The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger - Second Edition with a new chapter by the author

by Marc Levinson

The value of this utilitarian object lies not in what it is, but in how it is used. The container is at the core of a highly automated system for moving goods from anywhere, to anywhere, with a minimum of cost and complication on the way.

In 1956, the world was full of small manufacturers selling locally; by the end of the twentieth century, purely local markets for goods of any sort were few and far between.

Low shipping costs helped make capital even more mobile, increasing the bargaining power of employers against their far less mobile workers.

A ship carrying 9,000 40-foot containers, filled with 200,000 tons of shoes and clothes and electronics, may make the three-week transit from Hong Kong through the Suez Canal to Germany with only twenty people on board.4

A 25-ton container of coffeemakers can leave a factory in Malaysia, be loaded aboard a ship, and cover the 9,000 miles to Los Angeles in 23 days. A day later, the container is on a unit train to Chicago, where it is transferred immediately to a truck headed for Cincinnati. The 11,000-mile trip from the factory gate to the Ohio warehouse can take as little as 28 days, a rate of 400 miles per day, at a cost lower than that of a single business-class airline ticket. More than likely, no one has touched the contents, or even opened the container, along the way.

Transportation has become so efficient that for many purposes, freight costs do not much affect economic decisions.

In 1961, before the container was in international use, ocean freight costs alone accounted for 12 percent of the value of U.S. exports and 10 percent of the value of U.S. imports.

A pharmaceutical company would have paid approximately $2,400 to ship a truckload of medicines from the U.S. Midwest to an interior city in Europe in 1960 (see table 1). This might have included payments to a dozen different vendors: a local trucker in Chicago, the railroad that carried the truck trailer on a flatcar to New York or Baltimore, a local trucker in the port city, a port warehouse, a steamship company, a warehouse and a trucking company in Europe, an insurer, a European customs service, and the freight forwarder who put all the pieces of this complicated journey together. Half the total outlay went for port costs.7

“A four thousand mile voyage for a shipment might consume 50 percent of its costs in covering just the two ten-mile movements through two ports.” These were the costs that the container affected first, as the elimination of piece-by-piece freight handling brought lower expenses for longshore labor, insurance, pier rental, and the like. Containers were quickly adopted for land transportation, and the reduction in loading time and transshipment cost lowered rates for goods that moved entirely by land. As ship lines built huge vessels specially designed to handle containers, ocean freight rates plummeted. And as container shipping became intermodal, with a seamless shifting of containers among ships and trucks and trains, goods could move in a never-ending stream from Asian factories directly to the stockrooms of retail stores in North America or Europe, making the overall cost of transporting goods little more than a footnote in a company’s cost analysis.

Quicker handling and less time in storage translated to faster transit from manufacturer to customer, reducing the cost of financing inventories sitting unproductively on railway sidings or in pierside warehouses awaiting a ship. The container, combined with the computer, made it practical for companies like Toyota and Honda to develop just-intime manufacturing, in which a supplier makes the goods its customer wants only as the customer needs them and then ships them, in containers, to arrive at a specified time. Such precision, unimaginable before the container, has led to massive reductions in manufacturers’ inventories and correspondingly huge cost savings. Retailers have applied those same lessons, using careful logistics management to squeeze out billions of dollars of costs.

This book disputes that view. In the decade after the container first came into international use, in 1966, the volume of international trade in manufactured goods grew more than twice as fast as the volume of global manufacturing production, and two and a half times as fast as global economic output.

Capital, labor, and land, the basic factors of production, have lost much of their fascination for those looking to understand why economies grow and prosper. The key question asked today is no longer how much capital and labor an economy can amass, but how innovation helps employ those resources more effectively to produce more goods and services.

The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use—and most critically, as economists Erik Brynjolfsson and Lorin M. Hitt have pointed out, from the organizational changes through which businesses reshape themselves to take advantage of the new technology.

Not until firms learned to take advantage of the opportunities the container created did it change the world. Once the world began to change, it changed very rapidly: the more organizations that adopted the container, the more costs fell, and the cheaper and more ubiquitous container transportation became.13

Ricardo’s assumption that transportation costs were zero has been incorporated into economists’ models ever since, despite ample real-world evidence that transportation costs matter a great deal.

The total cost of moving the goods carried by the Warrior came to $237,577, not counting the cost of the vessel’s return to New York or interest on the inventory while in transit. Of that amount, the sea voyage itself accounted for only 11.5 percent. Cargo handling at both ends of the voyage accounted for 36.8 percent of the outlay. This was less than the 50 percent or more often cited by shipping executives—but only because Germany’s “economic miracle” had yet to drive up longshore wages; the authors noted that port costs would have been much higher were it not for the fact that German longshoremen earned less than one-fifth the wages of U.S. longshoremen. Their conclusion was that reducing the costs of receiving, storing, and loading the outbound cargo in the U.S. port offered the best method of reducing the total cost of shipping. The authors went beyond the normal admonitions to improve longshoremen’s productivity and eliminate inefficient work rules, and urged a fundamental rethinking of the entire process. “Perhaps the remedy lies in discovering ways of packaging, moving and stowing cargo in such a manner that breakbulk is avoided,” they wrote.

