THE TUCK SCHOOL AT DARTMOUTH
Intermodal Shipping
Containers
Brian Boyd, Will Cornock, Brennan Igoe, Matthew Webster, Leonard White
11/10/2012
Section I: Introduction
On April 26, 1956, the Ideal X, a converted World War II tanker loaded with 58 steel boxes the
size of a truck trailer, departed the harbor at Newark, NJ, bound for Houston. Five days later, the ship
arrived at its destination, where enormous custom-built cranes lifted the boxes one-by-one onto waiting
vacant truck beds, to be driven to their final destinations. Each 40,000 pound container took seven
minutes to unload, at an estimated cost of 15.8 cents per ton. Typical cargo loading costs on a mediumsized ship in 1956 were estimated at $5.83 per ton.1 Few realized at the time, but the voyage of the Ideal
X, the brainchild of trucking magnate Malcom McLean, marked the beginning of a revolution not just in
shipping, but in global trade and economics.
Nearly everywhere else in the world in 1956, the job of loading and unloading ships fell to
longshoremen. These heavily unionized and generationally entrenched workers loaded and unloaded
break-bulk cargo – i.e. items packaged in discrete bags or boxes – mostly through manual labor, and
occasionally with small ship-based winches. Using forklifts, steel hooks, or brute force, longshoremen
positioned each object in the irregular dark ship compartments, to be unloaded at the other end in the
same fashion. Safely securing cargo was critical, as ships had been known to capsize if a heavy load
shifted in rocky seas. Yet safety regulations for longshoremen were almost non-existent, and the work
was highly variable. Men could sit idle and unpaid for days between ship berths, then work for days on
end during busy periods.
Many cargo ships in the 1950s were Liberty Ships left over from World War II. Built cheaply
from prefabricated parts, and made intentionally small to minimize losses if sunk by German U-Boats, the
ships were not designed for efficient commercial trade. Also included in the merchant marine were many
Victory Ships slightly larger and faster than the Liberty Ships, but no better suited for easy
loading/unloading at commercial ports. The dockside system of the 1950’s had been built around
depression-era cheap labor, but through the 40’s and 50’s Stevedores were increasingly unionized, driving
up labor costs. Repeated conflicts over wages and unions also led to a culture of theft and pilfering
among dock workers. The availability of inexpensive military surplus ships, many of which could be
purchased for only $300,000, helped offset these problems for the shipping industry, but only
temporarily. It was estimated in 1959 that “60 to 75 percent of the cost of transporting cargo by sea is
accounted for by what takes place while the ship is at the dock and not by steaming time.” 2 Ships generate
1
Levinson, Marc. The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger.
Princeton, NJ: Princeton UP, 2006. p. 52
2
Levinson, p 21
1
revenue only by moving cargo, but it was not uncommon for a ship to spend over a week docked in a
single port while it was unloaded and reloaded.
McLean, the self-made owner of McLean Trucking Company, was a consummate entrepreneur
and a visionary, but he also was the beneficiary of two key co-innovations that aided the trucking industry
as a whole: 1) the development of the steel-belted radial tire in 1948, which vastly increased the load size
and weight that trucks were capable of carrying, and 2) President Eisenhower’s Federal Aid Highway Act
of 1956 that authorized $25 billion in federal investment for construction of 41,000 miles of interstate
highway.3 These developments meant that trucks were suddenly cost competitive with railroads. While
railroads had to pay for the construction of their own tracks, trucks drove for free on taxpayer-funded
roads and highways.
Already the owner of a successful trucking business in 1953, McLean was pondering the problem
of increasing traffic congestion and competition from domestic ship lines when he had a vision for a
drive-on/drive-off shipping line. He would load trucks onto surplus war vessels in New York City, and
offload them in North Carolina, circumventing traffic and saving money. However, all trucking, rail, and
shipping business in the United States was subject to the regulations of the Interstate Commerce
Commission (ICC), who viewed trucking and shipping as distinct industries, and whose main concern
was not efficiency but order. Any substantial new innovation or rate cut in the industry was subject to a
hearing at which other companies had the opportunity to object, stifling innovation. The ICC set rates in
both the shipping and trucking industries and kept shipping rates substantially below trucking to
compensate for longer transit times, but McLean’s plan would allow him to undercut his competition on
key trucking routes along the East Coast.
SS Ideal X
3
http://en.wikipedia.org/wiki/Federal_Aid_Highway_Act_of_1956
2
McLean was undeterred by the ICC, and in the course of three years had assembled a shipping
fleet, designed optimal containers, and developed a system for loading and unloading his ships at ports.
Through complex legal and financial engineering, McLean was able to circumvent the ICC – his efforts
culminating with the launch of the Ideal X in 1956. Yet this ship bearing 58 containers was just the
beginning. Just one year later in 1957, McLean had built his Sea-Land shipping service, and had new
ships capable of carrying 226 containers.
The shipping and container industry would continue to grow by leaps and bounds to reach the
levels of efficiency achieved today, and of course many of the most important subsequent innovations
were not directly attributable to McLean. Yet in addition to the relentless execution of his vision,
McLean’s key contribution was his realization that the shipping business is about more than just sailing
ships; its customers needed a holistic approach to moving cargo. It was a subtle distinction, but it allowed
McLean to broaden his view (or widen his lens) and start to anticipate the scope of change that his
container ships would bring to the transportation industry as a whole.
In the development of intermodal containers as the dominant shipping method in the world,
innumerable parties were affected by the change, each to varying degrees, and with varying degrees of
control over the innovation’s development path. The section below chronicles the effect of shipping
containers on several key parties.
Section II: The Ecosystem
EXHIBIT 1: Intermodal Container Ecosystem
3
The Innovation
Domestic
Manufacturers
International
Manufacturers
Intermodal
Container
Intermediaries
Government
Regulators
Shipping
Industry
• Trucking
• Trains
• Shipping/Docks
Industry Trade
Groups
Unions/Labor
Equipment
Manufacturers
Domestic
Receivers
International
Receivers
Logistics IT
Providers
• Truckers
• Longshoremen
• Trainmen
Complementors
Global and Domestic Manufacturers and Consumers
A broad category with a U.S. centric point of view, this section makes the point that virtually
nobody was left unaffected by the development of the intermodal shipping container. While the benefits
accrued somewhat unevenly, every constituent discussed in this section below was firmly in the “green
light” category.
U.S. Manufacturers
The U.S. economy in the 1950’s was based largely on manufacturing. Domestic manufacturing
capacity ballooned during World War II, and the postwar influx of labor helped that growth continue
through the 1950s. While the U.S. was relatively open, many other nations were closed to free trade or
simply not developed enough to provide much value. Among the largest barriers to trade was the high
cost of international shipping due to the inefficiencies of break-bulk cargo loading.
The intermodal container dramatically reduced both the time and cost of international shipping,
and further it drastically reduced the consideration of distance. Once cargo could be loaded and unloaded
efficiently, the issue of how far the ship sailed became somewhat of an afterthought. By reducing these
practical barriers, the intermodal container helped usher in the era of free trade. While it is generally
accepted among economists that more trade is always good for nations, there are almost always losers in
the trade game.
4
With increasing trade came increasing competition from internationally produced products. U.S.
manufacturing firms had been making outsized profits before this newfound competition, and their
employees saw this. Most firms wouldn’t willingly raise wages unless they had to, so the only way the
workers could force their employers to share with them more of the pie was to unionize, which they did.
