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Boxed In

There may be few business decisions more treacherous than buying a new containership. These aren’t purchased off the shelf; a ship line must make educated guesses about size, engine characteristics, propellers, and dozens of other factors—and then hope that its choices prove wise over a useful life of three decades or more. Once constant since the start of container shipping 60 years ago is that ship lines that guess wrong about which vessels to buy end up dead.

One of the questions shipping executives now ask their crystal balls is, “How fast should our ships go?” This was not a great concern in 2008, when the high price of oil and a slump in the amount of cargo first led ship lines to slow down their vessels, as it was assumed that speeds would be raised once business returned to normal. Since then, though, most of the dozens of new containerships that have come on line have been built to steam at 18 or 19 knots (roughly 33-35 kilometers per hour) rather than 24. This slashes fuel consumption and reduces emissions. It also sops up the excess capacity that ship lines have created by ordering mammoth new vessels, since more ships are required to provide the same frequency of service on each route.

Ship lines may love slow steaming and ships that carry 10,000 containers apiece, but their customers don’t. Megaships can take longer to load and unload than smaller vessels, and slow steaming means that it takes three to five more days to move a container across the Pacific than it did a decade ago. All of this increases longer transit times, which means that shippers must hold on to their goods for a longer period before selling them, raising costs. For companies moving time-sensitive products, such as apparel, longer transit times also increase the risk of losing sales when a product becomes “hot” and consumers are hungry for more.

Slow steaming looked brilliant when oil sold for more than $100 per barrel, as it did in 2008 and again from 2010 to 2014. Megaships seemed attractive when the demand on key containership routes was growing six or seven percent per year. With oil below $40 and the world economy heading into what looks like a prolonged period of slow growth, neither circumstance applies today. Which leads to the question of whether ship lines will again pay the price for having guessed wrong.

The Times Cracks the Digital Code

The New York Times has been congratulating itself for signing up the one-millionth paid subscriber to its digital edition, and well it should. In an age when information wants to be free, as Stewart Brand supposedly said, convincing a million people to pay for access to information over the Internet is a big deal.

The folks at the Gray Lady, predictably, attribute’s large following to the high-quality journalism provided by its crack reporters around the world. In my view, the Times has succeeded in finding subscribers online for an entirely different reason. Its digital editors, if that’s the proper name for the folks who manage, have figured out how to create a product that’s hard to steal.

Content theft is the bane of any information provider’s existence in the digital era. Articles, chapters, even entire books end up on the Internet without authorization, placed there by people who think they are providing a public service. A couple of years ago, I even came upon a French translation of one of my books on the Internet, the work of a university student who had translated it, without permission, because he thought that was a cool thing to do. Similarly, people think nothing of copying music or photos from the Internet without permission from those who wrote the songs, took the pictures, or acquired the rights from the creators. Many  content providers have tried to deal with rampant theft by putting their content behind pay walls, but in general this strategy has not succeeded. In the case of newspapers, many of them have trimmed their staffs to the point that their content just isn’t worth the money they charge, especially when potential subscribers know that any truly important news will appear all over cyberspace within minutes of its publication.

After years of treating its web product as a digital version of its print edition, the Times finally learned that the way to deal with content theft is to publish a multimedia product instead of an online newspaper. While much of the content on is plain old news articles, a significant amount is infused with videos, audio clips, photo essays, or dynamic maps and charts. This non-written content is of extremely high quality and well worth seeing or hearing. But what matters from the commercial point of view is that the complete package of these diverse content types embedded in a written article can’t readily be cut and pasted into other websites. If you want to read, watch, and listen, and if you want to talk to others about that terrific video on just like you talk about an article, you’ve got to subscribe.

So congrats to the Times on finding an approach that makes its product harder to steal while making digital subscribers feel like they are getting something valuable and unique for their money. If subscribers like the digital product enough that they are willing to pay serious money for it,  advertisers should like it, too.

