No one was more aware that the world was about to change than Malcom McLean. He was already fully committed to the container. Outracing any potential competitors, Sea-Land had converted seven vessels into containerships between 1961 and 1963. The converted ships allowed it to open West Coast service in 1962 and then to buy Alaska Freight Lines in 1964, but at the cost of increasing its debt from $8.5 million to $60 million in just two years. By 1964, far greater financing needs loomed as Sea-Land began to look at Europe. Once word of McLean’s next destination got out, the big American companies would surely enter the transatlantic container trade, and the European ship lines were bound to join in as well. To stay in the lead, McLean had no choice but to roll the dice once again. He did it by arranging two more extraordinary financial transactions in 1965.24
The first was with Daniel K. Ludwig, a man who had much in common with Malcom McLean. Ludwig, born in 1897, had entered the shipping business at age nineteen by transporting molasses around the Great Lakes. Like McLean, he ran his business with a legendary focus on costs; according to one famous story, he bought a tanker called the Anahuac and decided to keep the name because “it would have cost $50 to paint it out.” By the 1950s his National Bulk Carriers was the largest American-owned ship line, and Ludwig was one of the world’s wealthiest men. His holdings included American-Hawaiian Steamship Company, a shell since it stopped operating ships in 1953. Ludwig had watched McLean’s container venture carefully, and in January 1961 American-Hawaiian suddenly applied for $100 million in federal subsidies to build ten enormous high-speed ships and open an intercoastal service through the Panama Canal. Sea-Land promptly announced its own entry into the intercoastal route and spent the next year successfully blocking Ludwig’s bid for subsidies. Ludwig pared his subsidy request to three ships, to be powered by nuclear reactors, but then decided that the best way to profit from container shipping was to invest in Sea-Land instead. In early 1965, when McLean Industries’ shares were trading for $13 apiece, the company issued one million shares of stock to American-Hawaiian for $8.50 per share, and Ludwig joined the company’s board of directors. It was the first act of what would prove to be a long-running collaboration between Ludwig and Malcom McLean.25
The second deal involved Litton Industries. Litton, founded in the 1930s to make radio tubes, had been reshaped during the 1950s into a new type of company, a “conglomerate.” Among its far-flung holdings was the Ingalls Shipyard in Pascagoula, Mississippi. Litton, like the other conglomerates of the day, was bent on fast growth, and it was eager for Ingalls to diversify away from naval contracts into commercial work. McLean needed ships but had no money; Litton was rolling in money but desperate to keep its shipyard busy.
Negotiations led to the creation of a company called Litton Leasing. On November 5, 1964, Sea-Land sold Litton nine containerships for $28 million, using the proceeds to help pay off $35 million in bank loans. Litton immediately leased the ships back to Sea-Land. Litton took other ships formerly belonging to the Waterman operation, which McLean was selling off. It widened them, lengthened them, and installed container cells to meet Sea-Land’s specifications. For an annual rent that came to $14.6 million, the cash-strapped ship line was able to add eighteen containerships to its fleet in just four years. For good measure, Litton agreed to swap its convertible stock for 800,000 McLean Industries shares, immediately strengthening Sea-Land’s stretched balance sheet by $6.8 million.26
Sea-Land’s quick moves to acquire a huge new fleet opened the floodgates. During eight short weeks in the late summer of 1965, no fewer than twenty-six containership projects hit the headlines. Each required $8 to $10 million to convert a ship and another $1- $2 million for chassis and containers. For an industry notoriously tight with its cash, a total investment of a quarter billion dollars to enter a trade that might not generate business was almost incomprehensible. Companies that had watched containerization from a distance for years, curious but noncommittal, now felt that they had to put up real money or be swept away in the flood. Not all of them were eager. When Sea-Land threw a party at the Rotterdam Hilton to introduce its service to Dutch shippers at the start of 1966, its guests booed, and the head of Holland-America Line, itself preparing to carry containers, told a Sea-Land executive, “You come back with the next ship and take all the containers home.”27
The established carriers’ great fear was that containers would force down freight rates. Four conferences, one covering traffic each way between North America and northern Europe and the other two dealing with cargo between North America and the British Isles, set the rates for every commodity in their trades. They naturally had no provisions for containers.