As a result, many U.S. firms paid their employees wages and benefits far above global norms.
Faced with an influx of international goods produced with low-cost labor and shipped cheaply to
the United States in intermodal containers, many manufacturing firms could no longer compete. In many
ways the intermodal container is one of the chief causes of the demise of U.S. manufacturing. A
counterpoint that many would argue is that lower-cost shipping also opens opportunities for U.S.
manufacturers to sell their products abroad – and this is true, to an extent. But with such high domestic
labor costs and relatively unfavorable corporate taxes, it is no wonder that over the course of the life of
the intermodal shipping container, the United States has shifted from being a net exporter to a net
importer.
While the increased competition attributable to containerization has been harmful to many
manufacturers, those businesses that survived have been able to operate far more efficiently and
profitably due to predictability, speed, and low cost in shipping. Containers gave rise to just-in-time
manufacturing procedures, in which global supply chains feed geographically dispersed manufacturing
operations, and inventories are kept razor thin. To provide context for the savings this produces, if
nonfarm inventories in the United States in 2004 had been at the same levels relative to output as they had
been in the 1980s, there would have been over $1 trillion more inventory in the system. Assuming an
8.5% cost of capital, lean manufacturing procedures enabled by container shipping save U.S. businesses
$85 billion per year.4
U.S. Consumers
The effect of containerized shipping on typical consumers/citizens in the United States has been
largely positive, except to the extent that the same consumers formerly held U.S. manufacturing jobs that
have since been shipped overseas.
Insofar as containerization has contributed to globalization,
globalization and the rising intensity of competition on both price and quality of consumer products –
from technology to autos to foodstuffs – has provided U.S. consumers with increasing variety and choice,
as well as lower prices on everyday goods. Though many typical U.S. workers have seen real wages
stagnate over the past several decades, those same wages go much farther in terms of the quality and
assortment of products they have available.
4
Levinson, 267
5
When shipped in containers, transportation costs comprise a small fraction of the total price of
most consumer goods, meaning that U.S. consumers can purchase merchandise closer to what it costs to
produce in developing countries with far lower cost structures in manufacturing. This has led to a
dramatic rise in imports and an increasing quantity of products in U.S. stores that are made abroad. Big
box retailers increasingly compete on price, which leads to economies of scale and efficiency, and
producers winners like Wal-Mart. By negotiating bulk contracts with foreign manufacturers and keeping
shipping and logistics extremely lean, Wal-Mart is able to undercut nearly all competitors on prices of a
broad range of products – particularly those manufactured internationally.
While consumers overall benefit from the availability of low-priced products, the growth of big
box retail has come at the expense of countless “mom and pop shops” – small businesses who have found
themselves unable to compete with internationally sourced low priced options, and hence have been
forced to close their doors. These casualties of global trade are a relatively well-publicized negative
aspect of our modern economy, but are too often viewed in a vacuum rather than contrasted with the
benefits of the high-choice, low-cost marketplace in which we now live. Negative aspects of global trade
are mostly focused on sub-segments of the population, while the benefits accrue to society as a whole.
While there are those who may be worse off than before, American consumers overall benefit
substantially from shipping containers’ impact on global trade.
Foreign Manufacturers
Manufacturers in foreign countries similar to the United States faced many of the same
circumstances detailed above. However, manufacturers in less developed countries encountered a great
number of new opportunities thanks to intermodal shipping containers, and have benefitted almost
unequivocally due to the growth in global trade. To understand the impact of shipping containers on
international manufacturers, it helps to first understand the further progression of the shipping industry in
the United States.
Though intermodal containers got their start in 1957 and continued to develop through the 60’s
and 70’s, much of their potential continued to be curtailed by the ICC, and the railroad industry as a
whole. The benefit of the intermodal container was intended to be its seamless transition from ship to rail
to truck, but rail lines invested little in container-supporting infrastructure, and kept shipping rates
artificially high, negating their value in the chain described above. In 1980, two deregulating laws passed
that changed the balance of power in the shipping industry, allowing the intermodal container to begin to
deliver on its promise. The laws allowed truckers greater freedom over their own cargo, routes and rates,
and substantially limited the role of the ICC in setting rail rates, except for in coal and chemicals.
6
Deregulation allowed truck and rail carriers much greater flexibility in finding cargo to carry for
backhauls, meaning far fewer containers were shipped empty.
Further, railroads were allowed to
negotiate long-term shipping contracts with their customers, which meant lower rates for the largest
customers, and also finally gave the railroads the incentive to invest in container shipping infrastructure.
Because shippers moving cargo from west to east in the U.S. no longer had to foot the bill for empty
containers on the east-west backhaul, and due to competitively falling ground shipping rates overall, by
1987 nearly one third of the containers shipped from Asia to the U.S. East Coast crossed the U.S. by rail.
Just as deregulation unlocked greater efficiency in land shipping, the Shipping Act of 1984 did
the same for the maritime industry by allowing long term contracts and competitive bidding. Shipping 40
cubic feet of cargo either way across the pacific cost $40.94 in 1979. By 1986, that fell to $2.39
westbound and $15.89 eastbound.5 With the dramatic fall in the cost of international shipping, the vast
United States market was finally fully open for business with international manufacturers.
Throughout the 1980s, ‘90s and into today, the dramatic growth of manufacturing-based
developing economies is largely attributable to the intermodal shipping container. Low cost labor
combined with local government subsidies for investment meant that many U.S. firms shifted
manufacturing to developing economies. The influx of capital and opportunity also gave rise to growth in
foreign-based businesses, both in manufacturing and otherwise. Many foreign businesses arguably would
not exist today if not for the intermodal shipping container. Without a low cost means of getting their
products to their consumers, the economics of international production would not be feasible.
International manufacturers and economies as a whole are among the greatest beneficiaries of the value of
intermodal shipping containers.
International Consumers
The simple idea of a consumer society in many developing nations did not exist until recently. It
is due to the meteoric rise of manufacturing and employment in these low-cost countries that the very
employees who have worked for growing businesses are becoming consumers themselves. With the
founding viewpoint that employment and consumerism are good things, then the people of these
developing nations have most certainly benefitted from container-driven globalization.
At the same time, there are most certainly many ethical issues to be considered regarding the
accelerated path of development in many export-heavy countries. Sub-standard working conditions,
5
Levinson, 263
7
objectionable social policies, questions of child labor, and more all cloud the potentially straightforward
value judgment as to the accrued benefit of containerization.
Still, it is important to remember that along with the negatives of social change come many
positives as well. International consumers now have opportunities not just to work and buy their own
manufactured goods, but also to access a global marketplace of high technology products and life-saving
drugs manufactured both at home and abroad. On the opposite end of the spectrum, because of the low
barriers to international trade even in semi-perishable goods, price competition for commodities exists
across the globe. Many countries have benefitted from continually low food prices that are at least
partially attributable to U.S. farm subsidies.
Like their U.S. counterparts, international consumers benefit from a broader availability of
quality merchandise at fair prices. While U.S. society has had to deal with the implications of job losses
and shifts in the balance of the labor market, developing countries have had to deal with job creation and
an even more fundamental shift in their societies. Both come with advantages and disadvantages, but
overall it appears that international consumers are better off today than they were before the rise of the
intermodal shipping container.
Government
Sitting above the commercial players in the shipping logistics industry were government
regulators who had to balance several political and economic concerns before adapting this new
technology.
Positive Benefits
As discussed earlier in the paper, the intermodal shipping container ushered in a new era of
economic prosperity enhancing the manufacturing strength and quality of life within several nations. Not
only were existing industries such as pharmaceuticals and electronics manufacturing able to generate
higher profitability by creating new markets for their products but also new subsectors of transportation
emerged to aid in the transition. Looking specifically at the United States, this had the dual benefit of
increasing taxable revenues streams as well as improving the quality of life of its citizens. Seen in Exhibit
2 below, U.S. GDP’s CAGR dramatically rises in the period right after containerization and peaking in
the mid-1980s when regulatory cutbacks allowed the container to deliver on its full potential.
EXHIBIT 2: Historical U.S. GDP Growth
8
U.S. GDP Growth
+5%
Economic Boost from Containerization
+6%
12,623
7,415
+10%
4,218
+9%
+6%
1,638
415
719
1955
1965
1975
1985
1995
2005
Source: http://www.usgovernmentspending.com/us_gdp_history
Prior to the introduction of intermodal containerization, the staff of the Joint Economic Committee of
Congress expressed concern that “These (shipping) costs are more significant in many cases than
governmental trade barriers.” In 1961, ocean freight accounted for 12% and 10% of the value of U.S.
exports and imports respectively while average U.S. tariff was only 7%6. Therefore government
regulators were highly motivated to adopt this new innovation.
Negative Consequences
Conversely, Governments had two major hurdles to clear while considering adopting and
supporting this new mode of shipping. First, the efficiency produced by the modular container would
dramatically upset the existing workforce and their unions that were entrenched in the current system. As
discussed in later in the paper, this innovation would massively disrupt the shore man’s way of life and
consequently lead the union’s to exercise their political might with their representatives.
Second, while containerization provided a massive boost in shipping volumes, it did nothing to
solve the problem of inspecting and clearing cargo coming through international borders. For example, a
single ship could carry ~3,000 40-foot containers, creating volume at major ports like Long Beach or
Tokyo of over 10,000 containers on an average workday. Customs and immigration did not possess the
resources or technology to carefully screen all the incoming cargo. Thus the modular container
6
Levinson, p. 8-9
9
dramatically increased the risk of smuggled goods that wouldn’t be taxed, illegal drugs and merchandise
entering the country, and potential bombs or other terrorist weapons7.
In the face of such challenges and hurdles, the Government was at the onset a yellow light player
in the transportation ecosystem. Yet over time and with the help of the massive economic growth coupled
with the military’s enhanced logistics capabilities, this yellow light player turned green.
Equipment Manufacturers & Logistics Providers
With McLean’s new standard released, massive opportunities were created for both equipment
manufacturers and logistic service providers to service this new industry and capture value from the
entrenched unionized dockworkers. The following exhibit provides an illustrative value chain for the
transportation industry.
EXHIBIT 3: Profit Pool Analysis for the Transportation Industry
Total Market Size = $197B
Return on Capital (%)
60
Traditional Core Shipping Operating Assets
New Capabilities Required by
Containerization
55
50
45
40
35
30
25
20
15
10
5
0
Vessels
Revenue Growth (’97-’07)
Inland Delivery
7%
7%
Source: MergeGlobal analysis and estimates
7
Levinson, p. 7
10
Port Logistics Freight Forwarding
11%
10%
As the chart above shows, containerization opened up two high growth and high return market
opportunities in managing the complex port loading and tracking process. As the number of shipments
increased and supply chains began to lengthen, software technology and advanced resource planning
systems were required to ensure high quality transportation. Logistics IT providers had innovated capable
solutions to ensure proper storage, movement and tracking of these containers. This part of the ecosystem
was already well developed and in a green light stage.
Labor and Shipping Companies
While it is easy today to see the revolutionary effects that intermodal shipping containers have
had on the world economy and globalization, this innovation may not have occurred if it were not for the
adoption of the new technology by the shipping companies themselves and the highly unionized labor
forces.
Labor
One of the primary hurdles to unlock the value of McLean’s vision was getting the labor unions
to go along with this new technology. This proved to be no easy task.
Prior to the rise of intermodal shipping, longshoremen were responsible for loading and
unloading the break-bulk cargo from ships. Historically ill-paid, ill-treated, and working under dangerous
conditions, longshoreman lived difficult lives and were looked down upon by many other members of
society. They became their own community. There was no job security working as a longshoreman.
These men would show up to the docks each day and wait to be selected for work by a contractor, who
represented the shipping companies. Shipping companies themselves did not want to directly hire the
laborers to reduce their culpability regarding the poor conditions and casualties of the job. Under this
scheme, incomes were extremely irregular. Bribery of contractors for work and discrimination of certain
ethnic groups was common. Longshoremen were relatively disjointed, and all the power rested in the
hands of the shipping companies.
With the rise of organized labor in the early twentieth century, longshoremen became a force to
be reckoned with in the shipping industry. Collective bargaining allowed the longshoremen to negotiate
better wages and benefits, shorter workweeks, more generous disability pay, and earlier retirement. The
unions looked to increase pay and job certainty by restricting the supply of labor. The goal was to deter
casual laborers, men who showed up to the docks on days only when their other, regular jobs fell through.
11
Only men who registered were able to be hired for work. Additionally, the unions organized into groups
of men who were given priority for work on the docks, based on seniority. The category A men were
allocated jobs before any B men. Job security was still limited, but these groupings provided the
opportunity for the higher category laborers to earn a decent living.
Longshoremen were at the forefront of labor activism. The unions had no qualms about going on
strike to provide themselves with more leverage in negotiations. Dock workers lost more workdays due
to labor disputes than in any other profession. Dockworkers in Britain alone lost more than 1mm manwork days in the four years from 1948 through 1951.8 As the power shifted from shipping lines to labor
unions, productivity in the ports declined. Laborers became emboldened and resisted anything related to
eliminating jobs. Increasing mechanization in the 1950s wound up actually reducing productivity, as
workers actively fought to preserve their value-added. Due to the localized labor markets in the shipping
industry, unionized workers could hold the shipping lines’ feet to the fire in order to get what they
wanted. Rising wages continued to make the cost of shipping increase. In 1954, the government
conducted a study that showed just how inefficient cargo handling was. The study looked at a particular
ship, the Warrior, which transported goods from Brooklyn to Germany. The ship was loaded with
191,582 goods of various sizes and shapes and that arrived in Brooklyn from all over the United States in
1,156 separate shipments, some more than a month prior to departure. The longshoremen had to unpack
each and every item and stow it in an appropriate place in the ship’s hold. More than $5,000 worth of
rope and lumber was required to secure the items. The Warrior spent half the time of its journey in port.
The actual ocean-going journey of the Warrior required only about 10 days, which was the same time as
was needed to load and unload the ship. The entire shipping process from the origin to destination of
some of the goods lasted as long as 95 days. Of the total shipping costs, cargo handling at the ports
accounted for 36.8%, while the costs of the actual sea voyage were only 11.5%.9
By the 1950s, the wages of American seamen and longshoremen were double those of their
counterparts abroad. To maintain competitiveness, the U.S. government provided a subsidy to the
shipping lines. With the rise of shipping containers, the longshore unions could see the writing on the
wall and became increasingly active to prevent reductions in labor. The unions would refuse to load or
unload container ships or even go on strike.