Cost-saving innovations continually materialized as McLean Trucking grew.

By the early 1950s, McLean Trucking was hiring young university graduates and putting them through one of the first formal management training programs in American business.

Men just out of college would come to Winston-Salem, where their first task was learning to drive a truck. After six months of hauling freight, trainees were sent to a terminal and spent several months unloading trucks. Then came a stint in the office, learning the McLean Trucking method for making a proposal to a potential customer, which required careful analysis of the cost of serving the business. Only then were trainees dispatched to their first assignments, usually selling freight in Raleigh or Boston or Philadelphia.10

Container shipping would be 94 percent cheaper than breakbulk shipping of the same product, even allowing for the cost of the container.

For McLean, though, the real triumph came only when the costs were tallied. Loading loose cargo on a medium-size cargo ship cost $5.83 per ton in 1956. McLean’s experts pegged the cost of loading the Ideal-X at 15.8 cents per ton. With numbers like that, the container seemed to have a future.

Malcom McLean’s fundamental insight, commonplace today but quite radical in the 1950s, was that the shipping industry’s business was moving cargo, not sailing ships.

Every part of the system—ports, ships, cranes, storage facilities, trucks, trains, and the operations of the shippers themselves—would have to change. In that understanding, he was years ahead of almost everyone else in the transportation industry. His insights ushered in change so dramatic that even the experts at the International Container Bureau, people who had been pushing containers for decades, were astonished at what he had wrought. As one of that organization’s leaders confessed later, “We did not understand that at that time a revolution was taking place in the U.S.A.”32

The new ships were “the greatest advance made by the United States merchant marine in our time,” said Congressman Herbert Bonner, chairman of the Merchant Marine Committee.

McLean was not deterred. Pan-Atlantic’s problems, he determined, were rooted in the maritime industry’s passive, slow-moving culture. Domestic ship lines, such as Pan-Atlantic, operated in a highly regulated environment that left little room for entrepreneurial spirit. American-owned lines operating internationally, such as Waterman, were allowed to join international rate-making cartels. U.S.-flag ships, using American crews, had the exclusive right to carry the huge flow of U.S. government shipments, including military cargo, and many lines received government operating subsidies as well. This sheltered culture led to excesses like Waterman’s headquarters building in Mobile, with its revolving globe in the lobby and the lavish executive suite on the sixteenth floor. It did not breed the sorts of creative, aggressive, hungry employees that suited Malcom McLean. McLean decided it was time for a culture change. In June 1958, Pan-Atlantic, which now ran only containerships, moved to a new headquarters in a converted pineapple warehouse near the Newark docks, while Waterman, the traditional breakbulk ship line, was deliberately left behind in Mobile.

Meanwhile, Weldon’s research department pursued its quest for optimality by investigating the most efficient way to use Matson’s fleet. Renting time on an IBM 704 computer at several hundred dollars a minute, the researchers built a fully fledged simulation model of the business, incorporating data on volume and costs for more than three hundred commodities at every port the company served at every time of year. Then they added in data on port labor costs, the current utilization of docks and cranes, and the load aboard each ship, to provide real-time answers to practical questions: Should a big Hawaii-bound ship call at Hilo and Lanai, or should it transfer its cargo to a feeder ship at Honolulu? What time of day should a vessel depart Honolulu so as to minimize total costs of delivering a load of pineapples to Oakland? Such simulations were new in the 1950s and had never been used in the shipping industry.19

The experience of Grace Line offered a graphic warning. Grace had won a $7 million government subsidy to convert two vessels into containerships and spent another $3 million on chassis, forklifts, and 1,500 aluminum containers, only to have longshoremen in Venezuela refuse to handle its highly publicized ships. Having badly misjudged the politics and the economics of container shipping, it would eventually sell the ships to Sea-Land at a loss. As a Grace executive noted ruefully, “The concept was valid, but the timing was wrong.”

There can be no doubt, however, that containerization eliminated one of the key reasons for operating a factory in New York City: ease of shipment. A New York City location had long offered transport-cost advantages for factories serving foreign or distant domestic markets, as local plants could get their goods loaded on ships with much less handling than could factories inland. The container turned the economics of location on its head. Now, a company could replace its crowded multistory plant in Brooklyn or Manhattan with a modern, single-story factory in New Jersey or Pennsylvania, could enjoy lower taxes and electricity costs at its new home, and could send a container of goods to Port Elizabeth for a fraction of the cost of a plant in Manhattan or Brooklyn. This is exactly what occurred: while industry fled the city, 83 percent of the manufacturing jobs that left New York between 1961 and 1976 ended up no farther away than Pennsylvania, upstate New York, or Connecticut.

