The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger Paperback – January 27, 2008

Like most inhabitants of earth, I never gave much thought to intermodal shipping. It wasn't until I served as an economic development officer in southern Afghanistan and began looking into ways we could more efficiently export the high value fruits and nuts grown locally to the lucrative markets of the Middle East that I discovered "the box": the ubiquitous forty-foot container we've all seen on tractor trailer chassis, cargo ships and holding yards. On Kandahar Airfield, where I was stationed for a year, these containers were everywhere; literally thousands of them, double stacked in lines a half mile long, most serving as temporary warehouses while waiting for a way out of Afghanistan.As director of strategy and corporate development for a leading Silicon Valley software company, I also happen to be interested in disruptive technologies and business concepts, innovations that totally remake or create industries, the type of stuff that Harvard Business School's Clayton Christensen often writes about. Thus, Marc Levinson's "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger," was the perfect book for me and, as it turned out, one of the most enjoyable, enlightening reads I've had all year.In short, Levinson argues that containerization, which was introduced by the transportation pioneer Malcolm McLean in the early 1950s, did more than lower the cost of shipping. It fundamentally changed the world economy. And it did so in several ways.First, it redefined the meaning of a port city. In the era of break bulk shipping, all-purpose cargo ships that are manually (and slowly and expensively) loaded and unloaded by longshoremen, it made sense to have manufacturing close to the docks to save on transportation costs. Once the container began to dominate shipping, the only purpose of a port was to load and unload containers as rapidly as possible using labor saving cranes. Associated industries like light manufacturing, insurance, freight forwarding and other services, once co-located with the docks, were no longer relevant to the waterfront. Such a change spelled the end of shipping as a major operation in numerous traditional port cities, from Baltimore and San Francisco to Liverpool and London. In the busiest port in the US, New York City, the massive new container facility operation across the harbor at Newark and Elizabeth wiped out the long established docks of Brooklyn and Manhattan with a suddenness that shocked politicians, labor bosses and shippers, alike.'The primary reason for this change is that the container turned shipping into a capital intensive industry that thrived on economies of scale, making the once sleepy shipping industry look a lot like the hyper competitive US railroads of the 1850s. In the break bulk era, dockside labor accounted for the major part of operational costs and the expense of overland transportation made numerous port city venues necessary. The economics of the container ship, requiring regular debt payments to finance their construction and only earning revenue while underway, dictated that fewer ports were visited and more cargo was loaded at each. Suddenly, small port cities like Mobile and Tampa were simply passed by, devastating the local longshoremen unions and others reliant on the shipping industry. Meanwhile, upstart ports like Oakland, Singapore and Felixstowe in the UK emerged as major container shipping terminals.Second, it changed the geography of global manufacturing. The efficiencies of container shipping reduced transportation costs so dramatically that they no longer figured significantly influenced end user prices, whereas in the break bulk days the cost of transoceanic shipping acted as a double digit tariff on imported goods. Suddenly, it made economic sense to relocate manufacturing facilities in distant, low labor cost countries and simply ship the goods halfway around the world in container ships.Third, the economic revolution of the container was slow in coming. The real revolution didn't happen until the shippers (i.e. the makers of TVs, refrigerators, etc.) centralized operations and began to take advantage of container efficiencies, which also really weren't available until deregulation opened up opportunities for big shippers to save with long term contracts and steep bulk shipping discounts. Process innovations like Toyota's "just in time" supply chain, which gained popularity in the early 1980s, saw large corporations invest unprecedented time and energy to improve their logistics operations. Levinson writes that by the time the container dominated transoceanic shipping -- over 80% of all goods traveling by container -- the vast majority of cargo were not finished consumer goods but rather "intermediate goods," parts and supplies used for final manufacturing.Several additional themes emerge from "The Box." One is that organized labor and government regulation, no matter how well meaning, are often the most powerful inhibiters to business innovation, which comes with an enormous price tag that is ultimately passed on to consumers in the form of higher prices for inferior goods. Next, few people present at the creation ever "get" (and profit from) the full affect of sweeping change that new technologies and processes like intermodal shipping. Unions failed to appreciate its potential impact and suffered dearly because of it. It took governments decades to figure out that they shouldn't be in the port management business and leave the extensive capital outlays to private investors. And most private sector investors were wrong about the speed at which the container would alter the economics of international shipping. RJ Reynolds foray into the business through the acquisition of McLean's Sea Land ended in disappointment for everyone, their shareholders foremost among them. And even McLean himself, the godfather of the container and a man lionized by Levinson, got the container very wrong on several occasions, including the 1980s bankruptcy of his acquired US Lines, which sought to establish a round-the-world container transportation route. Most intriguingly, those that did profit from the revolution, such as Hong Kong-based Evergreen and Denmark-based Maersk Lines, were no early movers or bleeding edge innovators. Indeed, they didn't get into the container shipping business until the 1970s.As fascinating and compelling as the argument presented in "The Box" may be, it is only a hypothesis. Levinson has almost NO quantitative evidence to defend his claims. There are very few graphs and data tables in this book, although one gets the distinct impression it was not for lack of trying on Levinson's part. "The technical problems involved in measuring shipping rates during the 1960s and 1970s are so great that reliable measures of the container's price impact are unlikely to be developed," he glumly concludes.I loved this book. You may, too, if you find the basic themes interesting -- innovation, globalization, and market disruption.

