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After four months of hearings in 1931, the commission ruled weight-based rates illegal. Although it found the container to be “a commendable piece of equipment,” the commission said that the railroads could not charge less to carry a container than to carry the equivalent weight of the most expensive commodity inside the container. With that ruling, containers no longer made economic sense on the rails.
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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.
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Containerization, he concluded, “would appear to present the fortunate circumstance of a promising initial course of action offering the option of going as far as desired and stopping at any point that prudent planning dictates.”
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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.”
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Neither city had much besides canned tuna to ship out in containers, but providing container service earned McLean the goodwill of Teodoro Moscoso, the creator of Operation Bootstrap and a powerful figure in Puerto Rico’s economic development.
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There might not even be a transit shed, the most expensive part of pier construction.
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For their part, Tobin and King were now convinced that the container was the future, and the Port Authority lost interest in taking over city piers that would never have the acreage or transport connections for containers. Although the Port Authority was proceeding with plans to turn twenty-seven outmoded piers in Brooklyn into twelve modern ones, the agency understood that it was in a race to recover its investment before container shipping made the reconstructed piers obsolete.
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Longshore families, now receiving stable incomes, were free to move from tough waterfront neighborhoods to comfortable suburbs, dealing a blow to the class solidarity that came from isolation.
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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.
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Marad’s desire to set common standards was supported by the Navy, which had the right to commandeer subsidized ships in the event of war and worried that a merchant fleet using incompatible container systems would complicate logistics.
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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;
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If government agencies in those days had made it a routine practice to conduct cost-benefit studies, most likely the entire process of container standardization would never have begun.
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The specifics mattered less: within the limits set by state laws, trucks and railroads could accommodate almost any length and weight. The maritime interests that were influential in the Marad committees, in contrast, cared greatly about the specifics. A ship built with cells for 27-foot containers could not easily be redesigned to carry 35-foot containers.
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The cart, however, had gotten ahead of the horse: the ISO container committee had agreed on what the corner fitting should look like without defining all of the loads and stresses it should be able to withstand. Starting in the autumn of 1965, dozens of ship lines and leasing companies began ordering containers with fittings based on the design that had worked for Sea-Land’s operations but had never been tested under other conditions.
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He was followed by Sea-Land’s chief engineer, Ron Katims, who called for the subcommittee to recognize 35-foot containers as well. Sea-Land’s containers, the subcommittee was told, tended to hit weight limits long before they were filled to physical capacity, so 40-foot containers would not in practice hold more freight than 35-footers.
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Freight forwarders took advantage of the rate difference, arranging to consolidate smaller shipments into full carloads, for which they could demand lower rail rates.
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Behind the scenes, though, the prerequisites for the container revolution were falling into place. Dock labor costs were poised to fall massively thanks to union agreements on both coasts. International agreements were in place on standards for container sizes and lifting methods, even if few containers yet met those standards. Wharves designed for container handling were on the way. Manufacturers had learned to organize their factories so that they could save money by shipping large loads in single units to take advantage of containerization. Railroads, truckers, and freight forwarders had grown familiar with switching trailers and containers from one conveyance to another to move what was now being called “intermodal” freight. Regulators were cautiously encouraging competition so that carriers could pass some of the cost savings from containerization on to their customers. Only one crucial ingredient was missing: ships.
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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.
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With its ship operating costs fully covered by its military contracts for Vietnam, Sea-Land was guaranteed to make money no matter how little cargo it picked up in Japan.
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By the late 1950s, the lesson for public officials already was clear. As container shipping expanded, maritime traffic would be drawn to a small number of very large ports.
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Nutter dreamed up a lease very different from the norm of so many cents per ton: Sea-Land would pay a minimum fee high enough to cover the cost of building its terminal and would pay more as its tonnage rose, but beyond a certain point there would be no additional charge. That “mini-max” provision gave Sea-Land an incentive to pump cargo through Oakland, because once its tonnage exceeded the upper limit, its average port cost per ton would plummet.
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As early as 1966, though, public officials in Seattle were sensing that their remote city, with little industry, might be able to develop a new economy based on distribution rather than on factories.
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“Commodity distribution has grown out of the dependent sector to link production and consumption,” port planner Ting-Li Cho wrote presciently. “It has become an independent sector that, in return, determines the economy of production and consumption.”
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Seattle began no fewer than three new terminals with no tenants in place, driven by a new imperative: if the supply of terminal space was not adequate to meet the demand for container shipping, the ships might go somewhere else.
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The emerging economics of container shipping meant that the laggards faced potentially serious consequences. The newly built containerships coming on the scene in the late 1960s carried far more cargo than the vessels they supplanted; even if the total amount of cargo grew, fewer voyages would be required. Shipowners wanted to keep their ships under way to recover the high construction cost, so they preferred that each voyage involve only one or two stops on either side of the ocean rather than four or five.
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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.
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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 shipowner 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.
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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 overcapacity would persist until the demand for shipping space eventually caught up with the supply.
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The hundreds of containerships built in the first half of the 1970s had been designed for the world of the late 1960s. High speed was important because of the closure of the Suez Canal in the 1967 Arab-Israeli war, which forced ship traffic between Europe and Asia and Australia to take a much longer route around the tip of Africa. High fuel consumption—the inevitable result of high speed—did not much matter, because oil was cheap. The world of the mid-1970s was totally different.
