No conglomerate chieftain was a more avid reader of financial reports than Malcom McLean. He knew what the cost of competition was going to be, and he knew that Sea-Land, its balance sheet stretched to the limit, had no hope of borrowing the money. His previous conglomerate backer, Litton, which held 10 percent of Sea-Land’s shares, was tapped out. McLean turned toward an entirely unexpected source of funds: R. J. Reynolds Industries. Reynolds, based in Winston-Salem, North Carolina, was the nation’s largest tobacco company. Its cigarette business threw off cash by the bucketful, and its managers were using that cash to turn the company into a conglomerate. U.S. cigarette consumption had fallen in 1968, and impending restrictions on marketing—the government would ban cigarette advertising on American television at the start of 1971—boded ill for its core business. The ship line’s huge investment needs would provide Reynolds with a convenient shelter from corporate income tax. An added inducement was McLean’s status as a local genius—he had moved McLean Trucking to Winston-Salem after World War II and had lived there for a decade. Reynolds offered $530 million, with McLean Industries’ shareholders free to choose between Reynolds securities and $50 per share in cash. Litton Industries cashed out at a huge profit, as did Daniel K. Ludwig: the $8.5 million that Ludwig had invested in Sea-Land in 1965 now was worth $50 million. Many Sea-Land executives, shocked by word of their company’s sale, instantly became very wealthy men.7
If anyone doubted McLean’s timing, his wisdom soon became clear. In October 1968, he had commissioned designs for an entirely new kind of containership, the SL-7. The SL-7 was meant to leave U.S. Lines’ new Lancer looking as outdated as a Liberty Ship. It would be nearly a thousand feet long, just a few feet shorter than the famed Queen Mary. Its capacity was 1,096 of Sea-Land’s 35-foot containers, equivalent to more than 1,900 20-foot boxes—a far greater load than any other ship afloat. Its most striking characteristic, though, was its speed. The SL-7 would travel at 33 knots, twice as fast as any ship in the Sea-Land fleet. It would be fast enough to sail around the world in 56 days, so fast that a fleet of eight ships could provide a round-the-world sailing from each major port each week. U.S. Lines boasted that the Lancer and its sister ships could deliver a container from Newark to Rotterdam in 6½ days. The SL-7s would do it in 4½ days and could cross the Pacific from Oakland to Yokohama in just 5½ days. Only one commercial ship ever built, the venerable passenger liner United States, was fast enough to keep up with it.8
More was at work than megalomania. McLean, once more, had conceived a way to gain a strategic edge. He planned to deploy the new ships in the Pacific. Sea-Land was a conference carrier in the Pacific, charging the same rates as its competitors. The SL-7s’ faster transit time would help Sea-Land attract cargo, and other carriers, bound by the conference agreement, would not be able to drop their rates in response. In the summer of 1969, the Sea-Land division of R.J. Reynolds Industries made its plans for the SL-7 public, ordering eight vessels from European shipyards. The price tag was $32 million per ship. Containers and other equipment would bring the total cost of the SL-7s to $435 million. For McLean Industries, even if it could have raised the money, spending nearly half a billion dollars on ships would have been a bet-the-company gamble. For R. J. Reynolds, it was almost spare change. The tobacco giant was so cash rich that in 1970 it purchased a petroleum company, American Independent Oil Company, to provide a cheap source of fuel for Sea-Land’s expanding fleet.9
The first stage of the container boom occurred entirely on the North Atlantic. The second happened on the Pacific. Matson sailed the first fully containerized ship from Japan in September 1967, in what it thought would be a partnership with Japanese ship lines. Having learned the business, the Japanese soon left Matson behind and began their own container service to California in September 1968. Sea-Land, using containerships headed home from Vietnam, began carrying 35-foot boxes from Yokohama and Kobe the following month. If there had been any doubt about whether Japanese exporters would adopt containerization, it was settled quickly. Within a year, container tonnage between Japan and California was two-thirds that across the North Atlantic. The impact on trade flows was immediate. Japanese seaborne exports, 27.1 million metric tons in 1967, rose to 30.3 million with the start of containerization late in 1968 and then soared to 40.6 million tons in 1969, the first full year of container service to California. The value of Japanese exports to the United States leaped 21 percent in 1969 alone.10