Containers allowed the loading and unloading of ships at a fraction of the time and labor required
for break-bulk cargo. Cranes specially designed for use with intermodal containers could load a 40-ton
8
9
Levinson, 27
Levinson, 34
12
container in under two minutes—greatly reducing the time it took to unload pallets and stack individual
items in the ship’s hold. And since containers were basically portable warehouses, they could be loaded
at the shipper’s warehouse and not at the port, thus greatly reducing labor time at the docks. Not only
would the use of containers reduce the time and manpower in port, but the number of seamen would be
greatly reduced as well. New ships would be much larger than older, break-bulk ships. Each new vessel
would replace two or three of the old ones, yet require the same number of crew. Only 20 people would
be needed aboard a ship that could hold 3,000 40-foot containers.
Somewhat surprisingly, the seagoing unions did not oppose containerization. They realized that
American-flag ships were becoming less competitive relative to the rest of the world. The market share
of U.S. foreign commerce carried by American-flag ships was on the decline. Additionally, the U.S.
government refused to increase the subsidy it was providing to U.S. shipping lines to compensate for the
higher labor costs of seamen and longshoremen. If American ships failed to adopt containers, they would
cease to be competitive. Likewise, though the longshore unions worried about the potential effects of
containers on labor, they realized that resisting containers was futile. However, they resisted labor cuts
and demanded increased pay for increased productivity. The Port of New York Agreement was signed in
1969 and gave union workers wage and benefit increases. Additionally, to the detriment of the Teamsters
union, any container packaging done within 50 miles of the port needed to be done by longshoremen.
Also, the longshore unions proposed that any prepackaged containers arriving at the port needed to be
unloaded and repacked.
Obviously, this would have negated the primary value propositions of
containers—cost savings.
Dockworkers were grouped into two main unions, one in the East and one in the West. The
International Longshoreman’s Association (ILA) represented the interests of dockworkers on the East
Coast and Gulf of Mexico, while the International Longshoreman’s and Warehousemen’s Union (ILWU)
controlled the unions on the West Coast. The long-term success of McLean’s vision for low-cost,
efficient shipping via intermodal containers rested on the ability of getting these unions to adopt this new
technology. Otherwise, the cost structure would not allow the efficiency gains to be realized. The unions
represented the only red light in the container value chain. How this transition occurred will be discussed
in detail in Section III.
Shipping Companies
McLean’s container experiment with the Ideal X between Boston and Houston was the start of
intermodal container commercialization. His company, Pan-Atlantic began operating four ships and had
the rights to expand service to 16 ports. The railroads, however, felt threatened by this alternative,
13
cheaper form of domestic transportation and took Pan-Atlantic to court claiming the firm was breaking
ICC laws. Ultimately, however, Pan-Atlantic prevailed, which helped pave the way for widespread
container use. But by 1964, there were still only two container shipping lines: Matson in the Pacific and
Pan-Atlantic on the East Coast. However, it would not be until the 1970s and 80s that intermodal
container shipping would really take off.
This extended adoption period was due to a number of factors, including labor disputes,
regulatory issues, and concern about transporting empty containers on return trips. Yet another issue was
the tremendous cost of upgrading or purchasing new ships that could efficiently carry containers.
Shipping lines were hesitant to make the huge capital expenditures required to replace their war-era fleets
when they were unsure about the container’s commercial viability, especially considering the issues
surrounding the unionized longshoremen. It was just too risky for many companies to make the
investment. For example, the Grace Line in Venezuela spent millions of dollars converting ships only to
have the longshoremen refuse to load and unload the vessels. An executive of the firm was quoted as
saying, “The concept was valid, but the timing was wrong.”10 This was one of the main reasons container
shipping volume failed to overtake break-bulk volume until 1973, nearly twenty years after the Ideal X
completed its maiden container voyage.
As container shipping demonstrated its cost effectiveness and became increasingly popular, the
maritime shipping industry had to evolve. Shipping lines had little choice but to switch over from breakbulk. They could either they switch or go bankrupt. These firms suffered tremendous costs converting
their old ships (or in some cases purchasing new ones), and many of them failed anyway. Additionally,
ports had to be expanded or literally rebuilt to accommodate the larger and larger container ships being
constructed. Many longshoremen lost their jobs to mechanization. However, on the positive side,
containers provided a certain level of protection, so incidents of theft and damage declined. Shipping
insurance costs also fell.
For those shipping lines that did survive, their cost structure changed dramatically. With breakbulk shipping, dock labor was the largest cost component. But with container shipping, most of the
loading and unloading was mechanized via cranes, forklifts, etc., so the average loading costs per ton
dropped significantly—not to mention the time a ship had to spend in port, which was reduced from
multiple days to a matter of hours. Since ships were larger, their berths cost about 10 times as much to
build as those for traditional break-bulk ships; however, these larger ships could handle 20 times more
10
Levinson, 67
14
cargo per man hour.11 Therefore, the cost per ton was lower. Additionally, container ships were cheaper
to operate on a per ton basis because they carried more cargo.
Shipping became entirely about scale. In the age of break-bulk shipping, many small firms could
survive and thrive, some even operating on only one main route. For example, in 1960 there were at least
28 firms that shipped in the North Atlantic. However, with the rise of container ships, small firms could
no longer survive. Firms needed to operate on a large scale with many larger ships in order to spread
their fixed costs. Overall shipping capacity increased rapidly during the 1970s, going from 1.9 million
tons in 1970 to 10 million in 1980.12 Ships grew larger and larger. In 1978, ships entering service could
hold 3,500 20-foot containers, more than entered all the U.S. ports combined in a typical week in1968.13
By the 1980s, ships could accommodate 4,200 20-foot containers and could transport a ton of cargo at
60% of the cost on a ship designed for only 3,000 containers. Since the economies of scale were so
evident, shipping firms kept ordering larger ships. By 1988, some companies bought ships too large to
even fit through the Panama Canal. These ships were so large that only a few ports in the world at the
time could accommodate them. They typically operated between two large ports and then smaller ships
would take the cargo to smaller, tributary ports. Ports began spending money to compete for these superships. Some shipping lines began operating round-the-world routes in their quest for scale. They
encountered several problems with this, however. Delays were quite common, which frustrated certain
shipping clients. Besides few ports being able to handle these enormous ships, overcapacity began to
creep into the market, pushing shipping prices lower. Operators began running ships at slower speeds to
save on fuel costs. Fuel economy proved to be a huge advantage for large container ships when fuel costs
increased during the 1970s. However, as fuel costs dropped in the 1980s, slow, fuel-efficient ships were
no longer the way to go. Firms undertook huge losses, and even McLean’s own firm, McLean Industries,
filed for bankruptcy.
Shipping lines were able to exert tremendous control over pricing by pooling together in
conferences to keep shipping prices high. However, with so much capacity on the market, a recession,
and declining fuel prices, shipping lines lost much of this control. Their pricing power continued to erode
as the entire shipping industry was deregulated from 1980 to 1984, allowing for the container industry to
truly expand across rail, trucks, and ships, and causing a significant decline in shipping rates. Despite the
decline in prices, the shipping industry scaled up enormously as a result of the container. Though not as
11
Levinson, 246
Levinson, 233
13
Levinson, 234
12
15
“green” as some other beneficiaries, the shipping industry was firmly of the mind that intermodal
containers were a net positive to their business.
