Category Archives: Transportation

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.

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.

Who Owns the Curb?

How we define a problem often affects how we think about it. Consider the question of how we deal with the demand for curb space in our urban areas. If one were to approach this question as an engineer, one might look for ways to redesign our streetscape and reallocate the curb to certain users. If one were to approach this question as an economist, however, one might ask whether there’s a pricing problem.

As discussed earlier this month at the annual meeting of the Transportation Research Board (TRB), a government-sponsored research organization, this is an engineering problem. The assertion is that new ways of doing business have left us with too many vehicles at the curb. The growth of online shopping means more trucks making deliveries, and the growth of ride-sharing services has brought Uber and Lyft drivers waiting to pick up customers. Therefore, the logic goes, we need to provide more unloading zones for trucks and more pick-up locations for ridesharing vehicles. The presentations at TRB suggested that other uses, such as bus lanes, bike lanes, and parking of passenger vehicles, may have to give way.

The underlying assumption, you may have noticed, is that because consumers want online shopping and ridesharing, our streets should accommodate these uses. But there’s another way to look at the problem. Curb space is obviously of great value in some urban areas. That value belongs to local taxpayers. Every time a UPS truck parks at the curb to provide “free delivery” from Amazon, those local taxpayers are subsidizing Amazon customers unless UPS is paying the full market value of that parking space. Every time an Uber driver idles at the curb in Midtown Manhattan, she is occupying valuable real estate without paying for the privilege, and that subsidy is reflected in the artificially low cost of the ride.

Can the demand for curb space be met with economic measures rather than engineering? There is enormous pressure not to find out; in 2014, when Washington, DC, imposed a $323 annual fee for a decal that permits a truck to park in a loading zone, the trucking industry howled–even though that fee, about 88 cents per day, is far less than automobile drivers would gladly pay for a space one-third that size in many parts of the city. But perhaps if trucks and ridesharing vehicles paid the full value of the public assets they use, consumers would make less use of their services and businesses would save money by accepting deliveries at times when the value of curb space is low. Such changes could help relieve traffic congestion without remaking urban streets. There’s something to be said for paying full freight.

Information and Competition

It seems that competition regulators at the European Union are looking into whether “Big Data” is a potential threat to competition. The concern, apparently, is that a company may be able to use a trove of proprietary data about consumers in ways that foreclose competition — and that the assets changing hands in a merger could include enough data to give the merged firm an insurmountable advantage over would-be competitors.

There’s no doubt that control over data can affect competition. But it’s not so obvious how to ensure that consumers benefit.

Consider the logistics business. Every containership line publishes a schedule with the rate for moving one container from, say, Shanghai to Los Angeles. In practice, though, almost all ocean freight moves under confidential contracts between shippers and carriers. These contracts may be filled with contingencies providing for bonuses and penalties if the parties exceed or fail to meet their respective commitments. A large retailer, manufacturer, or freight forwarder has many such contracts in force at any one time, and it is always negotiating new ones. This means that big shippers have lots of up-to-date information about current shipping rates.

Now, imagine a small shipper, a modest retail chain rather than a Walmart or a Carrefour. Because of its size, this firm has only a handful of contracts with ship lines, and it may go months without negotiating a new one. It therefore lacks the current rate information its bigger competitors possess, so it will have a tougher time bargaining for the best rates. It may use a freight forwarder to get better rates, but then must pay the forwarder for its trouble. Either way, the smaller company’s information deficit will force it to pay more to move its goods than its larger competitors do.

This information disadvantage is one reason smaller retailers and manufacturers have been having such a difficult time. Their supply chains are comparatively costly to operate, on a per-container basis, and their higher costs make it hard for them to match their competitors’ prices. I suspect this is one reason we’ve been seeing increased concentration in so many industries. The big benefit from their control of big data about shipping costs; the small are harmed by their lack of information.

Is there a solution to this problem? Of course there is: it could be made mandatory to publicly disclose information about shipping costs. We actually tried such a policy in the United States in the early days of railroad deregulation. What happened? Railroads were reluctant to offer discounts to individual shippers when they knew that publicity would lead other shippers to demand similar discounts. Little freight moved under contract and rates remained relatively high. Only after confidential agreements were permitted did railroads’ freight rates fall and their service improve.

I think there’s a lesson here. Control of information can be anti-competitive, no question. But public disclosure of information can be anti-competitive as well, potentially raising costs for consumers. The EU will face a challenge getting the balance right.