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A round-the-world route, McLean thought, would solve one of the industry’s inherent problems, the imbalanced flow of freight that left some ships sailing full in one direction and half-empty in the other. The new vessels would have the lowest construction cost per container slot of any vessel in the world and the lowest operating costs per container as well.
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By the 1980s, new ships holding the equivalent of 4,200 20-foot containers could move a ton of cargo at 40 percent less than could a ship built for 3,000 containers and at one-third the cost of a vessel designed for 1,800.
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Entire technologies, such as on-dock rail, proved to be sinkholes: ports that laid train tracks on the docks, so that cranes could transfer cargo directly from ships to waiting railcars, learned that the time required to move the train forward as the crane loaded each railcar delayed ships and reduced productivity.
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Unlike government agencies, the private port operators had no imperative to expand for the sake of local economic development; they could insist on long-term contracts, backed by banks or by collateral, to assure that they would recover whatever investments they made. Governments retreated to the role of landlords, renting out waterfront land to private companies. By the end of the twentieth century, nearly half the world’s trade in containers would be passing through privately controlled ports.
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Quite unlike either breakbulk ships or first-generation containerships, though, the second-generation ships came with obligations payable regardless of the business situation.
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A global recession would hit shipowners twice over: the lack of freight would cause their fixed cost per container to increase at the same time as it would weaken their ability to hold rates at profitable levels.
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Many nonfreight costs undoubtedly fell with the growth of container shipping. Packing full containers at the factory eliminated the need for custom-made wooden crates to protect merchandise from theft or damage. The container itself served as a mobile warehouse, so the traditional costs of storage in transit warehouses fell away. Cargo theft dropped sharply, and claims of damage to goods in transit fell by up to 95 percent;
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In industry, the traffic department, housed in the back of the plant near the loading dock, would be given whatever the manufacturing department produced, with instructions to ship it. A tariff clerk, his desk piled high with the freight classification guidelines of various liner conferences, trucking conferences, and railroads, would try to describe the cargo in whatever way brought the lowest rate. An export manager would then call ship lines to select a vessel, balancing the desire for fast delivery with the need to keep from becoming too dependent on a particular carrier. With decentralized organizations and fairly primitive computer systems, even large, relatively sophisticated multinational corporations could end up paying dramatically different prices for the same type of cargo, depending on what the tariff clerk and the export manager could accomplish. “In some cases we’d pay $1,600 for a 40-foot container in the North Atlantic, and in other cases we’d be paying $8,000 for the same container,” recalled a former chemical-industry executive.
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In July 1983, American President Lines sponsored the first experimental train composed only of the new double-stack cars. Within months, ship lines and railroads had negotiated ten-year contracts under which dedicated double-stack container trains would speed imports from Seattle, Oakland, and Long Beach directly to specially designed freight yards in the Midwest.
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When American President Lines studied the matter a few years later, it concluded that freight rates from Asia to North America had fallen 40 to 60 percent because of the container. Between 1966 and 1990, economists Daniel M. Bernhofen, Zouheir El-Sahli, and Richard Kneller reported in 2013, the container was more than twice as important in increasing the flow of international trade among the wealthy countries as governments’ efforts to eliminate formal trade barriers. The box made the world economy much, much bigger.
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In 2014, inventories in the United States were perhaps $1.2 trillion lower than they would have been had they stayed at the level of the 1980s, relative to sales.
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The globalization of the late twentieth century took on quite a different character. International trade was no longer dominated by essential raw materials or finished products. Fewer than one-third of the containers imported through Southern California in 1998 contained consumer goods. Most of the rest were links in global supply chains, carrying what economists call “intermediate goods,” factory inputs that have been partially processed in one place and will be processed further someplace else.
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If high shipping costs, high port costs, and long waiting times do not leave a country at an economic disadvantage, a cargo imbalance might.
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In 2014, U.S. farmers exported more than 50,000 40-foot boxes loaded with soybeans, a commodity long deemed unsuitable for shipping in containers.
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The giant vessels’ size required ocean terminals to load and discharge more boxes but made it harder for them to do so. Their added width—as many as 23 containers abreast—meant that a crane took longer to move the average box from ship to shore, while their lack of additional length left terminals no room to move more cranes alongside to handle the additional cargo. The net result was longer port calls, wiping out some of the saving gained from greater efficiency at sea.
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If labor-intensive manufacturing shifts from an increasingly expensive China to lower-cost countries in South Asia or Africa, more America-bound ships may sail through the newly widened Suez Canal and cross the Atlantic rather than the Pacific, depriving the Panama Canal of traffic.
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At first, the system did not run smoothly: the veteran crane drivers, it turned out, relied partly on sound to get their bearings, and working in silence hurt their accuracy. Once microphones were installed on the cranes and speakers placed in the control room so the operators could hear every clang and whir, the tempo returned to normal.
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With several distribution centers at a single location, often owned by a single developer, a logistics cluster could support better transportation infrastructure and more frequent service than any single distribution center could have hoped for.
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If a containership ever reaches Malacca-Max, the maximum size for a vessel able to pass through the straits, it will be more than a quarter mile long and 210 feet wide, with its bottom at least 55 feet below the waterline. It may be uneconomical to build, because its width could require a structure of thicker steel, reducing cargo space. If such a vessel should sink, it could take nearly $2 billion of cargo with it.
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