Joining the conferences was not essential for Sea-Land, although belonging would surely smooth its way in dealings with European governments and ports. For United States Lines, already a conference member, conference rules on containers were critical. McLean ordered his representatives to seek admission to the eastbound and westbound North Atlantic Continental Freight Conferences, and to do so without causing fights. After Sea-Land proclaimed that it had no desire to start a rate war, the doors were opened. Sea-Land and U.S. Lines put forth two proposed rules: moving containers between piers and warehouses should be cheap, and ocean freight rates should include the use of steamship lines’ containers and chassis, so that shippers would not have to pay extra. Their European competitors, contemplating container services themselves, accepted both requests. “We didn’t ask for any big concessions,” a Sea-Land executive recalled. “We just asked them to accommodate the container. And, you know, I think that was a big mistake they made, but they did.” A European shipping executive remembered things differently: “They’re afraid of Sea-Land,” he said, “but they would rather keep an eye on them from the inside than have them on the outside and wonder what they’re doing.” Whatever the case, Sea-Land was able to enter the North Atlantic trade not as an outcast, but as a member of the club.28
Moore-McCormack Lines, a subsidized American carrier sailing between the East Coast and Scandinavia, opened the first transatlantic container service in March 1966, using combination ships that carried truck trailers, containers, and mixed freight. U.S. Lines, also a subsidized operator, followed almost immediately, carrying 40 20- foot containers along with mixed freight in its holds. In April, after signing agreements with 325 European truck lines to deliver its cargo to places like Basel and Munich, Sea-Land, with no government operating subsidy, began service on a totally different scale. Weekly sailings from Newark and Baltimore to Rotterdam and Bremerhaven carried 226 of its 35-foot containers.
All three carriers reported stunning efficiencies. Three medium-size containerships could handle as much transatlantic freight as six breakbulk ships, with only half the capital cost and two-thirds of the operating cost, a consultant reported. U.S. Lines found that at Port Elizabeth, one longshore gang with one crane could load as much in a ten-hour container operation as ten gangs handling conventional breakbulk freight. Moore-McCormack pegged the cost of loading containerized cargo at Port Elizabeth as $2.00 to $2.50 per ton, versus $16.00 per ton for conventional freight.29
Two types of freight appear to have filled those first containers crossing the Atlantic: whiskey on the westbound run, military goods on the voyage to Europe. Liquor exporters had long complained of huge losses to theft on the docks, and convincing them to use containers was not a hard sell. Among Sea-Land’s first ports of call was Grangemouth, in Scotland, where it picked up Scotch whiskey. Sea-Land won the business with a tank container, made of stainless steel, designed to let exporters ship their whiskey in bulk for bottling in the United States. Two tank containers would fit neatly into a standard container cell on a Sea-Land ship, putting an end to the pilferage that had plagued the whiskey trade from time immemorial.
