On April 26, 1956, a converted oil tanker called Ideal-X departed Newark, New Jersey, carrying 58 aluminum containers on its deck. This voyage, which ended in Houston, Texas, received little attention at the time, but it gave birth to an industry that would reshape the world economy. Today, more than 5,300 container ships sail the seas. Operating on regular schedules—such that an identical vessel is supposed to depart Shanghai every Wednesday, stop in Singapore nine days later, and arrive in Gioia Tauro four weeks hence with connections to barges and freight trains—container ships gave manufacturers and retailers the confidence to plan tightly organized long-distance supply chains. Without them, international trade would be much less important than it is today, and China would likely not be a world power.
At the backbone of supply chains
It used to be that manufacturing was a rich-country activity; poorer countries supplied raw materials to rich-country factories and then purchased their exports. But starting in the late 1980s, the combination of cheaper container shipping, vanishing communications costs, and improved computing flipped the script. Manufacturers and retailers adopted new strategies, arranging, for example, to buy chemicals in Country A, transform them into plastics in Country B, mold the plastics into components in Country C, and deliver them to an assembly plant in Country D, managing it all from a headquarters far away.
Two factors drove this process. One was wages: the gap between the pay of factory workers in China, Mexico, or Turkey and those in Europe, Japan, or North America yawned so wide that even if the low-wage workers accomplished far less in an hour of work, producing abroad rather than at home made financial sense. The other was economies of scale. Factories serving the entire world could specialize, making a small array of products in enormous volume and thereby lowering the cost of each unit.
Over the years, the container ships that made this transformation possible have become ever larger. The biggest ships in service today, owned by the South Korean company Hyundai Merchant Marine, have the capacity of 12,000 long-distance trucks—roughly 250 times as much cargo as the Ideal-X. The rationale for building such giants is straightforward: on a per-container basis, a larger vessel costs less to build and operate than a smaller one, allowing the owner to undercut competitors’ cargo rates and expand its market share. Most containerships are built in either South Korea of China, whose governments’ generous construction subsidies encouraged overcapacity that further drove down the cost of shipping: prior to the onset of the COVID-19 pandemic in January 2020, moving a standard 40-foot (12.2 meter) container laden with 25 tonnes of freight from Asia to northern Europe cost less than $1,500, adding only a few cents to retail price of a pair of athletic shoes made in Vietnam or a table lamp from China.
The “cons” of naval gigantism
But this blind quest for scale, which the Italian economist Michele Acciaro has labeled “naval gigantism,”, has had significant downsides. Long before the pandemic set off an unexpected boom in goods trade in the summer of 2020, megaships were making long-distance commerce slower and less reliable than it had been at the start of the twenty-first century.
As container vessels become larger, fewer sail the seas, which means a box filled with time-sensitive exports might have to sit longer at the port before it can be loaded aboard ship. Discharging and reloading takes longer than it used to; not only are there more boxes to move off and on during each port call, but the greater width of today’s megaships means that a shoreside crane requires more time to pluck each arriving container from the vessel and bring it to the wharf. Thousands more boxes multiplied by more handling time per box adds hours, or even days, to the average port visit. Delays were legion well before Ever Given, a ship chartered by the Taiwanese line Evergreen Marine, got wedged in the Suez Canal last March, throwing hundreds of other vessels off schedule.
Once, containerships would have been able to make up delays in route. But that was, and is, no longer possible. To save fuel, recent generations of vessels are uniformly designed to steam more slowly than their predecessors. Instead of twenty-four or twenty-five knots—in the range of 46 kilometers per hour—they commonly travel at seventeen or eighteen knots, adding several days to a long ocean voyage. And where earlier ships were able to speed up if required to get back on schedule, the megaships cannot. In the first half of 2021, only four in ten containership voyages were completed on schedule, and hundreds of planned sailings were cancelled.
The impact on logistics
Megaships have scrambled the land side of international logistics as well. With fewer vessels calling, ports alternately find their equipment and infrastructure unused or overwhelmed. Mountains of boxes stuffed with imports and exports fill the patios at container terminals, adding to the time it takes stacker cranes to locate a particular box, remove it from the stack, and place it aboard the transporter that is to carry it to the dock, the rail yard, or the truck loading gate. Where once an entire shipload of imports might be on its way to inland destinations within a day of arriving, now it can take two or three. At some terminals, these delays have left diesel-belching trucks queuing at terminal gates as drivers wait to collect their loads. Given that freight rates from Asia to Europe or North America are much higher than rates to Asia, ship lines have often sought to return their vessels to Asia as quickly as possible, in some cases refusing export containers bound for Asia rather than taking the time to load them.
How to escape from supply chain related risks?
All of this has forced businesses to pay more attention to the risks in their supply chains. Reversing a decades-long trend, risk-sensitive businesses are holding larger inventories, shipping via multiple routings, and producing in multiple factories rather than in giant sole-source plants. Such measures reduce the risk that goods will not arrive on time, but they do not flatter the bottom line. Thus, by making long-distance supply chains no longer seem such a bargain. the megaship has arguably helped stifle the globalization of manufacturing as much as Brexit, Trump, and COVID-19.
As the pandemic recedes, maritime trade is likely to grow more slowly that it has over the past year as rich-county households are again able to spend on restaurant meals, concerts, and vacation trips. Pressure to curb greenhouse gas emissions from container shipping will contribute to slower growth: reducing emissions means reducing fuel consumption per container, which can be achieved most easily by further lowering speed and thereby lengthening transit time on any given route. Moreover, as high wage costs in China push manufacturing activity to South Asia and Africa, the average distance of containerized shipments will probably decline. This will reduce the usefulness of megaships, which are most efficient on long routes between the largest ports, such as Shanghai and Rotterdam, rather than on shorter routes.
The greater emphasis on supply-chain resilience means that regional trade will probably become more important over the coming decade as manufacturers and retailers seek nearby suppliers to supplement those located far away. This implies a gradual shift from long-distance ocean shipping to truck and rail transport and short-sea shipping. Already, several firms not currently in the maritime business are studying the possibility of using smaller vessels to offer fast services between African ports and Europe. This may help change the pattern of international trade to benefit places that today’s giant container ships ignore.
Related Contents:
