Author Archives: Marc Levinson

Too Damn Big

Not too long ago, I had a chat with a high-ranking executive at a major container shipping line. The subject was new ships. “Those guys on the operating side always talk about how the bigger ships have lower costs,” he said, shaking his head. “They don’t see the bigger picture.”

The bigger picture is that the container shipping industry’s enthusiasm for size has brought it nothing but headaches. Changes in trade patterns, still in their early stages, are likely to make the problems worse. And yet most of the major ship lines can’t help themselves. In October, Mediterranean Shipping Company, the Switzerland-based company that is the world’s second-biggest container carrier, said it would acquire five megaships, each able to carry 23,000 20-foot containers — equal to 11,500 truckloads. Evergreen Marine, a Taiwanese line, just ordered six ships of the same size. Hyundai Merchant Marine has a dozen ships of that size on order, with deliveries to begin next year. CMA CGM of France, the fourth-largest container line, has several on the way. All of these vessels, it is worth noting, are larger than any containership now in commercial service.

The attraction of megaships is clear enough: if it is filled to capacity, a ship able to carry 23,000 twenty-foot-equivalent units — TEUs, as they’re called — has much lower operating costs per container than a tiddler carrying, say, 15,000 TEUs. But that is a very big “if.” With international trade growing slowly, there’s a lot of unused capacity on voyages from Asia to Europe, and on the reverse voyage from Europe to Asia empty containers, which travel at very low rates, are often the main cargo. The ships are too big to call at many ports and to fit through the recently enlarged Panama Canal, so they don’t serve North America. While a fully loaded megaship is highly efficient at sea, it can cause chaos in port by discharging or loading thousands of containers at a time, delaying customers’ deliveries and erasing many of the putative benefits of large vessels.

Recent economic trends pose an additional challenge. The world’s ten largest container ports all are located in Asia, seven of them in China. This is important for containership economics, because only a very large port is likely to amass enough outbound cargo to justify frequent calls by very large ships. But due to rising wages in China, trade sanctions in the United States, and businesses’ increased attention to risk, manufacturing of many widely traded goods — clothing, footwear, consumer electronics, toys — is shifting from China to such countries as Vietnam, Bangladesh, and even Ethiopia. This shift is visible in the fact that Chinese ports such as Hong Kong, Qingdao, Xiamen, and Dalian, all of them larger than any port in North America, have seen traffic flatten out or decline. Few of the new manufacturing hotbeds, though, export enough to Europe to justify a 23,000-TEU ship dropping by.

A few people in the shipping industry appear to recognize the insanity of the race for size. The chief financial officer of Maersk, the largest container line, said in November that “there are no intentions now to invest in any large vessels.” Cosco, the state-owned Chinese ship line, seems to have retreated from rumored plans to order 25,000-TEU vessels. No doubt, operating such vessels would bring prestige. But when it comes to making a profit, they’re too damn big.

In Search of Economic Narratives

A few years ago, I joined an organization of economic historians. Having written several books on economic history, I thought my involvement in the organization might help me broaden my horizons. But the main debates I heard at the group’s annual meeting concerned whether an equation used the correct variables or an author had adequately accounted for heteroskedasticity. Economic history, as practiced in academia, seemed to be mainly an exercise in regression analysis. Only the most senior professors, free from the demands of tenure committees, dared look beyond their spreadsheets and consider the meaning and implications of their historical research. I let my membership lapse.

I recalled that meeting as I read a recent Washington Post article about the need for economists to tell stories. According to the author, Heather Long, central bank governors from countries such as Australia and Sweden used the annual Federal Reserve conference at Jackson Hole, Wyoming, this past August to discuss the role of narrative in explaining economic policy to the public. A new book by Yale University economist Robert Shiller, Narrative Economics, emphasizes that economic outcomes often depend on public beliefs, and those beliefs are shaped by the stories people hear and remember. “Economists can best advance their science by developing and incorporating into it the art of narrative economics,” he writes.

