Containerization: The End of an Era?
09.22.22
West Elm, once considered a sacred cow by nouveau riche Millennials, has lost its vaunted place in the home furnishing world. Today, customers are more likely to find their Harper 2-Piece Chaise Sectional at the bottom of the ocean than to receive 2-month (much less 2-day) shipping.
“It’s been an existential nightmare, as confounding as Samuel Beckett’s Waiting for Godot,” said J.B. Harris, a faithful shopper who spent months sleeping on a mattress on the floor as he waited for his bed frame and headboard to materialize. Delivery delays are so routine that outraged customers have now formed a Twitter vent account, @westelmscam, to share their woes, in addition to the company’s lackluster Yelp and Facebook reviews.
“Their ‘in stock’ labels are a clear case of fraud as every time it is then immediately backordered and delivered 6–12 months later,” said one California-based customer. “I’m still waiting for my Pierre chairs that have been sitting in SF for three months (they won’t let me pick them up but can’t explain why they haven’t been delivered yet). I’m not sure these chairs even exist, one West Elm rep told me they currently have a ‘wood shortage’ so she doesn’t think many new pieces are being made…”
To be fair, the company is far from an anomaly in its supply-chain troubles. Reports of missing products, including tampons, baby formula, pharmaceuticals, and even shipping containers have frustrated the nation for nearly two years. “Now I’m saying, ‘Just get me a box,’” said supply chain manager RoxAnne Thomas of Gerber Plumbing Fixtures, who watched the price of transporting a 40-foot container from Asia to the U.S. spike from less than $2,000 to as much as $25,000 in 2021. “We’re constantly fighting this battle between how much is too much to spend and how many containers can that actually get me, and it literally seems to change week to week.”
While many attribute these shocks to the lingering effects of Covid, others are applying a more critical eye to the codependent relationship between modern manufacturers and global supply chains. Marc Levinson, a man who has devoted his professional career to studying the shipping container (an object, he admits, that “has all the romance of a tin can”), thinks the long era of manufacturers disregarding the risks of far-flung freight is coming to a close.
“Manufacturers and retailers tended to look at differences in the production costs and transportation costs. They didn’t really look at the risks. They said, ‘Okay, wages are cheaper in China or Cambodia or Bangladesh, so we will make this product there, and we can get it to the United State or Europe or Japan much more cheaply,’” says Levinson. “They didn’t really ask themselves what happens if the port is blocked or if the ships can’t get through the Suez Canal. And, it turns out, that that sort of thing happens fairly often. Once you work the risks into the calculation, some of these supply chains don’t make so much sense anymore.”
This week, we discuss how containerization wrought an economy built on ever-lengthening supply chains, exposing closeted nation states to global flows and unleashing a tidal wave of cheap imports to eager consumers. The price of cheap trinkets, however, was steep, and, in the words of one researcher, resulted in a national “Faustian bargain … in which imported consumer goods are plentiful and cheap while manufacturing jobs disappear.”
Making the Modern Shipping Container
Malcom Purcell McLean is credited as the “father of containerization,” not for creating the first shipping container — there were dozens of models before his creation — but for having the vision and charisma to reshape the entire freight business. Known for his financial stunts and exceptional business acumen, McLean first established himself as a self-made trucking magnate before entering the shipping business with no maritime experience whatsoever.
“He was a highly leveraged fellow,” remembered Walter Wriston, who started lending to McLean on behalf of National City Bank in 1954. “He understood cash flow. You’d go to a railroad in those days and talk about cash flow and they’d ask you what you meant.”
Prior to the container’s international use, ocean freight costs ate up 12 percent of the value of U.S. exports and 10 percent of the value of U.S. imports, a penalty significantly higher than most government tariffs (U.S. import tariffs averaged 7 percent in 1961). “The big bottleneck was getting things on and off the ships,” wrote Paul Krugman in a 2009 lecture to Citigroup. “A large part of the costs of international trade was taking the cargo off the ship, sorting it out, and dealing with the pilferage that always took place along the way.” For some commodities, the freight alone “may be as much as 25 percent of the cost of the product,” wrote two engineers after studying nationwide data in 1959. The biggest cost was labor: sorting up to 200,000 pieces of loose freight per ship — little of which was standardized or sorted — required massive longshore gangs which could account for half the total expense of shipment.