Section III: Leadership Drivers
EXHIBIT 4 – Surplus Analysis
Player
Manufacturers
Docks
Labor Unions
Shippers
Consumers
Government
Aggregator
Relative
Cost
-1
-6
-3
-7
-1
-4
-23
Relative
Benefit
8
7
1
8
8
5
37
Surplus
7
1
-2
1
7
1
14
Assessing the relative costs and relative benefits for each of the major ecosystem players, we
noted a number of significant roadblocks to widespread containerization with the shipping industry’s
original alignment. Docks would require significant costs to accommodate themselves for containers,
with no significant surplus after their efforts. Labor unions would see little benefit from containerization
in relation to the high relative cost. The shippers/transports saw significant relative benefit to be
achieved, but a lack of standards made the ability to compare that relative benefit to the end costs
difficult. This lack of standards also impacts the government’s regulation of the shipping industry. For
that reason, understanding how leadership in changing the ecosystems of the docks, labor unions and
container standards overcame these roadblocks is vital to appreciating the revolution of containerization.
Docks – The Port Authority Adds a New Player
By the time McLean was considering building his first container facility in the New York area,
the shipping ecosystem had already begun its own renaissance. New York’s docks had suffered a number
of drawbacks, chief among them high land transportation costs and decrepit facilities. The docks in New
York opened in the 1880s, leaving little space on land for truck access, resulting in significant delays even
after trucks suffered through typical New York City congestion. The docks built to accommodate ideally
ships from the 1800s, had been left to deteriorate after maintenance projects were often deemed too
expensive. The New York docks did benefit, though, from government regulation requiring that
16
shipments to and from New Jersey and New York have be at the same rate, keeping New York docks in
Manhattan and Brooklyn more popular due to their location in higher population areas. Despite similar
physical conditions, docks in Manhattan and Brooklyn remained profitable, while the docks across the
river in Newark suffered.
With rising economic growth in areas around the US, the Port Authority of New York, a joint
New York- New Jersey agency, realized the need to upgrade shipping capabilities to help the New York
area remain a desired shipping destination. The Port Authority proposed issuing revenue bonds to raise
the equivalent of $900 million in 2004 dollars to renovate and modernize the Manhattan dock facilities in
exchange for $5 million rent annually. The plan was rejected by New York City, which ran the docks,
citing the current profitability of the docks. Newark took advantage of this opportunity, and the Port
Authority rented and renovated Newark’s facilities14.
It was coming off this ecosystem realignment that McLean’s container innovation came to the
Port Authority’s attention. Private land in Elizabeth New Jersey would offer the Port Authority the
opportunity to build and control more facilities, while McLean would have a facility custom-built for his
container method with access to the newly built New Jersey Turnpike and less congestion between his
established trucking network and his shipping enterprise.
EXHIBIT 5 – Reconfiguring Dock Players
14
Levinson, Chapter 5, Digital Location 1400
17
The Port Authority was able to change the dynamics of this section of the shipping ecosystem by
recognizing that the cost and relative benefit to New York and New Jersey were different, and adjust itself
accordingly15.
Labor – From Obstruction to Beneficiary
By the 1950’s there were two main dockworkers unions, the International Longshoreman’s and
Warehousemen’s Union (ILWU), which controlled the unions on the West Coast, and the International
Longshoreman’s Association (ILA), which represented works on the East Coast and Gulf of Mexico.
McLean’s containerization was not the first attempt at solving the inefficiencies inherent in
traditional bulk stowing on ships, and these unions had experience in pushing back against these attempts.
In early 1950’s many shippers had already attempted to begin shipping pre-packed pallets directly to the
docks that could be loaded directly onto ships and shipped together. Many ILWU chapters then
implemented rules governing pallets that made their use incredibly inefficient. For example in Los
Angeles, pallets were required to be unloaded and then reloaded on the dock by union members, even if
they were to ship in a packaged state.
McLean, despite his track record of successfully eliminating costs, understood that pushback here
could be a significant roadblock to proving a minimal viable product. McLean agreed with the local ILA
chapter that his Newark operations would have the same number of workers that a traditional ship would
require, with the understanding that unnecessary workers would be paid but stay out of the way so as not
to further slow operations. The agreement left the ILA without significant objections despite the
automated nature of the work, because the number of jobs was increasing.
This strategy proved particularly shrewd. During his first two years of operation, McLean was
able to quantify loading times of 16% of what they had been previously, with only 33% of the originally
labor actually used16. This demonstration of feasibility enticed other shipping companies, who would
then make the subject of automation and new technology the subject of future union negotiations.
Matson, the largest west coast shipping company, was the first to make headway. Harry Bridges,
leader of the ILWU, recognized that the desire for new rules regarding automation, combined with a 1954
congressional investigation that found low levels of worker productivity on his docks, would result in a
government intolerant of strikes to maintain traditional working arrangements. Instead, Harry focused
securing some of value created by containerization for his workers. The ILWU members has secured
15
16
Levinson, Chapter 5, Digital Location 1516
Levinson, Chapter 6, Digital Location1830
18
their power by providing and receiving the benefits of work stoppages in the past, so convincing his
members that a change of strategy would be a significant undertaking. To make the change in strategy
successful, Bridges convinced the rank and file that specified tangible benefits from automation were
their best alternative; continued labor disputes produced high costs with little gains in benefit. In 1960,
the Mechanization & Modernization Agreement (M&M) was signed, guaranteeing there would be no
required hiring of unnecessary men. In exchange, union members as of 1958 received additional benefits
and a retirement fund with contributions of $29 million to be shared among union members through 1966.
The shippers, during that same time realized savings of nearly $60M17. By sharing the value captured,
labor was changed from a roadblock to a participant.
EXHIBIT 6 – Impact of M&M Agreement on Dockworkers Surplus
Prior to M&M Agreement
After M&M Agreement
89
0
29
The ILA, however, initially ran into other challenges. While the ILWU bargained together for all
locations, each ILA chapter/location were free to negotiate its own agreements. ILA strikes on the East
Coast were often met with government overrides and “cooling off periods.” By 1964, New York and
Philadelphia ILA chapters were able to reach agreements similar to those reached on the West Coast by
the ILWU. In exchange for the reduction of unnecessary workforce, workers would receive a share of the
benefit achieved by increased productivity and automation.
Avoiding the Standard Wars
An unclear path towards standardized containers presented another roadblock to ecosystem
evolution. Early pioneers like McLean settled on the a container length of 35 feet because, never wanting
17
Levinson, Chapter 6, Digital Location 2012
19
to waste an inch, that happened to be the maximum length a container could be on a truck in New Jersey.
This size however wouldn’t do for west coast powerhouse Matson, whose canned pineapple cargo from
Hawaii was too heavy to be lifted by crane if fully stocked in a 35 foot container. Instead they used
shorter 17 foot containers18. While many industries have begun with such standard wars that eventually
resolve themselves, there was another player in the ecosystem whose presence seriously delayed that
resolution.
The United States Maritime Association (Marad) among its responsibilities would dispense
subsidies to build US ships. Ships built to different standards would result in ships that could be
foreclosed if the original commissioner fell into financial distress, and leave Marad with a ship no one
else could use. This potential ambiguity left ship makers unsure whether Marad would subsidize new
boats, and prevented shippers from analyzing the relative benefits vs. the relative costs of
containerization. The International Organization for Standardization (“ISO”), an internationally
recognized standard setting body, sought to overcome this ambiguity with a worldwide standard.