Unfortunately, these ideas haven’t sunk very deeply into the economics profession, and certainly not into the historical branch of it. Economic historians are few and far between in university history departments; by and large, they’ve relegated themselves to economics departments where their advanced quantitative techniques are appreciated.

Traditional history departments, moreover, seem happy for the economic historians to stay away. There even seems to be a line between business historians, who typically are less addicted to econometrics and are usually housed in history departments, and economic historians, who mainly crunch numbers. I recently met an economic historian teaching at an influential business school who told me that he’s never met the business historians teaching at the same school. He didn’t seem to find that unusual.

The artificial separation of economic history from history has left students in history classes studying political or cultural or social or gender history with little attention to the economic background. Similarly, the public’s knowledge of history often comes from books or television shows in which economic factors are an afterthought. If economists were better at telling stories, their views might get more air time, and the public might have a broader understanding of history. Shiller is right about that.

But telling better stories requires having stories to tell. Economic historians, I would assert, tend to shortchange non-quantitative sources of information — including oral histories and news articles as well as work by historians — in favor of data that can be subjected to the quantitative tools that define academic economics. If economic historians want to offer better narratives, they have to understand that stories should be not only an output, but also an input.

Revisiting the Productivity Slump

Three years ago, in my book An Extraordinary Time, I advanced the view that governments have little power to make their economies grow faster over the long run. Economic growth, beyond the next year or two, depends mainly on productivity growth. Drawing on the experience of the 1970s, I asserted that governments cannot manage this in any predictable way; there have been periods when productivity improved quickly, usually when no one expected it, but slow productivity gains are the normal state of affairs.

Predictably, this viewpoint was not very popular. On the right, the usual suspects insisted that fewer regulations and lower tax rates, especially on capital, would usher in a new age of higher productivity and faster economic growth. On the left, I heard objections that I was condemning workers to stagnant living standards; if governments would spend more on education or infrastructure or research or something, productivity might skyrocket as it did in the 1930s and the 1950s.

I’ve been reexamining this issue, looking at the evidence that has come in since An Extraordinary Time appeared. Unfortunately, it seems to support my case.

In the United States, the much-touted 2017 tax reform, which mainly reduced taxes on business, seems to be doing nothing for productivity. Last month, in its latest economic outlook, the Congressional Budget Office projected that total factor productivity in the business sector, which takes account of capital investments and improvements in workers’ skills as well as output per worker hour, will grow about 1.1 percent per year over the coming decade, about the same miserable rate as in the 1970s and far more slowly than in the quarter-century between 1982 and 2007. The combination of this performance and slow population growth will leave the U.S. economy will be hard-pressed to grow at 2 percent annually, CBO found. That is far more slowly than U.S. politicians of either party claim is possible.

This is not merely a domestic trend. The OECD, the research organization of rich-country governments, projects that labor productivity in the wealthy economies, on average, will be a minuscule 4% higher in 2020 than it was in 2010. Some countries, mainly in Eastern Europe, are projected to do much better. Others, though, are seeing no productivity growth at all, which will make it difficult to improve workers’ wages. The Conference Board, a business research organization, finds that productivity growth is slowing in the major emerging economies as well, holding down their growth potential.

Is there any be cause for optimism about a productivity revival? Perhaps. An interesting article published last year suggests that slow growth in productivity in U.S. manufacturing may be related to outsourcing; the authors, economists at the Bureau of Labor Statistics, suggested that “industries that shift their production process toward greater use of intermediate purchases may be doing so at the expense of innovation.” We’ve seen some evidence over the past several years — predating President Trump’s attacks on trade — that manufacturers have been shortening their supply chains and bringing a greater share of their production in-house. If the BLS economists are right, this could stimulate innovation and hence faster productivity growth in the manufacturing sector.

Manufacturing, though, now accounts for only a small part of the economy in most wealthy countries. It’s no sure bet that faster productivity growth in manufacturing would provide enough of an economic boost to give workers the higher living standards they expect government to deliver.

