Transportation Deployment Casebook/2014/Container Shipping

Container Shipping: Qualitative Analysis

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Introduction

Celebrating its 50-year anniversary in 2006, modern container shipping has been a steady method of transport for goods all across the world. Container shipping has made a permanent mark in history. As early as 1792, England was using boxes similar to modern containers, and the US government had used small standard-sized containers during WWII. The idea wasn’t too complicated, and proved to be a means of quick and efficient method of loading, moving, and unloading various goods. An essential technological characteristic of this transportation mode was established in 1955 by a man named Malcolm P. McLean. Being a trucking entrepreneur in North Carolina, he bought a steamship company with the idea of transporting entire truck trailers with their cargo still inside, as opposed to unloading all of the contents of a truck before shipping it over seas. “Intermodalism” is a key word in the success of this industry. This means that by using different transportation modes to transport cargo could vastly improve the efficiency of the system. One of the main advantages of this mode is that the containers can be moved with ease between ships, trucks, and trains. This simplifies the whole process, and is what contributed to the revolution of cargo transportation and international trade.

History

The use of shipping for trade can be dated all the way back to the Egyptians, where great kings like Thutmose III and Ramses II helped grow the naval fleet of Egypt. An efficient marine police force even patrolled the Delta to give security against pirates, a phenomenon that we still see today. Soon enough, civilizations like the Greeks, Romans, Spanish, and then the British had improved the modes of shipping and seafaring. Shipping became so popular in Europe during the eighteenth century that Voltaire became impressed and made it a distinctive feature of his own time. Despite the extensive amount of shipping that was happening during the early stages, the process itself was not easy. Cargo having to be loaded into barrels, sacks, and wooden crates from land onto ships and back again was slow and labor intensive. Yet, this method remained one of the only efficient ways to transport goods via sea. The world at this point in time was definitely in need of standardized container shipping, but wouldn’t see it until the second half of the twentieth century. During the early years, however, there were a few basic advancements and improvements such as the use of rope for bundling goods together, as well as the use of pallets for stacking various bags or sacks in bulk.

Early Stages of Innovation

The emergence of railways in the eighteenth century proved to be one of the mechanisms that showed just how inadequate the current shipping system was. The transfer of cargo between ships and trains became a complexity. With industries and trade beginning to grow throughout the globe, the need for better utilization of the transportation modes was becoming evident to move masses of cargo and goods long distances. The solution to this was having railroad freight carry the cargo, and then have barges move the loads between the rail terminals to the ultimate location. In an industry that saw little changes over time, the movement of cargo using one transportation mode to the next showed some challenges, being that the goods were shipped in a number of various storage devices. With a great amount of innovation and dedication from Malcolm McLean in 1956, this problem (and many others) is taken care of. McLean converted a WWII tanker ship with a reinforced deck that was able to carry 58 containers and was the first safe, reliable, and cost effective approach to the transportation of containerized cargo. The first voyage was such a success, that within just 6 days of making port in the receiving city there were already orders to make more deliveries. McLean has even been compared to Robert Fulton, the father of the steam engine, for his accomplishments in improving maritime trade. However, McLean idea was not completely original, for railroad boxcars had been carried on sea vessels to transport good between New York and Cuba as far back as 1929. Although, no shipping business dedicated itself to the systematic process of hauling boxed cargo en masse at this point in history. The feasibility of such operations may have inspired McLean to adopt the concept himself and make it take off. To load the ships, McLean designed truck trailers that consisted of two parts: a truck bed on wheels, and an independent box trailer. To ensure the containers were durable and able to be moved without damage, Mclean patented a steel-reinforced corner-post structure, which allowed the trailers to be gripped for loading and to allow the strength for stacking needs. Also during this time, McLean bought the Pan-Atlantic Steamship Company for $7 million. Previously owning an exclusive trucking company, McLean believed the intermodal transportation of goods through trucks, rail, and ships would be a success. On this new idea coming about, the Wall Street Journal reported: “One of the nation’s oldest and sickest industries is embarking on a quiet attempt to cure some of its own ills. The patients are the operators of coastwise and intercoastal ships that carry dry cargoes.” McLean devoted his whole life to the shipping industry, and soon became president and owner of Pan-Atlantic, which he later renamed SeaLand Industries. McLean's ownership and presidency was not necessarily his first choice. When word got out that McLean was to own a trucking industry, as well as shipping, people attempted to stop McLean by using a section of the Interstate Commerce Act, stating it “was unlawful for anyone to take control or management in common interest of two or more carriers without getting ICC’s approval.” When McLean was unsuccessful in getting endorsement from the ICC, that’s when he made to move to sell his trucking company. Even though the first voyage of a container ship was a success, there was still a lot of work to do and improvements to make.

Growth

Ports needed to be redesigned to accommodate lifting and storage trailers, and customers needed to rely less on trucking and rail to move goods. Getting new clients was the least difficult of McLean’s tasks. His shipping methods could transport goods at 75% the cost of conventional travel modes. The next step in the evolution of container shipping was to convince port authorities to redesign their sites. McLean caught his first break by convincing the New York Port authority’s chairman to back him with his industry. When older ports noticed the financial resurgence of the redesigned ports, many others followed. Ports on the west coast of the United States believed that this new transportation mode would revolutionize trade with Asia. Just two years after the start of Pan-Atlantic, the company of Matson Navigation began container shipping in the Pacific. Ships were now making regular routes between Port Newark, Miami, Houston, and Tampa.