The military role was even more crucial. As a U.S.-flag carrier, Sea-Land was entitled to carry a portion of the freight for the quarter million U.S. soldiers in West Germany, and the military, deter
mined to push containerization, channeled cargo Sea-Land’s way. According to industry rumor, more than 90 percent of the cargo on Sea-Land’s first transatlantic voyage was military freight. Military demand all but assured that Sea-Land’s first voyages would be profitable, and gave it an advantage that foreign carriers could not match. When the navy finally overcame the objections of the breakbulk carriers and put European military shipping contracts out for competitive bids in the summer of 1966, Sea-Land underpriced every American competitor and won all the traffic it could handle.30
Authoritative numbers on shipments during that first year of transatlantic container service do not exist. The vast majority of containers going to and from Europe flowed through New York harbor, and port data offer the best guide to the magnitude of the new trade. The port’s container tonnage, 1.95 million long tons in 1965, soared to 2.6 million tons in 1966, even though hardly any containers were carried during the first 10 weeks of the year. Faced with this enormous flow of cargo, more U.S. companies, two groups of British carriers, and a consortium of Continental ship lines all raced to enter the container trade. “In 1966, commitments by ship operators and ports to containers passed the point of no return,” a consultant judged.31
Only 3 ship lines were offering international container service from the United States in the spring of 1966. By June 1967, one researcher counted 60 companies offering container service to Europe, Asia, and even Latin America (although only a handful used special containerships). More than 50,000 containers—enough to hold half a million tons of freight—crossed the ocean in the second half of 1967. Many carriers placed orders for brand-new containerships, designed to maximize the load of 8-foot-wide, 8-foot-high boxes that were quickly becoming the industry standard. In 1967, as the Port Authority touted a study showing that 75 percent of the Port of New York’s general cargo could move in containers, 64 container vessels were under construction by 12 ship lines. Kerry St. Johnston, head of the British consortium Overseas Containers Ltd., warned that so much new capacity would lead to rampant rate cutting, not a happy prospect for ship lines that were in the process of investing hundreds of millions of dollars in container equipment and ships.32
The new, fully containerized vessels began to come on-line in 1968. Ten containerships per week sailed the North Atlantic that year, carrying a total of 200,000 20-foot containers holding 1.7 million tons of freight. The European companies whose containerships had not yet been finished coped as best they could, piling containers on the decks of their breakbulk ships. They were able to provide their customers with some semblance of container shipping, but with none of the efficiencies enjoyed by companies using fully containerized ships and high-speed cranes. “The costs were horrendous,” remembered Karl Heinz Sager, the head of the German ship line Hapag-Lloyd.33
So far as shippers were concerned, the only reason not to join the rush to container freight was the shortage of containers. Although U.S.-flag ship lines added 13,000 containers between September 1966 and December 1967, and European ship lines bought thousands more, empty boxes could be in short supply. Otherwise, the cost savings were compelling, even with the conferences controlling transatlantic rates. Chas. Bruning Co., a maker of office machines near Chicago, found that it could get its equipment delivered to inland points in Europe in an average of twelve days. In addition to cheaper ocean freight, Bruning saved money by eliminating special export packaging, damage, and theft, and got a 25 percent discount on its insurance. So much traffic shifted so quickly that three years after containerships first sailed to Europe, only two American companies were still operating breakbulk ships across the North Atlantic, making a combined total of three sailings per month.34
The surge in transatlantic container traffic, coming at a time when American factories were running hard to meet the demands of a wartime economy, offered a golden opportunity for U.S. railroads to regain their place at the heart of the domestic transportation system. Their business in conventionally packaged export cargo was dying. Thousands of containers were passing through New Jersey and Baltimore every week, many of them going to or from factories in the industrial heartland of the upper Midwest. This huge scale offered no advantage to truckers, because, no matter how many boxes were being handled, one truck could pull only one 40-foot box. Scale could bring real savings aboard trains, giving the railroads a way to recover some of the export traffic they were losing.
The European railroads saw things that way. The Europeans had been trying to make a business with containers since the 1920s, and they were eager to strike deals with the ship lines. Almost as soon as transatlantic container shipping began, they offered flat per-container rates to draw traffic. In 1967, the French National Railway charged a flat 572 francs to carry a loaded 40-foot container from Bremen, in North Germany, to Basel, in Switzerland, while the German Federal Railway charged $241 to take any 40-foot box from Bremen to Munich. In Britain, using dedicated trains to carry containers to and from the port at Felixstowe had been part of Sea-Land’s plan from the very beginning, and British Rail was an eager collaborator.35
American railroads, especially those in the East, were notably less enthusiastic. They feared that containers would draw shipments away from boxcars, bringing in less revenue. Most of them had already built ramps to load and unload truck trailers under the auspices of Trailer Train, and at a time when they were financially pressed, they had no desire to lay out additional money for overhead cranes and storage yards to handle containers. The New York Central had a successful operation with its unique Flexi-Van service, and it feared that maritime containers would siphon off Flexi-Van’s customers. The railroads could not refuse to handle containers, but they could provide such poor service that no customer would want to ship them. In February 1966, the Pennsylvania Railroad delivered a flatcar holding two 20-foot containers to a Caterpillar Tractor warehouse in York, Pennsylvania. The containers were loaded while sitting on the car on Caterpillar’s siding, and the railroad charged for the haul to New Jersey as if Caterpillar had simply loaded its parts into boxcars. The shipment was billed as an experiment for American Export Lines, and the railroads were rooting for it to fail. “[W]e hope that the high cost of loading, blocking and bracing, and the unloading of the containers plus the loss of the containers for 2 weeks with no offsetting per diem revenue, will discourage their pursuing this avenue further,” a New York Central official wrote his counterpart at the Pennsylvania.36
The eastern railroads commissioned a study, which urged them to act quickly to attract container traffic. The railroads chose to do the opposite. They agreed on a new rate structure to discourage containers, providing that any container weighing more than five hundred pounds would be charged on the basis of the weight and the contents, rather than receiving the lowest full-carload rate. In addition, they insisted upon charging ship lines for carrying empty containers from the port to customers inland—hardly a policy that encouraged shippers to use rail for the land portion of international shipments. If those measures were not enough to deter container business, some railroads simply drove it away. In the spring of 1967, when Whirlpool Corporation asked the New York Central to move containers of refrigerators from an Indiana factory to the New Jersey docks, the railroad advised Whirlpool to ship its refrigerators in boxcars and put them into containers at the port; Whirlpool shipped by truck instead. Matson’s plan to ship containers of Hawaiian pineapple cross-country by train met with similar hostility, because the rate for transporting the containers between Chicago and New Jersey was far below the standard per-ton rate for carrying canned goods. “It is extremely important that we defeat the proposal,” a New York Central executive wrote.37
Malcom McLean had a different vision. For him, railroads, trucks, and ship lines were in the same business—moving freight. He wanted to turn Sea-Land’s intrepid sales force loose to locate manufacturers exporting to Europe from Little Rock and Milwaukee. In 1966, as Sea-Land’s transatlantic service was getting under way, McLean Industries
offered an audacious proposal to build rail-road yards in Chicago and St. Louis, at its own expense. Freight forwarders owned by McLean Industries would collect freight from shippers, consolidate it into McLean-owned containers, and load the containers aboard McLean-owned railcars, specially designed by the Pullman Company to carry containers stacked two high. The Pennsylvania Railroad would pull McLean’s all-container train straight to a rail yard Sea-Land would build by the docks at Elizabeth, arriving in time to meet a Europe-bound ship, which would in turn connect with trucks and trains on a European dock. For the first time, a shipper a thousand miles from the sea would be able to buy not just international transportation but tightly scheduled international transportation. A seller could tell its customers when the goods were to arrive, with a reasonable likelihood that the schedule would be met.38
The economic advantages of this truck-train-ship combination seemed overwhelming. Trucks would do the short-haul work for which they were best suited. Trains would handle the long land haul, where their costs were lowest. Shippers’ costs for the domestic leg of their international shipment would fall by half. The Pennsylvania was intrigued by the plan, the New York Central and the Baltimore and Ohio opposed. But as the Pennsylvania and the New York Central announced plans to merge, McLean’s ambitions were scuttled. The railroads made the minimum counteroffer that the ICC would allow: they would carry Sea-Land’s container cars—mixed in with other cars on their regular slow freights.39
The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger Page 20