McLean had invested heavily in his modular container design and also received a patent for his
hard work. However, his huge value surplus could not be recognized without significant buy-in from
other industrial transporters (e.g. trucks, trains and ships) who would then change their processes to allow
for adoption of his container. Inherently, McLean understood the route to acceptance throughout this
subsection of the ecosystem value chain was through the ISO.
EXHIBIT 7: Value Transfer from Sea-Land to Industry
Pre Patent Transfer
Post Patent Transfer
SeaLand Industries
(McLean)
SeaLand Industries
(McLean)
Surplus +10
Surplus +5
ISO
ISO
Surplus +3
Neutral +0
Industry
Competitors
Industry
Competitors
Deficit -4
Surplus +1
•
•
•
18
Levinson, Chapter 7, Digital Location 2271
20
SeaLand: Loss of Patent Protection and Revenue Stream
ISO: Increased funding from Sales of Standard
Industry Competitors: Increased sales from traffic volume
Given its international mandate, the ISO is by its nature a yellow light organization that seeks out
new ideas and best practices. To understand why, we must look at how this group funds its operations.
Money comes from three major sources including (1) management and use of experts in specific technical
projects, (2) subscriptions from member bodies which are based in proportion to the country’s national
GDP and (3) the sale of standards19. While the first two buckets were outside of his reach, McLean could
target the third source of funding to get the ISO’s backing. To encourage standardization of his container
design, McLean made his patents available to the ISO through a royalty-free lease20. Now he had an
external party pushing his innovation’s legitimacy across the ecosystem. By giving up some of the near
term profitability of monetizing his design, McLean and his transportation group would make it up on the
volume of new business achieved in other parts of his enterprise. By handing a tested design and the
subsequent revenue base, the ISO changed over from a yellow to green light.
EXHIBIT 8 – Revised Surplus Analysis
Player
Manufacturers
Docks
Labor Unions
Shippers
Consumers
Government
Aggregator
Relative
Cost
-1
-6
-3
-2
-1
-3
-16
Relative
Surplus
Benefit
8
7
8
2
3
0
6
4
8
7
5
2
38
22
Section IV: Minimum Viable Footprint & Expansion Strategy
McLean and his Sea-Land Service played a central role in the development of the intermodal
shipping ecosystem. The company’s decisions to introduce new elements to the ecosystem at certain
points in time were carefully planned to establish a basic proof-of-concept and later introduce a fullyscaled intercontinental freight solution.
19
20
"General information on ISO”, ISO website
"Tribute to Malcom McLean, Founding Father of the Freight Container", Michael Bohlman
21
This section of the paper focuses on Sea-Land’s expansion strategy, beginning in 1956 with the
maiden voyage of the Ideal X and taking us through the company’s reach into foreign markets and
support of U.S. Army logistics in the Vietnam War.
The Initial Voyage: Ideal X and the Minimum Viable Footprint
Observing the shipping industry as an outsider, McLean saw a heavily regulated and protected
industry. U.S. regulatory authorities controlled nearly every aspect of the industry, ranging from rate
setting to route permitting and ship construction. Despite this, McLean decided to press on and pursue his
vision of intermodal container shipping.
Years before McLean’s first containership, the Ideal X, set sail from Newark, New Jersey,
McLean began to assemble the pieces that would make the voyage possible. In late 1953, McLean found
unused dock space in Newark.21 The docks had plenty of space for trucks and containers, as well as easy
access to the New Jersey Turnpike. When McLean outlined his vision for the business, the Port Authority
offered to bear the costs of building the future Sea-Land terminal and then lease the property to the
company, thereby eliminating the need for Sea-Land to finance and oversee construction.
With his headquarters now secure, McLean turned his attention to assembling a marine fleet.
Ever the opportunist, McLean seized on the chance to acquire the troubled Pan-Atlantic Steamship
Corporation in January 1955 from its parent company, Waterman Steamship Company.22 Pan-Atlantic
was a regional operator with permits to trade along the East Coast between Boston and Houston. In May
of the same year, McLean made another move to acquire Waterman in what is considered to be the first
leveraged buy-out.23 At this time, Pan-Atlantic and Waterman owned thirty C-2 tankers, giving McLean
access to both East Coast ports and ships. Shortly after, McLean acquired two additional smaller T-2
tankers on the open market and immediately began to convert those ships to be better suited for container
trade.24 A few years later, McLean renamed the company Sea-Land Service to reflect the simple but
innovative nature of his planned offering.
The next piece of McLean’s ecosystem was the shipping containers themselves. McLean initially
had designs to retrofit his ships as drive-on/drive-off vessels which would transport both container and
21
Levinson, p. 44.
Levinson, pp. 44-45.
23
Levinson, p. 47.
24
One of these T-2 tankers became the Ideal X. The larger C-2s were put to use in 1957 and formed the core of SeaLand’s fleet in the next several years.
22
22
chassis (undercarriage – axis, wheels, etc.).25 However, McLean wisely changed his mind and deleted the
chassis from his design. Removing the wheels and undercarriage created two advantages. First, it saved
space on a per-unit basis, reducing the volume occupied by a trailer by 33 percent. Second, it created the
opportunity to stack trailers on top of each other, thereby making best use of a ship’s capacity.26
In 1956, the shipping container existed only in McLean’s mind -- and designing a prototype
would not be an easy task. McLean reached out to one of his contacts in the trucking industry, Brown
Industries of Toledo, OH, to perform the initial engineering work. Brown was an ideal candidate for the
project since the firm had undertaken similar work for the military during World War II, designing
containers that were shipped on barges to Alaska and then loaded onto highway-style running gear.27
McLean had two simple requirements for the new design: the containers should fit onboard a T-2 tanker
and be interchangeable between ship, rail, and trucks. Brown Industries and its lead engineer, Keith
Tanlinger, who was later hired by Sea-Land, quickly produced boxes that were suitable for Ideal X’s
initial voyage.
Around the same time, McLean arranged for the purchase of two idle revolving cranes from a
shipyard in Chester, PA. Sea-Land repurposed these cranes for loading shipping containers and installed
a spreader bar that minimized the physical labor required during the loading process. The cranes were
installed in Newark and Houston, providing a means by which Sea-Land’s ships could be efficiently
loaded and unloaded.28 Of course, he also needed to also convince the longshoremen’s union to
participate in the new activity. As discussed in the previous section, McLean promised to share some of
his surplus gains with them in order to reach a preliminary labor agreement.
The last remaining piece of puzzle was to arrange for the transportation of the containers once
they were unloaded in Houston. Since Sea-Land was prohibited by the ICC from owning any trucking
operations (McLean had placed his interest in McLean Trucking in a blind trust prior to the Pan-Atlantic
acquisition), the company decided to contract with independent trucking companies to arrange the
transport of the containers from the dock to their final destination. Central to this agreement was
McLean’s work to secure the support of the teamsters’ union in 1954, as well as his delineation of which
25
Levinson, 47. Cudahy, Brian, Box Boats: How Container Ships Changed the World, pp. 26-27, New York:
Fordham University Press, 2006.
26
Levinson, p. 47.
27
Cudahy, p. 28.
28
Levinson, p. 51.