 

Uncomfortable Questions About Our Ports

Sometimes people ask questions to which they really don’t want the answers–especially when the answers might be inconvenient. A new government report that purports to look at how U.S. container ports are performing is a good example.

Container shipping, as I document in my book The Box, was an American invention. Newark and Houston were the first ports anywhere in the world to have terminals designed specifically to handle containers, and container terminals were developed in ports such as Oakland and Baltimore years before containerships reached Europe and Asia. But U.S. ports have long been laggards when it comes to efficiency. The world’s most productive ports, by most measures, are all in Asia.  No U.S. container port comes close.

In 2015, Congress directed the Department of Transportation to prepare an annual report on port capacity and throughput and to “collect port performance measures.” Unfortunately, the department’s first annual report on port performance, released in mid-January, carefully avoids saying anything about container ports’ performance. It charts the number of acres covered by each port’s container terminals, the number of cranes, the number of linear feet of berth, and the number of containers passing through. But nothing in the report allows a reader to judge whether, say, the Port of New York and New Jersey is as efficient as the Port of Savannah. The average number of container moves per hour for each vessel call; the number of containers handled per acre of terminal area; the average time an incoming container spends in the storage yard before being removed for delivery; the number of dock workers per million containers; the number of containers actually handled as a percentage of theoretical capacity: all of these statistics would shed light on ports’ performance. None of them appears in the report.

Why might that be? Let me hazard a guess. True performance measures might reveal that many U.S. container ports have built far more capacity than they need, that poor management and union rules cause some ports to take far longer to handle a large ship than other ports, and that some ports use workers and storage space much less efficiently than others. They might also show that most U.S. container terminals make far less use of automation than the best-run terminals in other countries. It doesn’t take much imagination to figure out who might not want such measures of port performance to be highlighted. If they were, the public might start asking uncomfortable questions

Globalization in a Pickle

This morning, a crisp and lovely morning in Washington, I hopped on my bicycle and pedaled over to a farmers’ market a mile from my home. My modest goal was to buy a quart of half-dills from Number One Brothers, who turn cucumbers into terrific pickles.

The stand was open for business, stocked with pickled beets, pickled kale, and cauliflower and carrots pickled with ginger. There was not a half-dill in sight. The woman in charge told me that the last cucumber pickles of the season were sold in mid-October. Number One Brothers won’t have any more until June.

As I pondered this annoyance on the way home, I realized that it’s yet more evidence of what the shipping container has wrought. I, like most people, have come to expect the food I want when I want it. I don’t see why the end of cucumber season in the mid-Atlantic states should give rise to a pickle shortage. Aren’t farmers somewhere in the world now harvesting fresh cucumbers that can be piled in a container, shipped my way, and dumped into brine?

The answer, of course, is yes. Pickles from some far-off place may not be quite as good as the Number One Brothers half-dills, but I don’t need to wait until June to get my pickle fix. Some pickle factory somewhere is making cucumber pickles right this minute, and the container brings those pickles to me at an extremely modest cost. While buying them at Costco may not be as virtuous as buying directly from the maker at a neighborhood market, Costco never runs out of pickles.

What Happens After the Container Shipping Crisis?

Until 1978, dozens of airlines flew the U.S. skies. Then, with the passage of the Airline Deregulation Act, competition increased and profits became scarce. Decades of consolidation followed, as Allegheny, Eastern, Frontier, Ozark, Pan Am, and many other venerable names were merged out of existence or went bust. When the turbulence finally subsided, four giant carriers—American, Delta, Southwest, and United—controlled 70 percent of U.S. domestic passenger traffic and, through agreements with foreign carriers to share services, dominated international routes as well. Such measures have enabled the airline industry to rake in profits as never before.

Something similar is now going on in the world of container shipping. Excess capacity and slow-growing demand are forcing down the price of shipping, driving companies deeply into the red and bringing a wave of bankruptcies, mergers, and joint ventures. The August bankruptcy of South Korea’s Hanjin Shipping, the world’s seventh-largest container carrier, and the announcement, in September, of the restructuring of A.P. Moeller-Maersk, by far the world’s largest, are signs of a consolidation process that still has far to go. And although the industry is likely to remain troubled in the short term, in the long term, today’s troubles will lead to less competition among those carriers adept enough to survive. That in turn will mean higher rates for shippers, increasing the cost of moving goods around the world.

I’ve recently written an article laying out why I think this will occur. You can find the full text over at ForeignAffairs.com.