Shipbuilders’ Shotgun Weddings

There may be no industry that has lost more money over a longer period of time than shipbuilding. If two recently announced mergers go through, governments may finally have figured out how to stanch the red ink—by putting an end to competition.

Governments have long considered shipbuilding a vital industry, largely because shipyards building oceangoing vessels routinely employ thousands of workers and are major consumers of steel. The lion’s share of the world’s commercial shipbuilding after World War Two—nearly two-thirds in 1960—occurred in Europe, more or less on a commercial basis, to replace merchant ships lost during the war. In the late 1950s, when Japan elbowed its way in, government aid for ship construction was relatively minor, except in the United States. Japan’s low labor costs gave it an edge in building oil tankers, while orders for passenger ships, general cargo ships, and then container ships kept European yards busy. But the 1973 oil crisis changed matters abruptly. Demand for tankers plummeted, and trade in other goods was hit hard by the spreading recession. Many ship owners refused to accept delivery of vessels they had ordered but no longer needed. Orders placed with Japanese shipyards fell 90 percent between 1973 and 1978, and the decline was nearly as steep in Europe. Governments began sending money by the boatload to keep their shipyard afloat.

It was at that moment, when the industry’s outlook already seemed dire, that South Korea determined to become a shipbuilding powerhouse. Korea’s rapid industrialization over the previous decade had depended on exports of labor-intensive products such as clothing and footwear. Government economic planners, concerned that rising wages and other countries’ trade restrictions would crush the apparel manufacturers, set a course for heavy industry. In 1972, they opened Pohang Iron and Steel Company, a government-owned steel mill that was perhaps the most highly subsidized industrial venture in history up to that point. This was followed by a shipbuilding development plan, which proposed to build nine shipyards by 1980 and five more by 1985.

Korean shipbuilders previously had made only small vessels for fishing and coastal trade, mainly out of wood. The government pressured industrial companies with no background in shipbuilding to build and operate the new yards, granting them tax holidays, low-interest loans from state banks, and guarantees that let them borrow cheaply overseas. Hyundai the country’s largest industrial conglomerate, was induced to build the first yard at Ulsan, thirty-five miles down the coast from the mill at Pohang, which could furnish steel at low cost. The late Korea scholar Alice Amsden recounted how Hyundai was granted scarce foreign currency in order to acquire foreign ship designs, but was so inexperienced that when it followed a design calling for building an oil tanker in two halves, the completed halves did not fit together. When the buyer refused to accept the ship, the government supported creation of a new ship line, Hyundai Merchant Marine, to take the unwanted vessels off the shipyard’s hands.

As a job-creation strategy, the shipbuilding development plan proved wildly successful. Subsidies to the shipyards and the Pohang steel mill, along with Korea’s low wages, allowed Korean yards to underprice competitors in Europe and Japan. By 1990, South Korea’s ship production was eight times higher than it had been in 1975, while every other major shipbuilding nation was producing far less tonnage than before. Subsidies flowed freely in Europe and Japan, keeping shipbuilders alive and delivering vessels to ship lines at bargain prices.

In 2006, the Chinese government identified shipbuilding as a “strategic industry” and set a goal of China becoming the largest shipbuilding nation within a decade. It backed this up with heavy state investments: thanks to an estimated $4.3 billion of subsidies, two state-owned companies, China Shipbuilding Industry Corporation and China State Shipbuilding Corporation, added more than 100 dry docks large enough to build commercial vessels within seven years. Chinese ship owners—many of them state-owned companies—went on a demolition spree, replacing their older tankers, bulk ships, and containerships with new, highly subsidized ships built almost exclusively in Chinese yards.