Missing the Bus

A couple of days ago, I had to catch a flight at Dulles Airport. This is a considerable inconvenience: although Dulles supposedly serves Washington, DC, where I live, getting from Washington to Dulles can take longer than getting from Dulles to your destination. It can be expensive, too. The cab fare is upwards of 80 bucks. So to reach the airport, I took the 5A bus.
I boarded at L’Enfant Plaza, a dead zone of 1960s architecture in Southwest Washington. Only four other passengers joined me, aboard a bus without a luggage rack. Having made this trip before, I knew where my suitcase should go: in front of the rear exit door. The two Brits who boarded with me didn’t believe this was necessary.
They were convinced when we pulled up to the next stop, at Rosslyn, just across the river in Northern Virginia, to find a small army awaiting. Perhaps 50 people climbed on board. The first few put their luggage by the exit door, next to mine, making the emergency exit absolutely inaccessible in the event of an emergency. The next three dozen sat with their suitcases on their laps. Another 15 stood in the aisle, with one hand on their roller boards, the other grasping the silver handrail above their heads. Fifteen or 20 more were left at curbside, informed that the bus was full, and that they’d have to wait for the next one.
All in all, the hour-long ride on the 5A is a pretty lousy way for Metro, the Washington area’s main transit agency, to treat its customers, and it’s certainly not a nice way for the nation’s capital to greet its visitors. It’s worth asking why this problem can’t be fixed.
The answer, of course, is that it is being fixed. The Metropolitan Washington Airports Authority, the agency that runs Dulles Airport, is building a rail line to the airport. The first phase opened last year. The second, supposedly, will open in 2020. Together, they will cost at least $5.8 billion, a good hunk of it supplied by the federal government. When the Silver Line is finished, passengers may have a more comfortable trip from Washington to Dulles Airport, but that trip will take even longer on a Metro train than it does on the 5A bus.
We’ve heard a great deal of lamentation about America’s infrastructure crisis, about the purported lack of investment in vital transportation facilities. There are, indeed, places where the infrastructure is crumbling. But it is equally true that we have a marked preference for expensive solutions to our transportation problems. Yes, I know that many people besides airline passengers will ride the Silver Line. But I also know that for a great deal less than $5.8 billion, and in a matter of weeks rather than five years, Metro and the airports authority could provide more frequent service between Washington and Dulles. They could introduce luggage racks, so passengers who’ve paid $7 for the ride don’t have to spend an hour with their suitcases on their laps. With a better, more comfortable bus service, they might even manage to reverse the declining passenger numbers at Dulles by proving that the airport is not so hard to get to.
Innovation is a tough slog in the public transportation business. Too often, the folks who run transportation agencies associate innovation with expensive new equipment, custom-built infrastructure, and whizzy branding. But as I showed a couple of years ago when I described how the grocery chain A&P became the biggest retailer in the world, the best innovations often involve nothing more than better ways of doing business. It’s a lesson the folks at Metro and the Metropolitan Washington Airports Authority could stand to learn: a frequent, less uncomfortable bus service that gets passengers to the airport on time would be a valuable innovation.

The Limits of Co-ops

I recently gave a talk to some retailers with a problem. For many years, these mom-and-pop shopkeepers have belonged to a cooperative. The co-op functions as their distributor: it supplies them with merchandise cheaply enough to make them competitive with chain stores, it controls brand names that consumers know, it advises them how to display their merchandise and plan special events, it represents them when new government regulations pose a threat.

So what’s the problem? The co-op hasn’t been doing terrifically of late, as competition in the retail market is changing. The shop owners want to keep it, because they value its services. But they also are the co-op’s shareholders, and they know that their personal wealth will take a hit if the co-op goes into decline. The question is what to do.

This is actually an old question. Retail co-ops have been around since the industrial revolution; Britain’s Co-operative Group dates its birth to 1844. In the United States, they began around World War I, when chain stores began taking a significant share of the grocery market. Chain grocers, back in those days, could underprice mom and pop largely because they could buy directly from manufacturers, obtaining volume discounts and avoiding payment of commissions to wholesalers. Some of them, such as A&P, a company I’ve written about, also developed powerful brands. Co-ops provided these same benefits to small stores. By banding together, small retailers could buy in quantity, and the co-ops could build brands just as chains did.

The co-op movement was highly successful in some areas of retailing, notably groceries, drugs, and hardware. IGA–the Independent Grocers Alliance–was a household name in the town where I grew up. I suspect that few of the people in New Jersey and Connecticut who buy their food at ShopRite realize that it really isn’t a chain, but a group of separately owned stores that all receive their goods from, and use the brands of, Wakefern Foods, which in turn is owned cooperatively by the store owners.

