Tag Archives: containers

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.

Setting the Standard

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The Australian National Maritime Museum, in Sydney, has mounted an unusual exhibition about the history and consequences of the shipping container, a subject near and dear to my heart. Appropriately enough, the exhibition is housed in containers spread around the museum’s grounds.

When the organizers asked me to write a post for the museum’s blog, I took the opportunity to explain why standardization has been so important to the growth of container shipping — and asked readers to imagine how tangled world trade might be if the same basic 40-foot container was not in use everywhere. The first containers used aboard a ship in Australia were 16 feet 8 inches long. No ship in any other country has ever carried boxes of that size, and you can imagine how difficult it would be for Australia to engage in international trade if its containers couldn’t easily be used abroad. The post is here. Many thanks to the museum’s staff for coming up with some great pictures and drawings to illustrate it.

Globalization in a Pickle

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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.

Boxed In

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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.

Chain Stores in Chains

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Chain stores have a lot of advantages over mom and pop. By purchasing in enormous quantities, they can obtain volume discounts from manufacturers. By signing contracts to ship thousands of containers, they pay far less for freight than a retailer that ships only a handful. By maintaining strong credit ratings, they can lease better locations, at lower rents, than smaller competitors. All of this can help the chains keep customers coming through the door.

Yet chains face some disadvantages, too. Sheer size is foremost among them. When a chain does something wrong–which is to say, something that fails to satisfy customers–the problem can be very hard to fix, because it affects hundreds or even thousands of stores and may have irritated millions of shoppers.

There have been many recent examples of this challenge. Tesco, which only a few years ago fancied itself a challenger to Walmart for global retail leadership, still can’t figure out how to respond to British shoppers’ unexpected attraction to discount grocery stores. Wet Seal, which sells clothes to teenage girls, couldn’t cope with the fact that shopping malls are out of fashion; it has filed for bankruptcy and closed 338 stores. Target Stores, which marched noisily into Canada two years ago, is abruptly leaving with the admission that it failed to please Canadian shoppers. And then there is Walmart itself, which is struggling with U.S. consumers’ newfound preference for shopping close to home rather than in gigantic outlets miles away–a change of taste that presents an obvious problem for a company that has 606 million square feet of space tied up in “supercenters” across the United States.

Last week, at the annual meeting of the Transportation Research Board, a Walmart distribution executive, Douglas Estrada, provided some interesting color about how Walmart is trying to adjust to this trend. The company is opening smaller supercenters to fit in reviving urban neighborhoods, he said, but the company’s growth in the United States is likely to involve opening traditional grocery stores, small grocery stores with limited stock, and even convenience stores with gas pumps out front. Kiosks, now being tested, may compete with e-commerce, allowing a shopper to order anything available in a nearby supercenter and have it delivered to the small neighborhood store the same day.

This sort of innovation is a nightmare for Walmart’s distribution department. Walmart has more than 170 distribution centers across the United States. They are extraordinarily efficient at what they are designed to do: take in containers by the trainload, sort the contents, and pack merchandise into the 53-foot trucks that deliver full truckloads to each supercenter three or four times a day. But they are far less efficient when it comes to loading 28-foot trucks to deliver to urban grocery stores, and even less so in loading 16-foot trucks to replenish inventory at convenience stores. Walmart is trying to cope with this challenge, Mr. Estrada said, by using its supercenters for the purpose. The small-format stores will receive deliveries from a distribution center only once or twice a week; the rest of the time, they will be resupplied by vans coming from the nearest supercenter, often with merchandise picked directly from the supercenter’s shelves.

This means, of course, that goods headed for a smaller store will be handled more than goods going to a supercenter. Can Walmart do this and still offer the low prices its customers expect? Or will the small stores come to be treated as an inferior sort of Walmart, with higher prices and less selection than the real thing? Its distribution costs may determine whether the company succeeds in loosening the chains that bind its chains.

The World’s New Workshop

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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.

Link

The Kansas City Star ran an article today about a 1,300-acre logistics center southwest of KC recently opened by BNSF, Warren Buffett’s railroad. What’s particularly interesting about the article, which you can find here http://www.kansascity.com/2014/01/13/4750127/hail-the-humble-container.html, is that the author, Kevin Collison, treats the massive new facility not as a railyard but as a transfer point on global supply chains. The article quotes me, but perhaps the most important quotation is from a BNSF spokesman, who says, “We’re in the transportation business.” No railroad guy would have said such a thing in pre-container days; back then, railroads thought they were in the railroad business. Since then, they’ve figured out that their job is moving cargo. Trains are merely a tool to help do that, not the railroad’s reason for being.

So BNSF looks at its logistics center as a port. A seaport, after all, is nothing more than a point where transportation modes come together; it has massive cranes that move containers between oceangoing vehicles and land-based vehicles. The logistics center serves the same function, using massive cranes that move containers between vehicles that travel on rails and vehicles that travel on roads. As they travel internationally, containers will make a switch in Kansas City, another in a West Coast ocean port such as Long Beach or Oakland, another at a foreign seaport, and perhaps a fourth at an inland logistics center in China or India. BNSF’s new facility is expected eventually to handle 1.5 million containers a year, more than all but a handful of U.S. seaports. Although the ocean is not close at hand, the logistics center really does make KC a port on the plains.