China quickly dominated the market for bulk ships, used to transport raw commodities such as coal and ore: between 2006 and 2012, 57 percent of new bulker tonnage worldwide was produced in China. Breaking into the market for containerships, far more complex vessels, was tougher. As late as 2005, almost all large containerships were built in South Korea and Japan.  But with ample state aid, China quickly moved up the learning curve. Building in a highly subsidized Chinese yard cost 20 to 30 percent less than building in a highly subsidized Korean yard. It was no wonder that between 2006 and 2012, China built about two-fifths of the world’s new containership capacity.

Over the past few years, the Korean yards and the Chinese yards have slugged it out, with plenty of government money financing the battle. Now, though, the Korean government has more or less directed the two largest shipbuilders, one of which is already under outright government control, to merge. The Chinese government responded in July by directing the two large Chinese yards to merge.  Between them, the two giant shipbuilders that will emerge from these shotgun weddings will control roughly 56% of the global shipping order book and an even larger percentage of the capacity to build complicated vessels such as mega-containerships and liquefied natural gas tankers. Subsidies are likely to go down, which means vessel prices are likely to go up. When it all shakes out, ocean shipping may be much less of a bargain.

Slow Trade Growth is the New Normal

The World Trade Organization forecast on April 2 that merchandise trade will grow a modest 2.6 percent in 2019, with risks to the downside. The outlook for next year is only slightly better, with trade projected to expand 3 percent. These are disappointing numbers: international commerce, the WTO anticipates, will expand no faster than the world economy this year and will be only slightly more robust than global GDP in 2020.

The WTO’s director-general, Robert Azevêdo, blamed the unhappy news on uncertainty caused by protectionist bluster. “Of course there are other elements in play, but rising trade tensions are the major factor,” he told the press. But Mr. Azevêdo may be overstating the case. There is reason to think that slow growth in goods trade is not an aberration caused by protectionist rhetoric, but is the new normal, due to factors that have nothing to do with trade wars.

For most of the past half-century, exports and imports grew far faster than the world economy. Merchandise trade, less than one-third of the world’s GDP in the 1980s, climbed to more than half in 2008 as China developed into the world’s workshop. China’s factories consumed vast quantities of imported fuel, ore, and chemicals; shipped a quarter or more of their output abroad; and then imported waste paper, used electronic equipment, and scrap metal for recycling into yet more manufactured goods.  Each part of this cycle involved long-distance trade, which is why demand for container shipping increased an average of roughly nine percent per year.

Exports and imports of goods plummeted in 2009, and they have grown since then on a much lower trajectory then before. It seems likely that in the years ahead, international trade will grow more slowly than the world economy as a whole, a distinct divergence from the pattern since World War Two.

Several forces are driving this trend. One is a change in consumer behavior. As personal incomes rise, households tend to shift their spending away from physical products toward services and experiences, from education and medical care to adventure vacations.  Call it the Marie Kondo effect, the belief that having things brings us less joy than doing things. This shift in spending patterns is positive for trade in services, but it is unambiguously negative for merchandise trade.

Another cause of slower growth in trade is a reconsideration of global supply chains. Starting in the late 1980s, lower transport and communications costs and better information technology made it practical for manufacturers and retailers to stretch their supply chains around the globe in search of lower production costs. Intermediate goods—things made in one country and shipped to another for further processing—account for a large share of all merchandise trade.  But in recent years supply chains have become more costly and less reliable. Importers have responded to increased risk by keeping more inventory on hand and by building redundancy into their supply chains, measures that make trading more expensive.

A third factor weighing on trade is automation. The great relocation of factory production to China, Mexico, and Eastern Europe since the early 1990s was, in good part, a search for lower labor costs. But production labor matters far less than it used to as robotics and artificial intelligence enable computers to take on more of the work. Additive manufacturing, more widely known as 3-D manufacturing, lets manufacturers make some goods with very few workers on the factory floor, and important experiments are underway to produce some types of apparel and footwear in highly automated factories.  These developments are making it feasible to locate factories near end markets rather than near cheap labor, and they are likely to suppress the growth of international trade.