Development During the Mature Phase

With many shipping companies now adopting the container transportation, the next logical step was to standardize the container being used. This would help with stacking and make it possible for ships, trucks, and cranes to be specially fitted to a single size specification. In 1961, the International Organization for Standardization set sizes for containers that are still used today. The 20-foot container became the industry standard reference with cargo volume and vessel capacity now measured in TEU (twenty-foot equivalent unit). Since the start of container shipping, the industry has grown and total seaborne cargo movements exceeded 21 trillion ton-miles in 1998. In 2001, the maritime shipping industry carried 90 percent of the world’s 5.1 billion tons of international trade. Since 1980, container traffic has grown at about 7 percent per year since 2008. Some of the largest routes now connect Asia with North America to the east and with Europe to the west, and Europe and North America across the Atlantic. As trade volumes began to rise, economies of scale led to the development of larger ships. However, structural constraints have hindered the development of larger vessels, such as draft and beam constraints. These restrictions are partly in place due to the use of canals and the limitations of port facilities.

Regulatory Organizations

With the emergence of the shipping industry, came the emergence of the International Maritime Organization that was established in 1948 and finally became active in 1959. The organization’s 158 member states have adopted approximately 40 conventions and protocols governing international shipping. The protocols have been created to help with marine safety, pollution, and liability and compensation for third-party claims. The state in which the port is located is responsible for carrying out the enforcement of these conventions. The port state is allowed to inspect foreign ships, and can detain them until violations are addressed. Historically, “freedom of the seas” was a widely used concept in previous years of shipping, dating all the way back to the 17th century. National rights were very limited to only three nautical miles from the coastline. This distance was determined by the 17th century “cannon shot” rule, which was obviously overdue for an update. Finally in the early 20th century, nations expressed the desire to extend national claims. In 1945, President Truman extended the United States’ control to a distance of approximately 200 nautical miles, and other nations followed suit. In present day, most nations have extended their territorial seas to 12 nautical miles beyond the coastline. As of 2008, only two countries still use the “cannon shot” rule. In 1956, the United Nations held the first Law of the Sea conference at Geneva, Switzerland. This conference resulted in four ocean treaties being concluded in 1958, and was deemed a success. The second conference was held in 1960, but unfortunately did not result in any new agreements, even though the conference was a total of 6 weeks long. The Law of the Sea treaty resulted from the third conference that took place between 1973 and 1982, which defines the rights and responsibilities of nations with respect to their use of the world’s oceans.

Policies

As the use of container ships grew, so did the amount of pollution. In 1973, the Marine Pollution treaty was established, and adopted in two stages. Additionally, the International Maritime Organization required all tankers, new and previously existing, to be fitted with double hulls or a design that provides equivalent cargo protection in the event of a collision or grounding. Not only did the environment need to be protected, the ships themselves needed to be ensured proper safety precautions. In 1992, the Global Maritime Distress and Safety System started operating and managing distress messages that are automatically transmitted in the event of an accident at sea, without any intervention from the crew. In order to protect security, employment, and trade in maritime nations, laws and policies have been put in place. Laws that reserve domestic waterborne cargo are common in many countries, the United States having the strictest of policies. Only US citizens are allowed to crew US-flag ships. Furthermore, certain government cargos must be carried on US-built vessels owned by US citizens. Due to the high operating costs of vessels under such restrictions, the fleet may not be as competitive in international trade with vessels that have fewer restrictions. In that case, there are some nations that provide operating cost subsidies to mitigate this issue. However, the US operating subsidy program was phased out in the 1990s. Though there are fewer accidents with shipping industry compared to other transportation modes, the consequences are quite a bit larger. In order to protect ship owners and operators, the liability has been limited as a matter of policy to encourage shipping and trade. Large tankers operating in US waters today routinely carry liability insurance coverage upward of $2 billion.

Future

As for future developments, container cargo flows are expected to increase by 4 to 7 percent per year and will continue to increase in size as ports and canals allow. This means that port developments will improve container terminals to handle larger ships more efficiently. Despite a history of high regulation, the industry as a whole is relatively efficient and will continually adapt to support the world’s transportation needs, slowly but surely.

Container Shipping: Quantitative Analysis

The data used for the quantitative analysis portion was collected by Dr.William W. Wilson, a professor for the Department of Agribusiness and Applied Economics at North Dakota State University. From the 1990 to 2006, the total United States port container throughput was recorded in units of TEU (twenty-foot equivalent unit). The data has been used to estimate a three-parameter logistic function:

S(t) = K/[1+exp(-b(t-tnought)]

Where S(t) is the status measure, t is time in years, tnought is the inflection point, K is the saturation level, and b is a coefficient that describes the slope of the curve. This formula is used to analyze the lifecycle of container shipping, where TEUs are used as a metric. The following parameters were used:

K	b	tnought
60,000,000	0.15447134	1997.299

A plot of the actual amount of the United States' throughput of container shipping in TEUs, versus a model of the expected life cycle growth and maturity.

Conclusion

From observing the chart, the predicted value very closely follows the actual values of TEUs that were recorded in previous years. If the model is accurate, the birth and growing phase of container shipping have past, and container shipping will move into the mature phase within the next couple years. Given that there is statistical evidence that container shipping is expected to grow over the next couple years, the model may be underestimating the amount of TEUs that the United States will throughput in the future. However, outside factors can easily influence the accuracy of the model, such as politics and economical elements.