23
work would be performed by longshoremen (hooking the container to the loading crane) and teamsters
(securing the container to the truck chassis) at the dock facility.29
With all of this in place, McLean had achieved his Minimum Viable Footprint. The Ideal X set
sail on April 26, 1956, steaming out of Newark Harbor en route to Houston. The ship arrived in Houston
five days later, loaded with 58 of McLean’s shipping containers. While the venture was certainly not
profitable, the voyage can be seen as a major achievement nonetheless. In assembling the elements that
made the journey possible, McLean had proven that his vision of intermodal shipping was achievable.
The Ideal X’s voyage was certainly not perfect – nearly every element of the ecosystem was far from
operating at maximum efficiency, which would be critical to achieve the cost savings McLean envisioned
– but the event offered manufacturers and merchants alike a proof of concept. With the Ideal X, McLean
had established a Minimum Viable Footprint which he would then grow into a hundred-billion-dollar
industry in the following decades.
EXHIBIT 9: Minimum Viable Footprint
Newark Port
(Headquarters)
Container storage
and staging
On-shore crane
Loading
T-2 tanker
(Ideal X)
Transport
On-shore crane
Unloading
Houston Port
(truck chassis)
Final delivery
Containers
The Next Decade: Adding New Features and Market Access
The next ten years witnessed rapid expansion of container trade routes and introductions of new
value-creating features to the ecosystem.
29
Cudahy, p. 29.
24
Expansion Stage One: Building Basic Product Features
By the end of 1956, seven months after Ideal X’s maiden voyage, Sea-Land had established
successful service between Newark and the Gulf Coast, operating four converted T-2 tankers on these
routes.30
The company also undertook the conversion of its legacy C-2 fleet during this time period. C-2
tankers were preferable to T-2 tankers for two reasons. First, the ships were larger, meaning that they
could achieve greater economies of scale in container transport. Second, the ships could be converted to
carry 100% containers – both above and below deck.31 The first converted C-2, Gateway City, set sail in
October 1957.32 It could haul 226 containers: stacked two-high on the deck and four-high in the cells
below deck created during the conversion.33 With these C-2 conversions, Sea-Land also began outfitting
its ships with onboard cranes. Doing so allowed Sea-Land to visit ports besides Houston and Newark,
where on-shore cranes had been installed.
The company also focused on improving the container and chassis designs at this point.
Containers were engineered with corner castings that allowed them to support the weight of multiple
containers stacked on top of them. These castings also provided a “lock-in” for the cranes to use when
loading and unloading the boxes. McLean’s engineers also introduced “twist lock” functionality that
allowed containers to be easily secured to the top of the deck and protected them from the force of high,
shifting seas.34 Finally, Tanlinger, the chief engineer, focused on redesigning truck chassis so that they
could easily interlock with containers, further improving efficiency of the loading process.35
By building bigger ships with greater storage capacity and stacking them high with stronger
containers, Sea-Land enhanced the value proposition for its customers. The newfound efficiency further
lowered shipping costs. Furthermore, combining two separate elements of the ecosystem – the
containership and the crane – created value for players in the ecosystem by greatly expanding the list of
ports where containerships could call.
30
Cudahy, pp. 30 and 72.
Cudahy, p. 32. By contrast, T-2 tankers were able to only haul petroleum in their below-deck holds.
32
Cudahy, p. 32; Levinson, p. 55.
33
Engineering these cellular storage units was another challenge. Tanlinger was presented with the task of
designing cells large enough so that they could be loaded and unloaded with a large crane, but small enough so that
the containers would not shift during voyage, causing damage to the cargo and capsizing the ship.
34
Cudahy, pp. 39-40; Levinson, pp. 55-56.
35
Levinson, p. 55.
31
25
EXHIBIT 10: Expansion Stage 1
Originating port
Container storage
and staging
C-2 tanker
+
On-board crane
+
Cellular storage
(below and above
deck)
Destination port
(truck chassis)
Final delivery
Loading, transport,
and unloading
More containers,
stackable and
securable
Puerto Rico: A Small but Significant Step
In the two years following Ideal X’s voyage, Sea-Land established service between several
Atlantic and Gulf Coast ports.36 However, the strongest value proposition of intermodal shipping occurs
not when containerships serve as substitutes to rail and trucks (as they did on these routes), but instead
when they serve as complements to these other modes of freight. Islands and trans-oceanic journeys are
the natural candidates. And so, in 1958, Sea-Land launched service to Puerto Rico, making its first foray
into a market that could only be reached by sea.37 Bienville set sail for Puerto Rico in March but ran into
unexpected resistance when it reached land. The Puerto Rican longshoremen refused to unload the ship,
sensing that the onboard crane would soon replace render their labor redundant. Bienville sat at sea for
four weeks while negotiations occurred, eventually giving up and returning to New Orleans. The net loss
resulting from this debacle nearly wiped out all of Sea-Land’s prior retained earnings.38 Finally, in July,
McLean negotiated a deal with the labor union and permanent service was established to Puerto Rico.
In the years that followed, the Puerto Rican service proved to be very profitable for Sea-Land.
The company consolidated its hold on the market as competitors went out of business. The island also
experienced a period of strong economic growth during this time, both caused by and of great benefit to
Sea-Land.39 The company reduced the costs of shipping both imports and exports, which was of great
36
Cudahy, pp. 72-73.
Cudahy, p. 57.
38
Cudahy, p. 58.
39
Levinson, p. 73
37
26
importance to the growing number of manufacturers who relocated to the island. Sea-Land even
established a subsidiary that helped companies move their operations to Puerto Rico.40
While geographically close to Houston, Puerto Rico represented a major expansion of Sea-Land’s
value proposition. The island’s growth and isolation made Sea-Land a critical partner in its economic
development. By spreading the gains that Sea-Land realized – by reaching an agreement with the
longshoremen’s union and establishing service to three lesser, but politically important, Puerto Rican
ports – Sea-Land was able to overcome initial resistance and add a critical element to its ecosystem:
across-water service.
Building a Pacific Footprint
The next expansion did not provide Sea-Land with the immediate returns that Puerto Rican
service did, but was of strategic importance nonetheless. In 1961, the company inaugurated service
between the East and West Coast via the Panama Canal.41 This shipping route had been lucrative prior to
World War II, but was abandoned in the post-war era as rail and trucking became cheaper. In fact, intercoastal freight service was dormant when Sea-Land first sailed the route. While there was not a huge
demand for a Newark-California freight route initially, the venture had the benefit of opening access to
new markets: Sea-Land established a footprint on the Pacific Coast, which would later prove valuable as
it began its push into the Asian market (discussed below).
The next destination – Alaska – provided the company with a more lucrative return. While not an
island, Alaska is sufficiently isolated that shipping is a cost-efficient alternative to over-land freight.
Always one to seize an opportunity, McLean established the first Alaskan Sea-Land service by acquiring
ships from a bankrupt competitor (Bull Line) and launching the route in response to the Good Friday
Earthquake of March 1964.42 In a pattern that would become apparent during the Vietnam War, SeaLand used this crisis opportunity to establish the viability of its container service – first serving as a
public good and later as a commercial service. Over the coming years, the Alaskan trade proved to be
profitable, providing the young company with cash flow to finance further expansion.
Expansion Stage Two: Rounding out the Fleet and Other Capital Improvements
Sea-Land continued to invest in its fleet and add elements to its ecosystem that lowered costs and
improved reliability. In 1962, the company converted its first T-3 tanker (Elizabethport, named after the
40
Levinson, p. 73.
Cudahy, p. 76; Levinson, p. 70.