All this means that cross-border movement of goods will probably be far less buoyant in the years ahead. Services and ideas, not things, account for a growing share of global commerce; since 2012, exports of commercial services have grown twice as fast as exports of goods. Ship lines, ports, and railroads that have invested in expectation of an every-increasing volume of containers may need to adjust their expectations.  Even if protectionist pressures recede, the next stage of globalization will be quite different from the last one.

Payless: A Brief Obituary

Back in 1956, there were a couple of events that helped shape the course of globalization. One, about which I wrote in my book The Box, was the first modern containership voyage. This would eventually lead to the behemoths, some carrying more cargo than 10,000 full-size trucks, that move much of the world’s trade today. The other was the most prosaic development one could imagine, the opening of a shoe store in Topeka, Kansas, by two entrepreneurial cousins, Louis and Shaol Pozez. Sixty-three years later, that company is about to go out of business, the victim of the globalization it played a small role in bringing about.

My family knew both Pozez families and we shopped in their store. Payless-National, as they ambitiously called it, aimed to offer quality shoes at discounted prices. It did so by keeping costs low. The floor was covered with linoleum, not carpet, and the wooden shelves weren’t even painted. Payless laid out its merchandise in shoeboxes. Sales clerks were few; customers were expected to find their size and try on the shoes themselves. In return for putting up with these rather austere conditions, shoppers could buy two pairs of shoes for five dollars.

The Pozez cousins were able to undercut their competitors thanks to a series of court decisions in the early 1950s that effectively prohibited manufacturers from fixing retail prices. Importing was not part of their strategy: the United States imported very little footwear in 1956. Although shoes cost far less to make in many other countries, the United States still had a vibrant shoemaking industry, with 1,900 factories employing more than a quarter-million people in places like Endicott, New York, and St. Louis, Missouri. Thousands more people were employed in tanneries and in factories that made synthetic shoe materials.

But while making footwear provided plenty of jobs, those jobs came at a cost. By today’s standards, shoes were expensive. Men’s dress shoes from Florsheim started at $18.95 a pair. That’s about $170 in today’s prices—which is far more than an equivalent shoe from Florsheim costs today. A pair of men’s loafers from Sears for went for $8.65, or about $77 in today’s money—nearly twice the price of the loafers available right now on Sears’ website. StepMaster children’s shoes cost $5.50 a pair. No wonder Payless’s offer of two pairs of shoes for five dollars seemed like a good deal to a bus driver or factory worker earning two bucks an hour. Payless became a huge success, operating thousands of stores. It was purchased by a big department store chain in the 1970s, then spun off as a publicly traded company, and  eventually ended up in the hands of private equity funds.

Footwear manufacturing has proven difficult to automate, making labor costs the single most important factor in choosing production locations. As factories in low-wage Asian countries filled millions of containers with cheap plastic and synthetic shoes and shipped them across the pacific at only a few cents per pair, the U.S. shoe industry couldn’t come close on price; today, about 98 percent of the shoes sold in the United States are imported, mainly from China. To keep its lead in the discount shoe business, Payless became one of the largest shoe importers. For it, as for many other companies, globalization was not a choice, but the only alternative.

What killed it, at the end, was the same thing that made it a success—the constant quest for lower prices. According to the Bureau of Labor Statistics, the average consumer price of footwear has gone up all of 8 percent over the past 25 years. Rent and workers’ wages, meager though those may be, have been rising much faster, squeezing shoe retailers’ margins. In that environment, even globalizers can end up as road kill.

Delivering the Goods

Perhaps more than any other industry, trucking should demonstrate the virtues of capitalism. Almost anyone can become a driver or start a trucking company. Since the federal government’s economic regulation ended in 1980, truckers have been able to drive whatever routes they wish, carry whatever type of freight is available, and charge whatever price the market will bear. Conversely, shippers can hire employees to drive company-owned trucks, can sign long-term contracts with trucking companies, or can hire an independent trucker to haul a single load. With hundreds of thousands of truck operators on the one side and hundreds of thousands of shippers on the other, the price of freight transportation fluctuates constantly based on supply and demand. This is the free market on steroids.