The ILWU had a long history of difficult and at times violent relations with employers in the Pacific ports. The union, then the Pacific division of the ILA, gained recognition only after a bloody coastwide strike in 1934, and staged 1,399 legal and illegal stoppages over the next fourteen years in order to assert its rights. The net result of this constant conflict was a large body of rules, both written and unwritten, governing port operations in great detail. One formal rule provided that, once assigned to a job at a particular hatch of a particular ship, a worker would do only that specific job until the ship sailed; if loading was complete at one hatch but not at another, an idle worker from the first hatch could not be shifted to help out at the second. An important “hip pocket” rule, codified nowhere but enforced by the gang foreman as required, provided that a trucker delivering palletized cargo to a pier would have to remove each item from the pallet and place it on the dock. Longshoremen would then replace the items on the pallet for lowering into the hold, where other longshoremen would break down the pallet once more and stow each individual item—all at a cost so high that shippers knew not to send pallets to begin with.10

Developing such rules, a top ILWU official admitted later, “took no end of imagination and invention.” The union regarded them as indispensable to preserve jobs and maintain uniform costs among competitors. The stevedoring firms with which the ILWU negotiated were willing to accept the rules to avoid the alternative of endless wildcat strikes. Louis Goldblatt, the union’s longtime secretary-treasurer, claimed that the stevedores actually liked many of the rules, because the ship lines paid them a premium of 30 percent for each man-hour worked. Perversely, the more man-hours required to discharge and load a ship, the more profit the stevedore could make.

somewhat unsuccessful attempt to retard the wheels of industrial mechanization progress. In many cases, these efforts have only resulted in our eventual acceptance of the new device, accompanied by our loss of jurisdiction over the new work involved.… We believe that it is possible to encourage mechanization in the industry and at the same time establish and reaffirm our work jurisdiction, along with practical minimal manning scales, so that the ILWU will have all of the work from the railroad tracks outside the piers into the holds of the ships.

For organized labor, automation was a front-burner issue. Two-thirds of the labor leaders responding to a survey identified it as unions’ most serious concern. Automation is “rapidly becoming a curse to this society,” AFL-CIO president George Meany told the labor federation’s annual convention in 1963. The substitution of machinery for manpower was threatening to unions, blurring long-established jurisdictional lines and raising bargaining costs by reducing the number of workers in a plant, and displacement could be devastating to workers. Many workers in the 1960s lacked basic reading and mathematical skills, and education levels were low enough to make retraining problematic: half of U.S. factory production workers had no more than a tenth-grade education.

Despite these discontents, the longshore unions’ tenacious resistance to automation appeared to establish the principle that long-term workers deserved to be treated humanely as businesses embraced innovations that would eliminate their jobs. That principle was ultimately accepted in very few parts of the American economy and was never codified in law. Years of bargaining by two very different union leaders made the longshore industry a rare exception, in which employers that profited from automation were forced to share the benefits with the individuals whose work was automated away.

The railway precedent suggested that ship lines might eventually make their container systems compatible without a government dictate. Yet the analogy is misleading. The gauge that became “standard” on railways had no particular technical superiority, and standardization had almost no economic implications; the width of the track did not determine the design of freight cars, nor the capacity of a car, nor the time required to assemble a train. In the shipping world, on the other hand, individual companies had strong reasons to prefer one container system to another. The first carrier with fully containerized ships, Pan-Atlantic, used containers that were 35 feet long, because that was the maximum allowed on the highways leading to its home base in New Jersey. A 35-foot container would have been inefficient for carrying canned pineapple, Matson Navigation’s biggest single cargo, because a fully loaded container would have been too heavy for a crane to lift; Matson’s careful studies showed that a 24-foot box was best for its particular mix of traffic. Grace Line, which was planning service to Venezuela, worried about South America’s mountain roads and opted for shorter, 17-foot containers. Grace’s design included small slots at the bottom for forklifts, but Pan-Atlantic and Matson chose not to pay extra for slots because they did not use forklifts. Each company deemed the fittings it used to lift its containers the best for loading and discharging ships at top speed. Conform...

Faced with the prospect of competing against subsidized competitors while being excluded from subsidies themselves, Sea-Land and Matson turned to Congress. Their lobbyists drafted legislation in 1967 to prohibit the government from using the sizes of containers or shipboard container cells as a basis for awarding subsidies or freight.