Cars, which did not travel in containers, accounted for part of the export surge. Much of the increased trade, however, was stimulated by containerization. Within three years, nearly one-third of Japanese exports to the United States were containerized, as were half of Japan’s exports to Australia.11
Electronics manufacturers had been among the first Japanese exporters to see the advantages of shipping their fragile, theft-prone products in containers. Electronics exports had been on the rise since the early 1960s, but the lower freight rates, inventory costs, and insurance losses from container shipping helped turn Japanese products into everyday items in the United States, and soon in Western Europe. Exports of televisions climbed from 3.5 million sets in 1968 to 6.2 million in 1971. Shipments of tape recorders went from 10.5 million to 20.2 million units over the same three years. Containerization even gave new life to Japanese clothing and textile plants. Rising wages had put an end to the growth of Japan’s apparel exports in 1967, but the drop in shipping costs briefly made it viable for Japanese clothing manufacturers to sell in America again.12
In 1969, as United States Lines was preparing to add eight fast containerships to its U.S.-Japan service, the Japanese government put shipping at the center of its economic development strategy. Its new five-year plan called for a 50 percent expansion of Japan’s merchant fleet, including tankers and ore carriers as well as containerships. The government offered $440 million to help Japanese ship lines begin container service to New York, the Pacific Northwest, and Southeast Asia, using Japanese-built ships. The subsidies were an incredible bargain. A ship line needed to put up only 5 percent of the cost of building its new vessel. The government development bank provided most of the funds. No payments were due for three years, after which the ship line was to repay the loan over ten years at an interest rate of 5.5 percent—a lower rate than the Japanese government paid to borrow the money that its development bank lent out. The remainder of the construction cost came from commercial banks, with the government paying 2 percentage points of interest. With such giveaway terms, Japanese ship lines had no fewer than 158 vessels on order or under construction by the end of 1970, all in Japanese shipyards.13
Hong Kong received its first visit from a fully containerized ship in July 1969, even before its container terminal was ready. The following year, as Sea-Land opened container service to South Korea and Matson began biweekly visits to Taiwan, Hong Kong, and the Philippines, container capacity on transpacific routes reached nearly a quarter million units in 73 vessels. Other new services linked Australia to Europe, North America, and Japan. Regular sailings with fully containerized ships between Europe and the Far East began in 1971.14
Shipyards around the world were choked with new orders. East Asia’s ports, with years to prepare themselves, were ready and waiting as the new vessels came on line in 1971 and 1972. Trade soared, as a story similar to Japan’s was repeated along the Pacific Rim. Oceanborne exports from South Korea, 2.9 million tons in 1969, reached 6 million tons in 1973. Korean exports to the United States trebled over those three years as lower shipping costs made its garments competitive in the U.S. market. Hong Kong followed much the same course. Before it filled ninety-five acres of harbor to build a containerport, the colony’s shipping had been so primitive that oceangoing ships anchored far out in the harbor, and small boats shuttled imports and exports back and forth to shore. With the new terminal allowing containerships to collect cargo straight from the dock, Hong Kong’s shipments of clothing, plastic goods, and small electronics rose from 3 millio
n tons in 1970 to 3.8 million in 1972, and the value of its foreign trade rose 35 percent.