Or downers. Whatever economic theory says it should be, in the real world the trucking market is a mess. Shippers complain about terrible service, and their customers complain about blown schedules. Drivers, who often earn little or nothing when their vehicles are not moving, complain about congested highways and about having to cool their heels at a distribution center that is in no hurry to load or unload their truck. Trucking companies complain they can’t retain drivers. Meanwhile, many of the long-haul trucks on U.S. highways are running empty. Deregulation was supposed to put an end to that problem, but it didn’t. Local drivers now seem to spend much of their time making repeat deliveries to households that ordered online but weren’t at home when the order arrived, hardly a constructive use of capital and labor.

The extraordinary inefficiency of the trucking industry has not escaped notice. I recently spoke at a meeting organized by a company called FreightWaves, which is one of many trying to figure out how to create order out of trucking chaos. In addition to running a news service, it brings entrepreneurs touting solutions to the trucking industry’s problems together with investors who might finance their ventures and truck lines that might purchase their products. Some were selling software. Some were selling hardware. Some were selling services: Uber Trucking, which offers an app that a shipper can use to summon a driver, paid for dinner. Which is to say, Uber’s shareholders paid for dinner, because the company isn’t earning any profits that could cover such a bill.

The common vision of these visionaries is that technology can help squeeze the waste out of trucking. So far, though, their track record isn’t great. Trucking illustrates a paradoxical problem. The very things that economists praise about markets — the jockeying of many buyers and sellers to find the best deal, the constant pressure to innovate in order to eke out a profit, the dynamic benefits that arise from forcing prices down and inefficient players out — mean that there may be few commonalities among the participants. No one is in a position to coordinate or to impose order, so an innovation that may have great benefit overall — for example, a new system for matching drivers with loads or a device for keeping track of drivers’ hours — may not be used widely because it doesn’t serve the purposes of many industry participants.

In fact, once they’re done grousing, neither truckers nor their employers seem all that eager for change. Despite the purported driver shortage, the average weekly pay of long-haul truckers rose a scant 2% last year. After inflation, the year-on-year pay increase was zero. Even so, the number of people employed by general freight trucking firms reached an all-time high in 2018. This suggests the industry may not be quite as ripe for disruption as techno-optimists believe.

And what of the unhappy shippers? There’s an interesting development underway. Companies from WalMart and Amazon to your local furniture store seem to giving up on the industry’s ability to straighten itself out. They are buying more trucks, hiring more drivers as full-time employees, and handling a larger share of their freight transportation needs in-house.

This is a return to the old ways. Back before deregulation, about half of all over-the-road trucks were owned by the manufacturers and retailers who required their services. Even though these “private carriers” usually carried loads only in one direction and returned home empty, they provided cheaper, more reliable service than the regulated truck lines. In today’s environment, it’s likely cheaper for shippers to purchase trucking services than to manage their own truck fleets. They’re paying a premium for protection from a chaotic market that isn’t able to deliver the goods.

Of Sears and the Great A&P

The death of a major retailer rarely comes as a surprise. You can usually see the signs years ahead: the half-empty shelves, the dreary displays, the dim lighting, the odd combinations of merchandise as store managers struggle to fill space on the floor. The impending demise of Sears is no different. While the courts may have to decide whether Eddie Lampert, its chairman, has looted the company, as some investors claim, the truth is that by the time he took Sears over, in 2004, even a merchandising genius couldn’t have turned the chain around. Lampert made a bad situation worse when he combined Sears with Kmart, but he would have been hard-pressed to make it better.

Lampert is a financial guy, and like most financial guys he keeps his eye on the balance sheet. When it comes to retailing, though, the balance sheet doesn’t reveal the whole story. It will tell you about cash on hand — a valuable piece of information, to be sure — and about leases and credit card receivables, but it doesn’t capture the worth of a retailer’s most valuable asset, its brand.

There was a time when the Sears brand connoted reliability: whether you shopped in the store or ordered from the catalog, you expected quality merchandise at a reasonable price. It started to lose that reputation in the 1980s, when management was seduced by the glamour of selling stocks and real estate and lost interest in toys and underwear. By the time Wal-Mart began its nationwide expansion, in the 1990s, Sears had already forfeited much of its standing. Middle-class shoppers still went there for Craftsman tools and Kenmore appliances, but the rest of the business began to die.

The recovery plan involved buying Land’s End, the mail-order clothing retailer, in 2002. Land’s End, slightly trendy but definitely not haute couture, offered a plausible way to infuse a bit of excitement into Sears’s fashion offering without driving away long-time customers. But Sears couldn’t figure out what to do with it. Should Land’s End live alongside store apparel departments? Should it be the Sears apparel business? Management couldn’t decide, squandering an opportunity to restore a bit of the company’s diminished luster. All this occurred before Eddie Lampert loaded the company up with debt and Amazon induced consumers to do much of their shopping online. By the time of those events, Sears was already yesterday’s store.

To someone who has studied the rise and fall of the Great A&P, this story is familiar. Like Sears, A&P terrified its competitors for decades. Its stores were everywhere, and its commitment to low prices and its uncanny feel for changing consumer tastes made it the world’s largest retailer for more than 40 years. But in the 1950s, under managers who preferred to collect fat profits rather than investing in the business, A&P lost its edge. Customers complained that the stores were dowdy, and store brands like Ann Page and Jane Parker lacked the allure of the brands advertised prominently on national television. A&P became the place where grandma shopped, its name in such disrepute that the company tried to disguise its ownership of chains like Waldbaum’s and Food Emporium. No business strategy had a prayer of bringing A&P back.

Whatever the bankruptcy courts decide to do with Sears, I expect that the company will follow A&P to that great retail graveyard in the sky. A place where no one wants to be seen shopping doesn’t have much of a future in retailing.

Burdened by Bigness

Suppose your company invested billions of dollars in new equipment. And suppose now, very shortly after taking delivery, you’ve discovered that your investment was misguided. The machines you’ve bought are threatening to destroy your business. What would you do?

That, in essence, was the subject of a conference I spoke at in October at the Copenhagen Business School. Shipping is a very, very big business in Denmark, and of course Maersk Line, the world’s largest container shipping company, is headquartered on the Copenhagen waterfront. Maersk itself built the first of the megaships — ships that carry as much cargo as 8,000 or 10,000 trucks — back in 2006, when it launched what it called its E class (hence such clever ship names as Emma Maersk and Evelyn Maersk). There are now roughly 150 vessels this big or larger on the seas. More are on the way: the South Korean government just agreed to finance ships the size of 12,000 trucks. This is not something the world needs.

I’ve been spending some time of late studying how the megaships came to be, and I’m convinced that they are a colossal error. The ship lines that commissioned them, by and large, were transfixed by the idea of economies of scale: if you can actually fill one of these giant vessels, they can carry a single container for about 30 percent less than a ship half the size. But filling them has been a persistent challenge. Moreover, the people obsessed with achieving economies of scale at sea largely ignored the fact that these behemoths would create diseconomies of scale on land. With fewer ships calling but each ship discharging and loading many more boxes, ships spend more time in port, the ports are half-buried beneath mountains of containers, and service for the manufacturers and retailers who ship goods in containers has become much less reliable. These days, when a containership arrives in port, it’s behind schedule nearly half the time, and when the goods will reach their final destinations is anyone’s guess.

The ship lines have been praying that international trade will grow faster, as it did before 2009, and fill up all those half-empty ships. Some thoughtful people, including the experts who monitor shipping for the United Nations Conference on Trade and Development (UNCTAD), think this will happen. My own view is that it’s highly unlikely. The world economy itself is likely to grow more slowly than it has in recent decades; China’s years of 10% annual growth are over. Adding to that, the gradual shift of manufacturing closer to end markets and the desire of manufacturers and retailers to minimize risks from malfunctioning supply chains will suppress demand for container shipping. Managers of ship lines, in my view, need to think very hard about where they’re going to make money, because they are probably not going to make much from operating ships.

Many of the people I met in Copenhagen, including the authors of a new McKinsey study envisioning the shipping industry of 2043, seemed to agree with my analysis. There was much discussion about the digital future. What that seems to mean is that ship lines might figure out how to use information technology to provide higher-value services to their customers. In other words, they might become logistics managers, coordinating the efficient flow of goods around the world for individual customers, rather than simply selling cheap transportation. It’s an alluring vision. Many start-up companies are now pursuing similar strategies, without the burden of owning all those money-losing ships. Ocean carriers have to figure out how to turn their underutilized floating assets into a competitive advantage even as they transform themselves into technology companies — and given the fairly bleak profit outlook for the shipping industry, some of them may not have much time to get it right.

Thin Ice

The news that Maersk, the container shipping giant, is sailing a containership from Vladivostok to St. Petersburg along the northern coast of Russia has drawn new attention to the consequences of climate change in the Arctic. While the warming of northern climes is sadly real, it is unlikely to bring about a major change in container shipping.

For ship owners and their customers, the attractions of the Northern Sea route are obvious. By sailing north rather than south from Shanghai, Busan, or Yokohama, a ship bound for Europe can shave several thousand kilometers off the trip, saving a couple weeks of travel time, a great deal of fuel, and the need to pay a steep toll to pass through the Suez Canal. A small number of commercial ships have traveled this route over the past couple years, carrying commodities, heavy equipment, and other cargoes. Some ports in northern Europe have begun to dream of becoming centers for exporting to Asia.

The Northern Sea route may well develop into a useful artery for bulk ships and other vessels on one-off voyages, but it seems quite unlikely to become a highway for containerships. First and foremost, ship lines employ their containerships in what is called “liner service,” meaning that they offer scheduled port calls at regular intervals. Between Asia and Europe, a carrier might create a “string,” a route calling at eight or ten ports from, say, Busan to Antwerp and back again, with enough identical vessels assigned to the string that it can guarantee an Antwerp-bound ship calling at Dubai every Tuesday and a Busan-bound ship dropping by Algeciras on Thursdays. The Northern Sea route is poorly suited to this sort of arrangement because, for the foreseeable future, it is likely to be navigable only a few months each year. If a ship line serves the route between June and September, what will it do with those ships the rest of the year? This is no small question: vessels are the most expensive part of running a container shipping operation, and ship lines that can’t keep their vessels operating near capacity tend not to survive.

A second challenge to the success of the Northern Sea route is that its most protected, least ice-prone areas, close to the Russian coast, have shallow water. This means that shipping companies would have to use vessels that are about a fifth the size of the biggest containerships in use between Europe and Asia today. The cost of providing a “slot” for a single container is much higher aboard a small ship than aboard a big one, so ship lines won’t be eager to employ such small vessels on lengthy routes. They could use larger ships by sailing farther from the coast, but that route is blocked by ice for a greater portion of the year and is more likely to require the use of icebreakers.

A third challenge is that there are no great population centers en route. Ship lines select the ports in each string carefully, estimating the average number of containers they will take on here and put off there, in an effort to keep their vessels as full as possible. There may not be enough cargo from Antwerp to Busan to justify running a ship that makes no stops in between.

As a recent study by economists at the Copenhagen Business School points out, my hypothetical trip between Busan and Antwerp covers 7,248 nautical miles via the Northern Sea route, 33 percent less than a voyage between the same points through the Suez Canal. In theory, there is money to be saved, even after extra costs for having icebreaker and emergency equipment on standby. But given the practicalities of container shipping, it’s going to be difficult for the Northern Sea route to live up to the headlines.