Co-ops thrived for decades, and they arguably helped mom-and-pop stores survive the chain store onslaught. But many of them have gone by the boards, largely for reasons beyond their control. Their retailer-members, largely small merchants, often lacked the cash to build big, modern stores like the chains owned. If a retailer-member failed to keep its store looking good, the co-op could usually do little about it. With the arrival of television advertising in the 1950s, consumers were persuaded that nationally advertised products were better than the goods in their local store. As a result, co-ops’ brands became associated with outdated, down-market stores and low-quality products.Some retailer-owned co-ops have managed to overcome these obstacles, but many have not.

Today, the incredible rate of change in retailing poses a daunting challenge for co-ops. Almost by definition, co-ops move slowly. Management cannot make major changes without the approval of a board comprised of retailer-members, many of whom may not see the need. Repositioning the brand requires convincing the members of the urgency of drastic change, a process that can take years.

So while I’d like to be optimistic about the future of retailer co-ops, that’s not easy. Co-ops have played an important role in retailing, and in helping independent retailers stay in business. There are a handful of exceptionally well-run operations, which I very much admire. But for the most part, the retailer co-ops’ day has passed. I think it’s better to recognize that, and to look for alternatives, rather than to wait for the good old days to come back.

Maybe We Have Too Much Infrastructure

Not far from where I used to live, in New Jersey, a light rail line rumbles between Newark Penn Station and the much smaller Broad Street Station, on the other side of downtown. This line, about a mile long, opened in 2006, and it cost more than $200 million to build. It was projected to serve 13,300 riders a day by 2015. Actual ridership, though, is just a few hundred. You won’t have trouble finding a seat.

The Broad Street extension is an example of a problem people don’t much like to talk about: misguided infrastructure spending. We constantly hear complaints about inadequate infrastructure, from the archaic main terminal at LaGuardia to the all-day traffic jams at Chicago Circle, and armies of consultants roam the world helping justify yet more projects. The truth, though, is that a great deal of our existing infrastructure is poorly used, and taxpayers often are on the hook for new projects that don’t produce the expected returns.

This isn’t just an American problem. Last week, I was in Europe, where there has been massive investment in container ports to handle the extremely large vessels now coming on line. These ships carry the equivalent of 9,000 truck-size containers, and to accommodate them ports are deepening their channels, lengthening their wharves, expanding their storage areas, and installing bigger cranes. Every port wants the mega-ships to call. The ship lines that own these vessels, though, don’t want to stop in every port; they want their ships to spend as little time in port as possible. Moreover, as these giant ships replace smaller vessels, most ports will see fewer containerships, not more. The bottom line: Europe’s ports now have far more container-handling capacity than required. That overcapacity increases the ship lines’ ability to play one port off against another to force port charges down, making it even harder for port operators to recover the cost of their investments and increasing the likelihood that taxpayers will be forced to pay up.

Container ports are not the only place where there’s excess infrastructure. In the United States, several relatively new toll roads are attracting far less traffic than projected. Pittsburgh airport demolished one of its concourses after passenger numbers plummeted, and the near-empty terminals at Kansas City airport can be spooky. Japan’s high-speed trains are wonderful–but while some carry extremely heavy traffic, others appear to be rather underutilized. There seems to be a surplus of convention centers almost everywhere, and the world is full of stadiums that receive only occasional use.

So while there may be many places where today’s infrastructure is inadequate, claims of an infrastructure crisis deserve careful scrutiny. Often enough, users of infrastructure, such as transportation companies or sports teams, want governments to bear the risk of building facilities that the private sector may, or may not, choose to use. Governments have a hard time saying no to such demands: what politician wants to face accusations that his or her inaction caused a business to leave town? But building too much infrastructure may well leave tomorrow’s taxpayers facing the bill for today’s mistakes.

A New Survey Finds….

When it’s a slow day out in medialand, you can always count on a survey to provide “news” to fill empty space. It’s well known that much so-called public opinion research is bogus, using non-random samples and asking questions that are designed to elicit particular responses. But even honest attempts to measure public opinion in a neutral way can founder on unanticipated problems. One of these recently caught my eye.