42
Cudahy, p. 84.
41
27
company’s home port in New Jersey).43 The T-3 had even more capacity than its C-2 predecessors,
further driving down unit freight costs. By the end of 1962, a little over six years after the company’s
first voyage, Sea-Land owned over 8,000 containers.44 The company also began to add complementary
ships to its fleet, such as a 313-foot unpowered barge that brought containers between San Francisco and
Portland, marking the beginning of Sea-Land’s hub-and-spoke model.45 The company broadened its
customer base by opening a Manhattan terminal that collected small consignments that would be
consolidated into containers, decreasing the minimum order size for customers.46
These advancements, coupled with its every-increasing fleet size, meant that managing the
enterprise became increasingly difficult. In 1962, the company invested in an early IT system that used
computers to monitor ship and container locations.47
Financing this expansion required large amounts of cash, which created a challenge for Sea-Land.
The young company was profitable, but did not generate enough cash to continually finance expensive
new ship construction. To get around this, nearly all of Sea-Land’s fleet projects during its first decade
were ship renovations.48 World War II ships were in high supply at this point, meaning that they could be
acquired for relatively cheap. Converting the ships to container format could be done at any global
shipyard since these “repairs” did not constitute a violation of the protectionist Jones Act. This trend of
favoring converted ships over new builds continued past Sea-Land’s first decade. In 1969, 199 new
containerships were under construction around the world. None of these ships belonged to Sea-Land.49
The company also introduced an innovative financing arrangement in 1964 that helped to
conserve cash flow. To finance the conversion of tankers acquired from the U.S. government, McLean
introduced a leasing arrangement that, while common in other industries, was new to shipping. Sea-Land
would agree to lease the ships from the shipyard performing the conversion, meaning that Sea-Land paid
nothing until the first payment was due.50
Perhaps the most substantial change to Sea-Land’s ecosystem at this point was the reintroduction
of the on-shore crane. In moving the crane from the deck to the dock, the company separated two
elements of the ecosystem that it had previously combined. The first company to exclusively use land-
43
Cudahy, pp. 77-78.
Cudahy, p. 78.
45
Cudahy, p. 81.
46
Cudahy, p. 82.
47
Cudahy, p. 78.
48
Cudahy, p. 100.
49
Cudahy, p. 106.
50
Cudahy, p. 94.
44
28
based cranes was a Sea-Land rival, Matson Shipping. Matson serviced only a few ports, so onboard
cranes were not necessary.51 In 1966, Sea-Land followed suit and ceased the construction of ships with
on-board cranes. The company began to acquire and install land-based cranes that were two to three
times faster than their on-board counterparts.52
During 1962-1966, Sea-Land invested heavily in adding new elements to its ecosystem. Each of
these innovations increased efficiency and reliability, further lowering the cost of intermodal freight. By
the end of this period, Sea-Land had expanded its geographical footprint to cover North and Central
America at costs that blew away traditional ocean freight. The company introduced elements that
enhanced the value captured by a number of players – truckers, manufacturers, governments – while also
establishing itself as the clear leader in this industry.
51
52
Levinson, p. 63.
Cudahy, p. 94.
29
EXHIBIT 11: Expansion Stage 2
IT system
Coordination and
tracking
Originating port
Container storage
and staging
Not pictured: loading and
unloading, barge and small-ship
transport
On-shore crane
Vessel fleet
Hub port
Spoke port
Loading
Transport
Distribution
Final delivery
Small consignments
Renovations and
shipyard financing
Containers
Aggregation
World War II vessel
surplus
30
Section V: Conclusion
Realizing the Full Value Proposition through International Expansion
Sea-Land’s expansion to Europe and Asia represented the culmination of its growth from its
Minimal Viable Footprint (Newark to Houston) to international trade routes that featured containerships
as a critical part of an intermodal shipping solution. Moving product between continents allowed
containerships to complement, and integrate seamlessly with, other forms of freight transport. Cheap and
reliable transcontinental shipment of goods is the pinnacle of value creation for containerization.
In April 1966, Sea-Land launched service from New York to European ports.53 While rival
United States Lines sent the first containership to Europe, Sea-Land was not far behind. Days after
USL’s voyage, on April 23, 1966, Sea-Land’s Fairland set off for Europe. This voyage required
significant advance work: McLean had sent agents abroad to stoke demand and put together networks of
contractors that would handle the final portion of the container’s voyage. While Sea-Land faced fresh
challenges in the European market – fatal crane accidents and threats from Dutch competitors – most
observers recognized the disruption that containerization would bring to transatlantic commerce. One
economic and maritime historian notes: “If any one voyage can be said to have grabbed the traditional
world steamship establishment by the lapels, given it a good shake, and underscored the point that
containerization was here to stay, it was Fairland's 1966 arrival in Rotterdam.”54 As if this initial voyage
was not enough, Sea-Land pushed to establish regular service immediately by sending another
containership to Europe seven days later. In a few short years, the transatlantic service quickly rose to
become the dominant line of business for Sea-Land.
If the European service demonstrated the value of containerization on a global scale, Sea-Land’s
logistical support of the Vietnam War cemented this value and dealt a fatal blow to competitors. From
1966 through the end of the military’s engagement in April 1975, Sea-Land supported the U.S. military’s
effort by shipping containers from the home front to the frontlines. Sea-Land’s operation was reliable and
efficient: the company transported 10% of Vietnam-bound cargo using only 2% of the merchant ships in
Vietnam service. Sea-Land also offered another important upside to the military. Prior to 1966, it was
estimated that half or more of any incoming cargo shipment was stolen by the Viet Cong. With SeaLand’s sealed containers, this pilferage rate dropped to virtually zero.55
53
Cudahy, pp. 86-88.
Cudahy, p. 88.
55
Cudahy, p. 107.
54
31
Besides demonstrating the clear advantage of container shipping in large logistical operations like
war, the Vietnam episode also had a distinct commercial advantage for Sea-Land. Given its proximity to
Asian ports, Vietnam served as a natural testing ground for containerization in Asia. After dropping off
military loads, many Sea-Land ships would continue east to pick up low-cost goods destined for the U.S.
In 1968, Sea-Land solidified this route by inaugurating service out of Yokohama, Japan, and signing a
trade agreement with Japanese industrial giant Mitsui Corporation.56
Spanning from Newark to Yokohama, Sea-Land’s first decade of container service was a period
of rapid growth and constant innovation. In less than ten years, the world economy was transformed from
being handicapped by slow and costly freight to an economy where efficient and reliable transport of
goods connected global markets. None of this would have been possible without McLean’s carefully
planned expansion strategy. Sea-Land began with a simple Minimum Viable Footprint: one route, one
(relatively) small ship, and two cranes. On the back of this prototype, McLean added new elements –
both markets and features – ultimately culminating in international trade routes that ranged from
Rotterdam to the Far East. At each step of the process, McLean introduced new elements that enhanced
the offering by building on prior success.
Of course, there will still challenges to overcome – burdensome regulation being the primary
obstacle. While ICC regulations kept the nominal cost of ship, truck, and rail freight high in the U.S., the
relative cost had declined substantially. Prior to containerization, it was simply not economical to ship
any low-margin good overseas. Now, these goods were beginning to travel around the globe. When
deregulation of these industries came in the early 1980s, the massive cost savings that McLean envisioned
in April 1956 were finally realized.
56
Cudahy, pp. 108-109.
32