty agreement did not guarantee space on a ship; if the manufacturer had cargo to ship to India but no space was available on a conference member’s vessel, the cargo had to wait until a conference ship had room. Sending the freight on an independent liner or a tramp ship violated the contract and would expose the shipper to a heavy fine from the conference. If the only available conference vessel was making multiple port calls before heading overseas, the cargo would have to wait while the vessel loaded other freight in each port. Managing relationships with ship lines and doling out cargo were administrative nightmares for major manufacturers, requiring large numbers of staff.
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As ship lines combined their forces to gain market power, manufacturers responded aggressively. The first step was to look beyond the conferences.

Nonconference carriers had always played a role in the major trades, but a small one. The biggest shippers rarely used them. Independents, as the nonconference lines were known, offered discounts of 10 to 20 percent from conference rates, but most of them were too small to provide frequent service on the routes they plied. If a shipper used an independent carrier and then required service that the independent could not provide, it would end up paying a conference line more than if it had signed an agreement with the conference in the first place. Shippers that had a highly predictable flow of cargo could handle that risk. For manufacturers, who might have a sudden need to ship an unanticipated order, sticking with the large conference carriers, even at higher cost, was the safer strategy.
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When containers came on the scene, the economics of container shipping were thought to work against independent lines. The costs were so high that small operators could not enter the business on a whim. Establishing a viable container operation in the United States-Asia trade, one economist estimated in 1978, would require $374 million to buy five ships plus containers, chassis, and cranes. Common sense suggested that anyone putting up that much money would join conferences in hopes of keeping rates high enough to recover costs. But in the second half of the 1970s, it turned out that the barriers to entry were not as high as they seemed. Shipbuilding costs, which had risen 400 percent from the end of 1970 through the end of 1975, began to fall as the collapse of the oil tanker market left shipyards bereft of orders. Builders slashed prices and extended loans just to keep their yards at work. Bargains on new vessels allowed traditional ship lines such as Maersk of Denmark and Evergreen Marine of Taiwan to elbow their way into container shipping. Maersk and Evergreen operated as independents on most routes, with rates far below what the conferences charged. As they added ships, they became credible competitors, drawing shippers that had been wedded to the conferences. Neither company had owned a containership before 1973. By 1981, Maersk’s twenty-five ships made it the world’s third-largest containership operator, while Evergreen, with fifteen vessels, ranked eighth.
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Other independent lines proliferated, particularly in the Pacific. Taiwan’s Orient Overseas, owned by shipping magnate C. Y. Tung, became the first independent carrier to run containerships between Asia and New York in 1972, charging 10 to 15 percent less than the conference. Korea Shipping Corp., another nonconference operator, laid out $88 million for eight containerships in 1973. Far Eastern Shipping Company, a Russian independent, sent two containerships a month from Yokohama to Long Beach and Oakland. Conference tariff books turned into comic books as shippers deserted the conference carriers in droves. The shift to flat per-container rates in the late 1970s revealed the severe erosion of conference bargaining power in a way not possible when each commodity was charged a different rate. The conference rate for shipping a 20- foot container from Felixstowe to Hong Kong fell from $3,645 in 1980 to $2,136 just three years later, and was lower in 1988 than at the start of the decade. The cost of shipping a 40-foot box from Europe to New York, $2,000 in the middle of 1979, was below $1,000 by the summer of 1980. By January 1981, so many nonconference ships were competing to carry trade from Manila that the Philippines-North America conference collapsed.
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The second important result of shippers’ new power in the 1970s, along with their willingness to defy the shipping cartels, was their embrace of an idea that had been a heresy: the deregulation of transportation.

Trucking was tightly regulated almost everywhere in the early 1970s, with the notable exception of Australia. Most railroads were state-owned, damping any competitive instincts. So long as political power rested with the transportation companies and their unions, rather than their customers, the regulatory structure stood strong. If its collapse can be dated to a single event, it was the bankruptcy of the Penn Central, the largest railroad in the United States, in June 1970. The Penn Central’s failure, followed in short order by half a dozen other rail bankruptcies, drew attention to the regulations that kept the railroads from adapting to truck competition. The costly and controversial government rescue program altered the political equation, and Republicans and Democrats alike began calling for reductions in regulation. In November 1975, President Gerald Ford proposed eliminating much of the Interstate Commerce Commission’s authority over interstate trucking. The following year, Congress took the first steps to ease regulation of railroads.
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An intense national debate ensued. On one side, along with railroads wanting more flexibility to compete with truckers, were shippers and consumer advocates who argued that deregulation would reduce costs. Some trucking companies, especially those that handled smaller shipments, were eager to get rid of regulations. On the other side, many companies that handled full truckloads of freight were bitterly opposed to changes that would encourage partial truckloads, and the unions representing railroad workers and truck drivers fought changes that would weaken union power and eliminate union jobs. The regulators, who were easing regulations slowly and gradually, warned Congress against haste. “Certain shippers command substantial and sometimes overwhelmingly superior bargaining power,” the ICC’s chairman cautioned, asserting the need for the government to keep control in order to protect truckers and railroads from their customers.
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In the midst of this heated campaign, the container became a poster child for the inefficiency caused by outdated regulation.