Containerization made an immediate dent into freight costs. Using a $42 million dollar bank loan to refit two World War II tankers (as well as docks, shipbuilding, and repair facilities), McLean designed a ship capable of stacking trailers below and on top of the decks. McLean’s system — the first to use detached trailer bodies — reduced the amount of space taken up by each trailer by 33%. “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,” writes Levinson in the first general history of the shipping container, The Box. “Every part of the system — ports, ships, cranes, storage facilities, trucks, trains, and the operations of the shippers themselves — would have to change.”
When Ideal X, an “old bucket of bolts,” first left the money-losing docks of Newark, New Jersey in 1956, she was carrying 58 metal containers and 15,000 tons of petroleum. The sight attracted over one hundred dignitaries and dozens of longshoremen. “Everybody looked at this monstrosity and couldn’t believe their eyes,” recalled one onlooker. When McLean tallied the costs, he concluded that loading loose cargo on a medium-size cargo ship would have cost $5.83 per ton in 1956, while loading Ideal-X cost 15.8 cents per ton.
Freddy Fields, a prominent member of the International Longshoremen’s Association, watched the spectacle unfold and concluded, “I’d like to sink that son of a bitch.”
What Hath Containerization Wrought?
The U.S. Army, McLean’s first mega-customer, witnessed the logistical miracles accomplished by containerization in Vietnam and instructed its depots from there on out to abide by the Three Cs: one container, one customer, one commodity. McLean singlehandedly ran a profitable commercial operation in the middle of a war zone, sorting through the backlog of military cargo in record time and with record savings (one military officer calculated that the army could have saved $882 million between 1965 and 1968 if it had adopted containerization earlier on). By 1970, half of military cargo going to Europe was containerized.
Today, politicians, scholars, and economists alike credit the shipping container with reshaping world trade, integrating East Asia into the global economy, and facilitating the movement of nearly any object across previously inconceivable distances for the cost of a few pennies. Yet they also criticize containerization for destroying local markets, dislocating workers, gutting rural economies, and exposing retailers to the unique vulnerabilities of just-in-time manufacturing. Many believe that peak globalization — at least in terms of physical trade — has been reached. Total merchandise trade — according to the World Bank — peaked at 51 percent of the world’s output in 2008 (in 2021, that number had fallen to 46 percent). Similarly, the amount of foreign direct investment fell by two-thirds from its precrisis peak.
Levinson, in his sequel to The Box, attributes the decline of stuff to three main factors: 1) an aging global population (up from 23.3 years in 1985 to 31 years in 2019), which is less likely to buy more things, 2) the transformation of many goods into digital services (i.e. music, books, films), and 3) smaller-scale manufacturing, which allows producers to manufacture goods on a more local scale. Additive manufacturing, for example, squeezes out many labor costs, allowing manufacturers to make specialized parts in small quantities and eliminate the need for “far-flung value chains.”
At the same time, long-distance supply chains proved less profitable than imagined for many manufacturers, reflecting rising labor costs in outsourcing areas, slower, less reliable freight rates, and outages at sole-source factories. “Even with generous subsidies for manufacturers, shipbuilders, and ocean carriers, the perception that long value chains have become costlier, riskier, less reliable, and less essential was bringing an end to the globalization of the early twenty-first century well before the coronavirus arrived on the scene,” writes Levinson.
Yet, that doesn’t mean he’s given up on globalization. While globalization may be waning in terms of physical production, Levinson believes it is entering a new renaissance for services and ideas. “If work can go anywhere, capturing it requires that governments focus on education policy rather than trade policy,” concludes Levinson. “A large supply of low-wage workers helped some countries industrialize during the Third Globalization, but it may be a highly trained workforce with flexible skills that will be the greatest source of economic strength during the Fourth.”
About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.