The first thing that struck me about the impact of the shipping container was the public policy impact on it. Before the shipping container, shipping, trucking, and railroading were heavily regulated by the ICC. Rates were set not only according to weight and distance, but also according to contents. Thus, the cost of shipping 1000 pounds of tires would be different than, say, 1000 pounds of grain, and not just because of density differences. This apparently goes back to the complaints made by shippers in the late 19th century, and made sense to regulators in that era. Also, prior to the container, shippers were allowed to charge less than truckers because ships took longer. So if a ship already had a stated rate for, say, wheat, between two ports, truckers were not allowed to charge less (or something like that - Levinson didn't attempt to explain the intricacies of ICC regulation). Further, shipping between American ports was restricted to American flagged ships, and international shipping was heavily regulated and subsidized - to qualify for the subsidy, you had to use American built ships, and the subsidy supposedly helped make up for the more expensive American crew. One final government involvement in the era just prior to the shipping container's introduction: many of the ships currently in use in 1956 were WWII surplus ships, built on the cheap and available for next to nothing. It was relatively easy to get into the business, as very little capital was required, and ships could ply from port to port picking up freight as they went.Enter the shipping container, 1956.But wait: the container requires different infrastructure. The story of the shipping container is also the story of ports where governments chose to support the companies investing in the container. In New York City, the story is governed by the decisions of the Port of New York Authority (now the Port Authority of New York), which was looking to expand its bureaucratic territory. The piers on the New York side had all the business they could want and politicians to defend that turf. The only reason they remained viable was the fact that the ICC required railroads to charge the same for freight delivered on either side of the port, in effect a requirement to throw in the trans-Hudson part of the journey for free. That was not trivial, since it involved either removing freight from trains and loading it on barges, crossing, and then re-loading into warehouses to wait for a ship.Much of the history revolves around boy genius Malcom (not Malcolm, he dropped the second l to differentiate from his father) McLean, who started in the trucking business. Shipping something from a factory via truck to a railroad and then (via truck again) to a port, loading it on a ship, and reversing the process at the far end cost plenty. It cost time in transit, storage, and management; it cost labor at each change of mode; it was extremely expensive because of pilferage and breakage because of the frequent handling and the subsequent insurance; and of course the shipping cost money. Malcom realized the problem and the potential money to be made from rationalizing the shipping process.The first container ships required their own cranes because standard dock cranes were not capable of lifting the containers, much less taking advantage of their standardization and the potential savings in ship loading times. Thereafter, however, the cranes became part of the port infrastructure, along with rail sidings, truck terminals, deeper and wider ports, and computer controls. The industry, in other words, became more capital intensive, and some of that capital came from state and local governments. Those who made the commitment, such as the Port Authority in New Jersey and Port Elizabeth, became the winners, while those who didn't, such as New York City, did not.The government did not only take sides in the wars between technologies and shipping companies. As it became clear that automation was going to cost not only cushy jobs, but real ones too, the various unions found themselves at odds not only with shippers, but with governments as well. The City of Los Angeles chose sides when longshoreman at first refused to unload Matson's shipping container ships; the city threatened to take over the port and make their jobs civil service, prevented by law from striking. The Federal government stepped in repeatedly on the side of shippers against the East Coast union strikes. Eventually, the Longshoreman's unions on both coasts struck deals with shippers, trading generous contributions to retirement and unemployment funds in return for acceptance of the technology and more productive work rules. I'm not sure which side I come down on in that dispute: yes, there were aspects of the trade that sound cushy, such as rules that allowed each of the two teams working a ship to take a half day off with pay, and the day laborer aspect meant that senior union members could work or take the day