Exports from Taiwan, $1.4 billion in 1970, were $4.3 billion by 1973, and imports more than doubled. The pattern in Singapore was much the same. In Australia, the opening of container traffic coincided with a surge in manufactured exports and a dramatic shift away from traditional exports such as meat, ore, and greasy wool. The volume of exports other than minerals or farm products rose 16 percent annually from 1966–67 to 1969–70. Prior to 1968, the value of Australia’s industrial exports typically came to less than half its exports of grain and meat. By 1970, most of Australia’s general-merchandise trade was already moving in containers, and factory exports nearly matched farm exports. In the process, Australia left behind its past as a resource-based economy and began to develop a much more balanced economic structure.15
The container cannot claim sole credit for this burst of international commerce, but it is entitled to a share. A 1972 study by McKinsey & Company, an international consulting firm, laid out some of the ways in which containerization stimulated trade between Europe and Australia, where containers came into use on mixed vessels in 1967 and fully containerized ships opened service in 1969. Previously, Australia-bound ships had spent weeks calling at any of eleven European ports before starting the southbound voyage. Containerships collected cargo only at the huge containerports at Tilbury, Hamburg, and Rotterdam, whose enormous size kept the cost of handling each container low. Previously, shipments took a minimum of 70 days to get from Hamburg to Sydney, with each additional port call adding to the time; containerships offered a transit time of 34 days, eliminating at least 36 days’ worth of carrying costs. Insurance claims for Europe-Australia service were running 85 percent lower than in the days of breakbulk freight. Packaging costs were much lower, and ocean shipping rates themselves had dropped. The total savings from containerization were so great that traditional ships abandoned the Australia route almost immediately.16
The breakneck construction of new containerships transformed the world’s merchant fleet. In 1967, 50 American-owned vessels, most of them built during World War II and rebuilt during the 1950s or 1960s, accounted for all but a handful of the fully containerized ships in operation around the world. From 1968 through 1975, no fewer than 406 containerships entered service. Most of the new vessels were at least twice as large as any that had been on the scene in 1967. Beyond these fully containerized vessels, ship lines added more than 200 partially containerized ships, with container cells built into some of their holds but not others, and almost 300 roll on-roll off ships to serve routes that lacked the volume to justify containerships. With these hundreds of new vessels, container shipping was coming into full flower.17
The U.S. merchant fleet changed almost overnight. In 1968, there were still 615 general-cargo freighters flying the U.S. flag. Within the next six years, more than half of those vessels had left American-flag service, either cast off to the tenuous ship lines of poor countries or sold for scrap. Replacing them were fewer but much larger and faster ships. The American seamen’s unions were wont to cite the diminished fleet as a sign of maritime weakness, but the truth is that the few dozen new containerships could carry far more cargo than the hundreds of rust buckets they supplanted. Even as the U.S.-flag fleet shrank nearly by half, the number of vessels able to carry more than 15,000 tons of cargo rose from 49 in 1968 to 119 in 1974. New steam-turbine engines helped boost the average speed of large U.S.-flag freighters from just 17 knots in 1968 to 21 knots in 1974. The difference was enough to cut a full day off a transatlantic crossing.18
The launch of so many vessels resulted in a quantum jump in capacity. The basic economics of containerization dictated as much. Once a ship line had made the decision to introduce containerships on a particular route, other carriers in the trade normally followed swiftly lest they be left behind. The capital-intensive nature of container shipping put a premium on size; quite unlike breakbulk shipping, in which an owner of “tramp” ships could eke out a profit picking up freight wherever it could be found, a container line needed enough ships, containers, and chassis to run a high-frequency service between major ports on a regular schedule. When a ship line decided to enter a trade, it had to do so in a large way—which meant that on every major route, several competitors were entering with several vessels apiece. Capacity on the largest international routes increased fourteen times over between 1968 and 1974. Between the United States and northern Europe, where only a handful of small containers had moved prior to 1966, there were enough new ships to carry nearly a million boxes a year by 1974. The containership route between Japan and the U.S. Atlantic coast, opened only in 1970, was served by thirty vessels in 1973.19
Demand, robust through it was, could not possibly keep up with this explosion of supply. The result was a new and painful experience for the shipping industry: a rate war.
Overcapacity was an old story in ocean shipping. The flow of cargo had always been volatile, based on economic growth, changes in tariffs and trade restrictions, and political factors such as wars and embargoes. In the 1950s and 1960s, though, a temporary imbalance between the amount of space on breakbulk ships and the amount of general cargo usually was not a fatal problem. The war-surplus ships that filled most merchant fleets had been acquired for little or nothing, so shipowners were not saddled with huge mortgage payments. Their main expenses—cargo handling, fees for the use of docks, pay for crews, fuel—were operating costs. If business was bad, the ship-owner could lay the vessel up and most of the costs would go away.
