published Wednesday, November 20th, 2013

Personal Finance: How does all that stuff get from China to Walmart?

Christopher A. Hopkins, CFA

Ever wonder how a wrist watch that traveled 8,000 miles can sell for $5? Or why it's cheaper to import a 200 pound headstone from China than from Georgia? The answer is not cheap foreign labor, but rather those ubiquitous steel boxes we see on the backs of hundreds of trucks each day rumbling down the interstate: the humble shipping container.

Known as intermodal or ISO containers, the standard steel shipping box has become so common that we hardly notice its presence on trains or trucks. But it is no exaggeration to suggest that this seemingly obvious method of transporting goods around the world has contributed more than any other single development to the explosion in global trade and commerce in the past half century.

Until the late 1950s, little had changed conceptually in the maritime shipping industry since the great Phoenician trading vessels plied the Mediterranean 3 millennia ago. Cargo was typically crated, then wheeled aboard ships down gang planks. Electrically powered cranes increased capacities and lightened the work, but the task of loading a ship remained painfully labor intensive and therefore costly.

Then in 1955, North Carolina trucking magnate Malcolm McLean had an inspiration: place an entire loaded truck trailer aboard ship, and then drive it away at the other end of the voyage. He purchased a steamship company and began refitting the vessels to carry the trailers with their wheels removed. Ultimately he realized the key was a common-size, detachable steel container that could be lifted directly from a truck to the ship, then unloaded directly to another truck bed. By the mid 1970s, intermodal shipping of containers by sea, rail, truck and even air transport had established a firm footing and changed the way the world does business.

Prior to the advent of intermodal container shipping, a freight vessel might spend up to 3 weeks in port being unloaded and reloaded for the next voyage. Today the typical time in port is 16 hours. A stevedoring crew in 1959 could load about 0.6 tons of cargo per man-hour of labor, compared with over 8,000 tons per man-hour today. Meanwhile, the cost of loading a transoceanic transport ship has plummeted from around $6 per ton before containerization to less than 16 cents per ton.

Like Henry Ford with his Model T, McLean understood the secret to success was standardization. Today, steel container sizes are few (typically 20 or 40 foot), number around 26 million units world-wide, and are governed by the International Standards Organization to insure that boxes from one company will stack neatly together with those of any other. McLean's first containership carried 58 boxes. Currently under construction is the Maersk Triple E, designed to carry 18,000 standard 20-foot units, roughly equivalent in capacity to a standard freight train 68 miles long.

It is no coincidence that global trade has expanded exponentially since McLean's simple but revolutionary idea. Without the intermodal shipping container, we almost certainly wouldn't have the Thanksgiving Day Doorbuster Sale.

Maybe it wasn't such a great idea after all.

Christopher A. Hopkins, CFA, is a vice president for Barnett & Co. Advisors

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