off as they desired. On the other hand, the corrupt day labor culture enabled organized crime and allowed rampant pilferage to persist, not to mention the fact that jobs were described as incredibly dangerous and literally back breaking. In the old paradigm, workers had to live in slums near the docks to make themselves available; today, the crane operators are guaranteed a regular 40-hour-per-week job, and can afford to live anywhere, but have to get permission to take off. In any event, government was neither impartial referee nor friend of labor in these struggles.So this ends up being a very complex story in which government starts out standing against change in the status quo that had persisted since roughly the 1920s, and then steps in to tip the playing field toward the shipping container. Levinson argues that the shipping container may not have been the only factor, but it certainly was *a* factor in accelerating the globalization of the economy. Before the shipping container, it was extraordinarily expensive to ship anything overseas; today, it may be less expensive to ship goods overseas by rail and ship than across the state by truck. Remove time and distance as factors or advantages, and suddenly labor costs become the more important factor.Two final factors radically altered the trajectory of shipping. The first was Viet Nam. The Army suddenly found itself in a situation where it needed lots of supplies shipped in to a place with no infrastructure or railroads. McLean was the man on the spot, winning the contract by offering to build all of the necessary port infrastructure. The remarkable increase in efficiency forced the federal government into the pro-container camp, but also had an unexpected effect. With the Army picking up the ship's entire journey, westbound and eastbound, but only shipping freight west, this left Malcom with a *pure* profit opportunity: ships returning from Asia in the late 1960s with no cargo. A stop in Japan for loads of televisions and automobiles solved that "problem". Incidentally, by rationalizing shipping by making it predictable and fast, the container contributed to the development of the inventory-free manufacturing method of Just In Time.The other final factor was the phasing out of the WWII surplus ships and the phasing in of dedicated container ships in the middle of the first oil embargo era. The shipping industry thus completed the transition from labor-intensive to capital-intensive. The enormous ships, some of which no longer fit in the Panama Canal, have to keep moving just to keep paying for their own financing. The cost of shipping plummeted, and the size of ships continues to expand. The Molucca Straits have overtaken the Panama Canal as the limiting factor on size.Because of the plummet in shipping costs, the resulting increase in dependence on shipping, the pressures of the oil embargoes, and the changes in finance and capital requirements, the shipping industries were "deregulated" in the late 1970s. That deregulation was, of course, not complete. Levinson notes some exceptions, and I found that some of the rules were still in effect when I tried to ship something to Hawai'i a few years back.Marc Levinson cites W. W. Rostow's "Stages of Development" argument early in the book regarding the importance of the railroad to American and English development, noting that the container is a modern equivalent in global development. Rostow in fact made two claims: one, that the railroad was essential, and two, that government investments were also crucial. Levinson's history of the shipping container would seem to support Rostow's claim. Many of the Asian Tiger economies - Japan, South Korea, Hong Kong, Singapore - invested heavily in port infrastructure to bring the shipping container to their shores; they were literal cargo cults. To the extent that it worked, they have reaped the benefits.But Levinson provides some counterexamples. England adapted to the shipping container very poorly, and to the extent that they did, it was because of a private port at Felixstowe; England has arguably done quite well for itself in the past 30 years despite missing both of the Rostovian requirements. Further, much of the investment in American ports was private, though government has also played a role. Finally, the Rostow argument only makes sense when you accept that people are unequivocally better off when they adopt capital intensity. Yes, the increase in measurable wealth is notable, but I am curious about the intangibles and the change in quality of life, pace, direct control of one's life that result from acceptance of the modern.This book hits somewhere in between detailed Fogelian economic history and story-telling, so I gave it 4 rather than 5 stars. It is certainly more accessible than a dry investigation of the numbers, but does manage to highlight many aspects of the technical, cultural, social, economic, and political issues at the nexus of which was The Box.