The subject, in the case, was financial literacy. Surveyors working for the central bank of the Netherlands wanted to know how much average households understand about basic financial matters. As part of a longer survey, half the participants were asked the following question:

*Buying a company stock usually provides a safer return than stock mutual fund. True or false?

The other half were given the question this way:

*Buying a stock mutual fund usually provides a safer return than a company stock. True or false?

It may seem to you that the second question was nothing more than the contrary of the first. yet the share of people answering correctly was twice as great when the question was asked the first way as when it was asked the second way. How could this have been? The answer, the researchers speculate, is that a large number of respondents may have been unfamiliar with words in the question. When the subject of the question was “company stock,” enough people apparently were sufficiently familiar with the concept not to find it “safer” than the alternative. When the subject was “stock mutual fund,” however, they did not know enough to make a judgment about its safety–even though they were comparing stock mutual funds to individual company stocks in both questions.

This finding is a good warning for those of us who consume media–-and for those who produce it. Surveys, even when well designed and carefully conducted, may not tell us what they claim to tell us. Skepticism is always in order, because we never know how the people surveyed understood the questions they were asked.

The survey I mention above is cited in Annemaria Lusardi and Olivia Mitchell, “The Economic Importance of Financial Literacy,” Journal of Economic Literature 52 (March 2014).

The Panama Canal’s Next Century

This month marks the hundredth anniversary of the Panama Canal. Work on a major expansion is in full swing. If all goes well, deeper channels and a third set of locks, wider, longer, and deeper than the two constructed in the early 1900s, will enable larger ships to cross the isthmus by the end of 2016. As I saw on a recent visit, the $6 billion or so being spent on canal construction and the billions more going to build a new metro system are fueling an economic boom. Yet as Panamanians celebrate the canal’s centennial, concerns about the future are not far below the surface. The canal’s next century may be a challenging one.
To start with, it’s no sure bet that enough ships will use the enlarged canal to cover the cost of construction. The expansion was conceived at a time when world trade was growing about 7 percent per year, as it had done since the aftermath of World War II. But the growth of trade has slowed considerably since economic crisis arrived in 2008, meaning that there will be far fewer ships passing through the expanded canal than its promoters envisioned. In addition, a growing number of manufacturers are concluding that Mexico is a better location from which to serve the North American market than Asia. While many ships carrying Japanese-made cars to the U.S. East Coast transit the Panama Canal, Japanese models produced in Mexico will move to U.S. and Canadian dealers by road or rail.
Then there is the matter of competition. For many decades, the Panama Canal had no competition. Starting in the 1970s, large volumes of cargo bound for the East Coast began moving through West Coast ports, and the water/rail route became a direct competitor to the canal’s all-water route. More recently, some ocean carriers have been moving cargo between Asia and the U.S. East Coast via the Suez Canal, which can accommodate larger vessels than the Panama Canal. According to some estimates, more than one-third of the container traffic between Asia and the East Coast now moves through Suez rather than Panama, a shift encouraged by steep increases in Panama Canal tolls. And now there is serious discussion of a Chinese-backed canal through Nicaragua. While it seems unlikely that such a canal could be completed by 2019, as its promoters promise, a Nicaraguan canal could siphon off Panama’s traffic at some point in the next decade.
How will Panama respond? One possibility would be to cut tolls. The Panama Canal Authority has yet to disclose how much vessels will have to pay to transit the enlarged canal, but comparatively low rates could draw carriers back from the Suez route and also make life hard for the sponsors of the costly Nicaragua project. Trouble is, lower tolls could squeeze the Panamanian government, which receives a large share of the Canal Authority’s profits.
Another option would be to give ship lines inducements to use the canal. The canal is now 100 percent owned by the government, and selling shares to ship operators seems to be out of the question for political reasons. Nor are there discussions about offering bargains to carriers that would sign contracts guaranteeing to use the canal; the Canal Authority has never done this. But the Canal Authority is toying with the idea of offering volume discounts, so that carriers moving large amounts of cargo through the canal would enjoy lower tolls per unit of cargo. This concept involves some complications. For example, many carriers participate in alliances in which they book blocks of space on other carriers’ ships in addition to running their own vessels, and it would have to be decided which cargo would count in determining the volume discount. But volume discounts might be a way to tie some ship operators more closely to Panama and to discourage them from using a competitive routing.
It is the third response, though, that seems most promising. Manufacturers are making increasing use of Panama not just as a transit location, but as a place to do final manufacturing of products destined for multiple markets in the Caribbean and Latin America. Shoes from Vietnam and drugs made in Mexico are offloaded in the port of Colon, at the Atlantic end of the canal, and the products inside are then customized for individual markets within the region. This can mean anything from adding price tags in Venezuelan bolivars or inserting warranty documents compliant with Costa Rican law to making physical modifications. In many cases, the cargo is repacked on pallets for individual retail outlets. The pallets headed to each country are then stowed in separate container, so that when the container arrives in-country, the local distribution center needs only to load the pallets aboard delivery trucks. This kind of value-added work creates jobs in Panama. But it also gives shippers reason to insist that their cargo move through the Panama Canal, assuring that the expensive new facilities will see a steady flow of freight.

