I didn’t intend to make this “China Week”, it just sorta worked out that way as things caught my eye 🙂 That said, this interesting article from Prospect highlighted something that has probably flown under the radar as we go about our daily lives and wonder why our favorite Acme Widget isn’t on the shelf at Wal-mart this week.
Standardized intermodal shipping containers have revolutionized the worldwide transport of cargo. When a container can be shipped to a port, then lifted off the ship by crane and placed directly on a rail car, then transported to another hub and lifted off the train and placed directly onto a truck trailer, all without unloading that container, costs are greatly reduced.
Guess who manufactures the lion’s share of those containers, though?
Three large Chinese companies—CIMC, Dong Fang, and CXIC—produce approximately 82 percent of all containers, according to the report. Combined with some smaller firms, China makes over 95 percent of these containers, and the only other ones produced are for specific regional markets or in nonstandard sizes.
So essentially all standard-sized containers used in global shipping, roughly 44 million boxes, were manufactured in China, as well as around 86 percent of all intermodal chassis. China’s state-owned container manufacturers benefit from large government subsidies and other benefits. And in seemingly coordinated fashion, they slowed production of new containers when demand initially rose during the pandemic, leading to prices nearly doubling from early 2020 to today.
China took control of container manufacturing in the 1990s, stealing market share from South Korea, according to FreightWaves. A coalition known as the China Container Industry Association, or CCIA, directs most of the activity, and it’s dominated by CIMC, the world’s largest container manufacturer, producing about 40 percent of the world’s containers.
Having production concentrated in so few hands can have predictable impacts on prices.
Shipping companies that were “desperate for more capacity” raised prices to account for the lack of availability. Increased ocean shipping rates alone are responsible for 1.5 percent of global inflation, according to a U.N. report, which doesn’t take into account increases for trucking and rail and other cargo fees.
The shortages put container prices at a premium. In the second quarter of 2021, prices for a 40-foot container were $6,500, the highest level on record and four times the pre-pandemic rate. They settled down, but even now, according to the FMC report, the average price is $3,500 per cost equivalent unit, up from $1,800 in early 2020.
The Chinese production increase in 2021 was mostly making up for the record lows in 2019 and 2020, when production fell below the amount needed to replace aging containers. Bentzel, the FMC commissioner who produced the report, has publicly stated that China artificially and deliberately suppressed container supply to boost prices. “The shipping lines that were reviewed for this report all indicated severe frustration, and experienced both delays in orders, and increases in price that they admitted were impacting service ability and reliability,” Bentzel explained in the report, while adding that the circumstance could have been “a deliberate strategy to manipulate prices.”
I have a book on my shelf that is one those “you wouldn’t think is fascinating but is” types. Entitled The Box by Marc Levinson, copyright 2006, it tells the story of the development of these standardized containers. The following info comes from it.
Going back as far as the 1800s there had been various efforts to use standardized shipping containers but by and large in the first part of the 20th century shipping was done with break bulk cargo. Think of many different containers of various shapes and sizes piled up on the dock along side a ship. This cargo would be handled by longshoremen (Union! Union! Union!) and the loading process was not efficient.
The US military had been using some standardized containers in the WW2 and Korean War era, eventually leading to the CONEX box, a metal box that was modular and stackable. However the shipping container revolution came from another source. Malcom McLean owned a trucking company, and he was trying to devise ways to lower the cost of trucking. He first tried putting already loaded trailers on ships, but there was wasted space underneath the trailers.
A logical solution was to just take the containers off the trailer and put them on the ship, but simply lowering those into holds filled with all kinds of other randomly shaped containers and getting all to fit together didn’t result in much savings either.
Long story short, McLean worked with an engineer named Keith Tantlinger to develop what became today’s shipping container, and a way to efficiently store and stack them on ships. McLean with his trucking experience also worked on building truck trailers to hold the new containers. The initial size of these containers was made to conform to what Pennsylvania allowed on the highway. The first voyage with the new containers took place in 1956.
From there, the revolution was on. There were legal hurdles and other obstacles to overcome. Much of The Box has to do with that process. And there were ripple effects. With the ability to quickly load containers, it was cheaper to ship with larger ships and carry as many as possible on one voyage. This created a need for larger ports to handle the larger ships, and the dockside machinery to unload these. And with more work being done by machine, there was significant disruption for longshoremen.
But, the cost of shipping was reduced significantly. And with the cost of shipping so much lower, it was easier to ship manufacturing overseas to take advantage of cheaper labor. The products could be shipped back and still be cheaper than before. Speaking of labor, with the savings from the containers, companies went looking for other ways to save money and found that in the crews hired on the cargo ships. Again, it was much cheaper to hire from second or third world countries and sail under flags of convenience.
It is ironic, then, that the invention which led to such significant cost savings, the standardized modular container, was allowed to be gobbled up by a Chinese monopoly, and a monopoly by its nature leads to price increases.
I’ll close with this from the Prospect article.
The FMC could provide some of the solution by using the 1988 Foreign Shipping Practices Act to penalize China for “restrictive trade practices that adversely affect U.S. carriers in foreign trade.” The penalties could include limited sailings to U.S. ports, suspension of service contracts or rights to operate in the country, or penalty fees. Bentzel doesn’t recommend this action, which is rare, so much as he lays it out in the report.
More realistically, breaking the container monopoly could align with the general business shift to diversify suppliers, rely more on domestic production, and avoid single points of failure in the supply chain. If more production is moved onshore, the impetus to build containers near those manufacturers would increase. And virtuous circles around domestic steel and other inputs could form.
It’s incredible that anyone could manage to secure a monopoly on a 40-foot box. But as the promise of globalization reveals itself as problematic, these absurdities may finally be rooted out.
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