TED talk on “Container Shipping & Global Supply Chain Disruptions — What’s Up?” at HBS

At our 40th reunion this past weekend at Harvard Business School, I was asked by my classmates to give a short ten-minute TED talk. My remarks on the subject I was asked to talk about are included below.

Before getting into the maritime supply chain mess and its causes and ramifications, I’ll set the stage with some information about the industry. It’s still fairly invisible. But it’s a bigger industry than most of you may realize.

Let’s pick 600 feet or two football fields long as being a large ship. Based on that metric, there are 3,500 large container ships. There are another 2,000 smaller ships, between one and two football fields long, in short-sea routes.

Last year those thousands of container ships moved 179 million TEU’s of cargo. TEU stands for twenty-foot equivalent unit.

If linked end to end, those shipments would stretch out almost 700,000 miles. That would be like a steel tunnel, 8 feet wide and 8 feet tall, that circles the equator 27 times and is filled with any and all products you can imagine.

The value of the products that moved on those ships was $7 trillion last year. That $7 trillion is equivalent to 25% of the gross goods product of the world. One-quarter of the products you can touch move in container ships.

The largest container ships today carry 24,000 TEU’s of cargo worth $1 billion. Those giants are over 1,300 feet long. That makes them more than 200 feet longer than our aircraft carriers. They are the largest moving objects ever built by man.

Along with the tens of millions of containers that move to and from every corner of the globe, container shipping represents the biggest physical network in the world.

If you combine all the domestic modes of transport in the US, the millions of trucks and thousands of trains, planes, barges and pipelines, all of them still move just half the total ton-miles of freight those 3,500 giant container ships move. These ships are the heavy-lifters in supply chains.

Container volume expansion at multiples of GDP has led to sharp growth in the number of ships and those ships are much bigger ships. The largest are now seven times bigger than when we got out of HBS. Their efficiency has pushed shipping costs down to being 2% or less of the value of goods shipped thousands of miles.

With those cost economics, the shipping cost barrier that was often 50% or more of value before containerization has almost disappeared. The cost efficiency of container ships has been a catalyst for much of the growth in world trade.

This is a graph showing the year over year change in inbound containers into the US by month.

China is the origin point for almost half of our containers.

March 2020 saw the first big impact from COVID as boxes were down 15%. The container shipping companies immediately reduced capacity by temporarily sidelining ships. Volume got worse, but it was short lived.

By late summer, volume was returning and ramping up fast. Growth would peak in May 2021 with gains of more than 50%. The money consumers weren’t spending on vacations, restaurants and other services was going into goods, with most of those coming from Asia.

The volume surges began to test the capacity of ports. That had less to do with getting the boxes off the ships and more to do with getting them out of the terminals.

Many terminals were already approaching capacity. The freight systems of truckers and railroads were also stressed. The interfaces between modes began to operate less smoothly and predictably.

What occurred with container shipping was in effect gridlock on a massive scale. If you’ve driven in Manhattan, you know that if a car gets stuck in the middle of an intersection, nobody moves until it moves. Likewise, if there is no space in the terminal, the ship can’t be unloaded.

As volume grew, the line of ships waiting to be unloaded grew. The issue was most problematic at Los Angeles and Long Beach, our two busiest ports. In January of this year, it peaked at 109 container ships waiting in San Pedro Bay or off the Southern California coast.

The US saw a bigger spike in volume than Europe and other areas, but similar patterns would play out around the world. Integrated networks of carriers meant that issues in one area had a way of flowing to other areas. This Whack-A-Mole effect had gridlock expanding thru networks.

Right in the middle of a growing maritime supply chain mess, a ship named the Ever Given played a cameo role by wedging itself into the Suez Canal. That snafu stopped $10 billion a day in commerce and lasted for a week.

I think the Ever Given did in fact give the world a tangible reminder of just how linked everyone is to the maritime supply chain.

Everything was getting backed up and when that occurred, more choke points would develop. As warehouses filled up, containers were being used to store goods, soaking up equipment and further reducing capacity.

Equipment shortages in the US grew last May when 200% tariffs were imposed on Chinese made chassis, the wheels containers are placed on. That action shutdown all imports of chassis, adding to the gridlock.

A term that began to be routinely used last Fall was “containergeddon” to describe the logjams resulting from the growing global issues.

Shippers were and remain livid. Service has never been worse. What had been deliveries scheduled to the hour now were being bracketed by the week or month.

So what’s up with the carriers? Profits. Mind-bending profits.

This is a graph of actual container shipping industry net income by quarter. The industry went from being an extreme under-performer to performing at never dreamed levels.

The volume spikes and the gridlock that reduced capacity resulted in an unprecedented supply/demand dynamic favoring carriers. Both spot and contract rates took off. Pricing in shipping is totally set at the intersection of supply and demand and is more elastic than other industries.

Worldwide average container rates are now three times higher than they were at the beginning of the pandemic. That has fueled six straight quarters of record net income for the industry. That such a pricing increase hasn’t put a noticeable dent in volume says something about the continuing efficiency of container shipping.

That is one hockey stick curve of actual earnings. I doubt there has ever been an industry that has experienced such a rapid acceleration. That it occurred in an industry bouncing below and at breakeven for years makes it more remarkable.

The $59 billion in first quarter earnings was three times last year, which itself was a record. The industry net income to revenue margin was 45%, with some individual companies over 60%. Those actual industry margins were well above Microsoft, Apple and all of the FANG companies.

Watch out, digital!

On an individual company basis, 7 container shipping companies reported higher first quarter net income than UPS, historically the world’s most profitable transport company. There is no transport company coming even close to the margins of the container shipping companies. Three container shipping companies actually had higher first quarter net income than Exxon.

At the macro level, the pricing increases are adding to the overall inflation rate. One estimate has higher container shipping costs representing 1.5 percentage points of the current inflation level.

There should be business school cases written about the container shipping industry during the pandemic. Pricing would be the best focus of such a case. It certainly shouldn’t be a “Management of Service Operations” case. Hard to see the worst service ever linked with the best profits ever.

This story is still playing out. Last week President Biden spoke at the port of Los Angeles where he excoriated the carriers and accused them of engaging in a rip-off. Three days ago congress passed a new bill aimed at addressing some shipper complaints. Many are calling for more aggressive regulatory investigation and action.

While the Gordian Knot that led to this mess is slowly unraveling, there are lessons from this that we should all hope business and government policy makers learn.

Our port infrastructure is sorely insufficient. A central focus should be on new investment and new processes that improve the fluidity between modes. New processes could include giant new inland terminals and larger marine containers.

There is something on the horizon with the potential to lead to another massive supply chain gridlock.

In two weeks, the labor contract with the ILWU covering all West Coast dockworkers expires. Tensions are high. An all out strike would completely stop half the containers coming into the US. The ramifications that would kick in immediately would be enormous. They would make the Ever Given getting stuck in the Suez Canal look like a walk in the park.

Let’s all keep our fingers crossed that this possibility doesn’t occur.

We don’t need another lesson on the tie-in between our economy and container shipping.

I think the country learned enough during the pandemic.

Thank you.