A Reminder of the Joys of Regulation

Not too long ago, I had occasion to take a trip on Metro, Washington’s subway system. My trip required a change of trains at Metro Center station, from the Red Line  on the upper level to the Orange Line on the lower. Three escalators connect the platforms. One was stopped. The other two were going up. So of course I complained to Metro, asking why, if one escalator was out of service, the station manager did not reverse one of the other two, so that one went up and one down.

The answer I received surprised me. Here’s what it said: “Metro’s policy states that the majority of our escalators are set so that in the event of an emergency we can get as many customers out of the system as quickly as possible. In addition, all station escalator configurations were evaluated and modified to reflect the most efficient usage of these assets. Metro Center station was included in this analysis. We now have a set direction for each escalator and the set configuration cannot be changed by the station manager.”

As I read and reread this response, it made me think of nothing so much as the days of rail regulation. Back then, before railroads were deregulated in 1980, they didn’t much care what their customers thought. They offered what they offered,  and customers could pretty much take it or leave it. Rigidity was the norm. The concept that some flexibility and customer sensitivity could build business was foreign.

That’s the type of attitude Metro seems to have. Its experts have determined the most efficient way to do business–which means, at Metro Center, two escalators going up and one going down. That’s how Metro will operate, and it’s not going to change just because circumstances have changed and the down escalator isn’t working. And Metro is not going to give its employees the flexibility to make changes as conditions change. The rules are king, not the customers.

Once deregulation came, the railroads figured out that they needed to take a different attitude toward freight shippers. By doing so they turned their very stodgy industry into a growth industry. Regrettably, there’s no such competitive pressure on Metro. I don’t expect either its attitude or its escalator service to improve soon.

The World’s New Workshop

Sometimes a single number can reveal a great deal about economic change. Last week, I learned of one such number from Tsuyoshi Yoshida, the head of the American business of the Japanese ship line MOL: in 2013, more than half the waterborne cargo from Asia to the U.S. East Coast passed through the Suez Canal.

Why is this important? For the past 20 years or so, China has been the world’s workshop, shipping out tens of millions of containers stuffed with everything from acrylic resins to zippers. If they are destined for the Eastern United States and traveling by ship, almost all of those containers cross the Pacific Ocean and pass through the Panama Canal to ports along the Atlantic and Gulf coasts. Cargo from China to North America doesn’t move via Suez, because the Pacific route is much faster.

But now, China’s manufacturing sector is struggling, with factory output at an eight-month low. As wages in China rise and credit gets harder to come by, makers of labor-intensive goods such as clothing and toys are relocating to cheaper locations in Southeast and South Asia. From newly industrializing countries like Cambodia and Bangladesh, the fastest route to the U.S. East Coast is through Suez, not across the Pacific. In just four years, according to Mr. Yoshida, the proportion of East Coast-bound cargo from Asia that transits the Suez Canal has risen from 39% to 52%, indicating how quickly the shift away from China has proceeded.

This shift has to be worrying to the Panama Canal Authority, whose ongoing expansion project will allow larger ships to pass through the canal by 2015 or 2016. The canal widening, which may end up costing $6 billion or so, is premised on an increasing flow of cargo from Asia to the East Coast. But if other Asian countries supplant China as sources of U.S. imports, the Panama Canal may face a challenge meeting its traffic forecasts.