The basic concept of the container was that cargo could move seamlessly among trains, trucks, and ships. Two decades after Malcom McLean’s first containership, though, container shipping was anything but seamless. In principle, a truck line or a railroad could offer an exporter a “through rate” between St. Louis and Spain, but the through rate was simply the published truck or rail rate for that product from St. Louis to a port, plus the published ship rate for that commodity across the Atlantic. Domestically, truckers did not much like carrying containers long distances from the ports because they might well have to haul them back empty; domestic shippers preferred to use conventional trailers, which did not detach from their chassis, rather than detachable containers. Railroads did have a business carrying domestic “piggyback” truck trailers on flatcars, but the service was attractive only for relatively long trips; sending a trailer piggyback the four hundred miles from Minneapolis to Chicago took eighteen to twenty-two hours, against eight hours or so in a truck. Piggyback was often no bargain, either. The railroads set rates high in the forlorn hope that shippers would use boxcars instead, so putting a trailer on a train often cost more than taking it over the road.
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The railroads were no more aggressive when it came to containers, without the truck chassis and wheels. When Sea-Land and the railroads had discussed a transcontinental container service back in 1967, the railroads asked for three times the price that the ship line was willing to pay, and talks went no further. They tried again in 1972 with a service called “minibridge,” in which a ship line and railroads would join forces to carry a container from, say, Tokyo to New York via the port of Oakland. The carriers would agree on a single rate for the entire trip, file it with both the Interstate Commerce Commission (the rail regulator) and the Federal Maritime Commission (the ship regulator), and decide how to split up the money. Ship lines claimed that minibridge cut costs by eliminating the long, fuel-consuming voyage through the Panama Canal. The real advantage, less publicized, was that loading and unloading ships was much cheaper in Pacific coast ports than on the East Coast: almost no one bothered to export from California to Europe by minibridge through New York. The railroads were so uninterested in the concept that they could not even be bothered to design equipment more efficient than their standard flatcars. Shippers often saw little saving. Sending televisions from Japan to New York by mini-bridge took several days less than by all-water service but was no less expensive. Sending synthetic rubber from Texas to Japan, a U.S. government study found in 1978, cost three times as much by mini-bridge through Los Angeles as when the rubber was trucked to Houston and loaded on a ship.
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Deregulation changed everything. In two separate laws passed in 1980, Congress freed interstate truckers to carry almost anything almost anywhere at whatever rates they could negotiate. The ICC lost its role approving rail rates, except for a few commodities such as coal and chemicals. Trucks and railcars that had often been forced to return empty were able to get cargo for backhauls. Another definitive break from the past proved critical to driving down the cost of international shipping. For the first time, railroads and their customers could negotiate long-term contracts setting rates and terms of service. The long-standing principle that all customers should pay the same price to transport the same product gave way to a system that yielded huge discounts for the biggest customers. Within five years, 41,021 contracts between railroads and shippers were filed with the ICC. Freight transportation within the United States was reshaped dramatically. Costs fell so steeply that by 1988, U.S. shippers—and, ultimately, U.S. consumers—saved nearly one-sixth of their total land freight bill.
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Perhaps no part of the freight industry was altered more than container shipping. The ability to sign long-term contracts gave railroads an incentive to develop a business that had languished for two decades, with assurance that their investment would not go to waste. Equipment manufacturers went back to work on low-slung railcars designed for fast loading of containers stacked two-high, the sort of cars Malcom McLean had tried—and failed—to convince railroads to use back in 1967. Deregulation meant that those doublestack cars could be used to haul international containers in one direction and containers filled with domestic freight in the other—impractical before 1980—so the international shipment did not have to bear the cost of returning an empty container to the port.

In July 1983, American President Lines sponsored the first experimental train composed only of the new double-stack cars. Within months, ship lines and railroads had negotiated ten-year contracts under which dedicated double-stack container trains would speed imports from Seattle, Oakland, and Long Beach directly to specially designed freight yards in the Midwest. Days were shaved off the delivery time. The rates, set by negotiation rather than regulation, were far lower than before and were designed to fall further as volumes rose. On average, it cost four cents to ship one ton of containerized freight one mile by rail in 1982. Adjusted for inflation, that cost dropped 40 percent over the next six years. Rail rates fell so steeply that by 1987, more than one-third of the containers headed from Asia to the U.S. East Coast crossed the United States by rail rather than making the voyage entirely by sea. A major obstacle to international trade had given way.
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