The supply experts “had never had grease under their fingernails,” a top army general groused, and from a distance of thousands of miles they had no actual knowledge of the rapidly changing situation in the field. Nor were they familiar with Vietnam.

Looking back from 1970, Besson calculated that the armed forces could have saved $882 million in shipping, inventory, port, and storage costs between 1965 and 1968 if they had adopted containerization when the buildup began.

The army instructed its depots to stop combining shipments that would need to be sorted in Vietnam and to abide by the Three Cs: one container, one customer, one commodity.

Like everything else Malcom McLean did, venturing into Vietnam entailed considerable risk in hopes of large reward. The cost and risk of reinforcing the pier at Cam Ranh Bay, assembling the cranes, floating equipment and vehicles across from the Philippines, and building the truck terminals were entirely Sea-Land’s.

The U.S. government was liable only for damage to Sea-Land’s trucks and equipment caused by enemy fire. It did not furnish men or material to help Sea-Land get its operations up and running. In a place where replacement parts could not simply be ordered from a nearby distributor, the chance that something would go wrong, blowing budgets and cost calculations, was very high. McLean was running a commercial operation in a war zone, and betting that he could control costs well enough to make a profit from his fixed-price bid.

East and Gulf Coast ports had large numbers of part-time longshoremen well into the 1970s. Boston longshoremen worked an average of one and a half days per week, New Orleans longshoremen two days. If containers were allowed, these part-time jobs were likely to vanish as the industry shifted to a permanent, full-time workforce. The ILA had seen how container shipping had decimated its membership rolls in New York, and it was loath to tolerate it in other ports until income guarantees were in place.

The Transport and General Workers Union was powerful, but not omnipotent. It had never bothered to sign up members at the tiny Port of Felixstowe, located on a North Sea estuary ninety miles northeast of London. Felixstowe, one of the hundreds of towns on Britain’s coasts, had two docks owned by the Felixstowe Railway and Dock Company, a private company controlled by an importer of grain and palm oil. The docks had been destroyed in the storms of 1953, and by 1959 the only activity involved ninety permanent workers who unloaded tropical commodities into a few storage tanks and warehouses. Felixstowe had no general-cargo business to protect, no militant unions, and, because it had never employed casual dock labor, no requirement for ship lines to contribute to the national dockworker severance scheme.

In 1966, while the British government was trying to convince container ship lines to call at Tilbury, Felixstowe’s owners had had the foresight to strike a private deal with Sea-Land Service. They spent £3.5 million pounds, less than one-eighth of the government’s outlay at Tilbury, to reinforce a wharf and install a container crane. Sea-Land opened service in July 1967 with a small ship shuttling containers back and forth to Rotterdam, and soon added ships directly from the United States. In 1968, with Tilbury closed by the strike, the hitherto obscure Port of Felixstowe became Britain’s largest container terminal. United States Lines finally was able to use Tilbury after reaching a union agreement, but the port remained closed to most other container carriers, including British lines. By 1969, Felixstowe, with two or three North Atlantic sailings each week and several feeder services running across the North Sea to Rotterdam, handled 1.9 million tons of general cargo, every bit of it in containers.

The preparations for container shipping in the United States and Europe provided Asian governments a lesson. In the United States, ports responded to containerization with no overriding rhyme or reason; cities such as New York and San Francisco squandered tax money on wharves and cranes that had little chance of recouping the initial investment, even as cities that might have become important containerports, such as Philadelphia, failed to invest in time. In Britain, the government was so terrified of the waterfront unions that it took few steps to prepare for the container era until the first ships were already in port. In continental Europe, the ports that had the foresight to plan for container shipping, notably Rotterdam, Antwerp, and Bremen, were the first to capture the traffic. Along Asia’s Pacific Rim, it seemed apparent that containerization would require major change, and change had to be planned.37

The first of these new vessels was American Lancer, owned by United States Lines, Sea-Land’s biggest competitor across the North Atlantic. The Lancer, which made its maiden voyage between Newark and Rotterdam, London, and Hamburg in May 1968, was far bigger than any other containership on the seas. It could carry 1,210 20-foot containers at a speed of 23 knots—half again as fast as the reconstructed ships in Sea-Land’s fleet. In August 1968, United States Lines asked the Maritime Administration for a $95 million subsidy to build six more such behemoths. Other American, European, and Japanese companies raced to place their orders. Almost always, a ship was designed with a specific route in mind. Atlantic vessels usually held 1,000–1,200 containers, because too large a ship meant too much port time after a relatively short voyage. Ships meant for the Asia trades were typically larger, carrying 1,300–1,600 20-foot containers, because the relatively long ocean voyages from Europe or America to Japan generated enough additional revenue to cover the added construction cost.4

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.

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.

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

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.

competitors were entering with several vessels apiece. Capacity on the largest international routes increased fourteen times over between 1968 and 1974.