The economics of container shipping were fundamentally different. The huge sums borrowed to buy ships, containers, and chassis required regular payments of interest and principal. State-of-the-art container terminals meant either debt service, if a ship line had borrowed to build its own terminal, or rent, if the terminal was leased from a port agency. Those fixed costs accounted for up to three-quarters of the total cost of running a container operation, and they had to be paid no matter how much cargo was available. No company could afford to lay up a containership just because there was too little cargo. So long as each voyage collected enough revenue to cover operating costs, the ship had to keep moving. In container shipping, quite unlike breakbulk, overcapacity would not diminish as owners temporarily idled their ships. Instead, rates would fall as carriers struggled to win every available box, and over-capacity would persist until the demand for shipping space eventually caught up with the supply.20
Overcapacity preoccupied everyone connected with containerization. “Now that standardized containers have been introduced, the rush to ‘get on the bandwagon’ will probably lead to substantial overexpansion,” a study for the British government warned in 1967. By one early estimate, 5 ships carrying 1,200 containers each, sailing at 25 knots, could move all of the U.S.-UK trade that could be containerized. By another, just 25 ships could handle the entire general-cargo trade between Europe and North America. A third estimate foresaw that the 5 ships ordered by the American carrier Farrell Line would be adequate for all of Australia’s exports to the United States. With hundreds of containerships on order, experts projected that half the available container slots across both the Atlantic and the Pacific would go unused by 1974. In the North Atlantic, “by the early 1970s there will be excess container capacity,” a study for the U.S. government predicted in 1968.21
The wolf was at the door even sooner than anticipated. In early 1967, less than a year after fully cellular containerships entered the trade, the North Atlantic conferences cut rates for containers by 10 percent—an action that a leading U.S. shipping executive termed “a disaster.” That was only the beginning. With too many ships chasing too little cargo, the long-standing structure of ocean freight rates began to fall apart.22
Prices for international shipping, unlike domestic shipping, usually were not set by government regulators. Instead, rate setting was the realm of liner conferences, voluntary cartels of the operators on each route.
No fewer than 110 different conferences set rates on routes to or from the United States, and similar conferences governed routes elsewhere in the world. The conference members negotiated a rate schedule among themselves and often assigned each member ship line a percentage of the total traffic. All shippers using conference carriers were supposed to pay the official rates, with no special deals, although cheating was common; “rebating,” secretly refunding part of a shipper’s payments, was a widespread if illegal practice. Conferences in trades serving the United States were required to publish their rates and to be “open”—that is, to accept new lines that wished to join—but many other routes around the world featured confidential rates and “closed” conferences that excluded newcomers. On most routes, governments did not require ship lines to be conference members—but if a carrier began operating as an “independent,” it was likely to find the conference letting its members slash rates and add capacity in order to destroy the intruder. Most of the time, all carriers had an interest in going along with the system.23
The conferences structured their rates very much as railroads did. There was a separate rate for each commodity, or sometimes two rates, one measured by weight and one by volume. For breakbulk shipping, there was logic behind this: some commodities were more complicated to load than others, some took more shipboard space and some less, and different rates were a way to recognize the differing costs. Applied to containers, the commodity-based system made no sense at all: a ship line’s cost to move a 40-foot container of bicycle tires was identical to its cost for a 40-foot container of table lamps. When containers appeared, though, the conferences, dominated by companies that still sailed breakbulk ships, relied on the tried-and-true system of commodity-based rates. On the North Atlantic, the rate per ton for a product shipped in a container was the same as if it were shipped breakbulk, with a discount of 5 to 10 percent for a full container of a single commodity. Rates for mixed freight made even less sense. When the Europe-Australia conference set container rates in 1967, a year before containership service opened, it decreed that each commodity in a mixed container would be charged the per-ton rate for that commodity. The only way to find the correct rate was to open the container and weigh every single item inside.24
The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger Page 26