Strawberries in Winter

In our globalized world, many people hold firmly to the belief that local is better. That conviction is particularly strong when it comes to food. In Washington, where I live, farmers markets are crowded with shoppers (including myself) who are prepared to pay outrageous prices for a basket of apples or a pound of cheese if it originated at a nearby farm. We convince ourselves that what we eat is fresher, purer, or more environmentally virtuous because it was grown or manufactured on a family farm close by.

I recently had the chance to participate in an unusual radio program, produced by the BBC, that takes a look at the booming international trade in food. Called The Food Chain, the program asks why long-distance shipments of food are growing so quickly. Part of the answer, it will not surprise you to hear, is that low transport costs and high reliability make it feasible to import goods that would not be traded if freight rates were higher, a story I tell in my book The Box. But an even more important cause of increased trade in food, I suspect, is changed consumer preferences. We expect to eat the foods of our choice when we want to eat them, and if that means importing strawberries from Mexico or Chile when local berries are out of season, so be it.
Those of a certain age can remember when life was otherwise. In the town where I grew up, in the U.S. Midwest, having fish for dinner meant popping a box of frozen fish sticks in the oven. Fresh fish was something our supermarket simply did not carry, because it had no means of bringing it in. Now, the town boasts several sushi bars. Thank modern logistics, including refrigerated containers and air freight, for providing diners with an option that previously did not exist.

One current line of attack on such variety in our food supply is that long-distance shipments of food are “unsustainable.” By this, the critics usually are taking aim at the large amounts of greenhouse gases supposedly produced while transporting food internationally. Part of my contribution to the BBC program was to point out that “local” is not at all the same as “sustainable.” International trade in food often involves huge economies of scale, which means food produced on another continent may be transported far more efficiently than food produced nearby. Moving 40-foot containers of fruit great distances in a large containership can result in much lower emissions per ton than carrying smaller quantities a hundred miles in a diesel truck.
The BBC has taken an unusually sophisticated look at the food trade. I hope you’ll have a chance to listen.

Supply Chain Insurance

As of this writing, 47 people have been killed and many more injured by the earthquakes that have struck the Japanese island of Kyushu since April 14. These tragic events have had economic ramifications as well, offering a reminder that business risks can be hard for outsiders to evaluate.

The complicated industrial supply chains that are routine today began to develop in the 1970s, in good part because the spread of container shipping drove down the cost of transporting parts and components from one place to another. As I discuss in The Box, low transport costs made it practical for big manufacturers to decentralize: instead of running vast factories that churned out all sorts of inputs and assembled them into finished goods, they could farm out much of the work to specialized factories far away. Large retailers have done much the same. These long supply chains were seen as having two main advantages. Companies were able to draw on low-wage labor in developing countries, and they could gain economies of scale because a supplier might make just one or two components in enormous volume instead of lots of different things in small quantities. The result was lower costs—or so it seemed.

Invariably, though, the beancounters who made these calculations were afflicted with a dangerous myopia. Supply chains can lower costs, but they can also create risks that aren’t always visible. Some of these risks are reputational: if a supplier is accused of being a bad actor by polluting the water or by running an unsafe workplace, consumers may blame the better-known company that contracted out the work. There may be legal risks if the supplier’s shoddy work results in unsafe goods. And then there is the risk of supply-chain interruption. Interruptions aren’t high-frequency events: in a well-organized supply chain, most goods get where they’re supposed to be almost all the time. But when goods aren’t delivered due to weather, labor unrest, electricity cutoffs, or earthquakes, the cost can suddenly become extremely high.

The Kyushu earthquakes have halted plants that supply critical parts for many other consumer goods. But from what is known so far, the costs of this interruption may be less than might have been expected. The reason is that, with little publicity, companies like Toyota, Sony, and Honda seem to have reduced their potential losses by making sure that Kyushu is not their only source of critical inputs. While some of their plants will be shuttered, in some cases for several weeks, many of the key components produced in the earthquake-hit region are also made elsewhere. Those supply chain links will continue to function normally.

After the Fukushima earthquake and tsunami in 2011, factories around the world shut down for lack of components made only in the devastated region. Major industrial companies appear to have drawn lessons from that experience. Some of them have protected themselves against earthquake-related disruptions by developing redundant supply chains, so that an event such as the Kyushu earthquake won’t cripple their operations. This undoubtedly reduces efficiency and raises the firms’ normal operating costs. But supply-chain redundancy is not a frivolous expense. Like most insurance, it seems wasteful only until you need it.

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.