June 26, 2014 Leave a comment
Recently I read the book The Box, which was recommended by Bill Gates in hiswebsite. Bill Gates stated that you “won’t look at a cargo ship in quite the same way again” after reading it. I couldn’t agree more. In the 1990s, Mr Gates was always plotted as an evil dictator of a software empire and as a tyrant who cracked down his enemies, like the Netscape, ruthlessly. I was also somehow influenced by those plots for a time. However, after getting more familiar with his experience, especially after reading some of his books and articles, I do think that those disesteems are unfair in many ways. Mr Gates is undoubtedly one of the most visionary and benevolent person in our planet.
I have read his book the road ahead before, which was an extraordinary book. In that book, Mr Gates pointed out a bright future of technology society. Many of his imaginations, such as portable PCs, wireless Internet, smart TVs, have already become reality, despite that Microsoft’s role in the process, sadly, is not as significant as it should be.
Rather than predicting the future, The box is talking about history, if that is long enough to be qualified for. Both books, however, give us tastes of how technology influenced an industry and people’s life. Here are some of my thoughts about this book on “boxes”.
Influence of Containerization
The paradigm of business is heavily influenced by transport costs. When transport costs are high, manufacturers’ main concern is to locate near their customers, even if this requires undesirably small plants or high operating costs. As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs.
The immediate result of containerization is a sharp decline of international transport costs, which results in an unprecedented process of globalization.
Globalization is not a new phenomenon. The world economy became highly integrated in the nineteenth century, which caused by a variety of reasons. First, the Napoleonic wars united Europe, at least temporarily, and reduced tariffs and other trade barriers for many years. Second, due to the industrial revolution, in particular the steamship invented by Robert Fulton, the ocean freight rates fell 70 percents between 1840 and 1910. Third, new technologies also significantly reduced the time required for worldwide information exchange. For example, Telegraph, the nineteenth-center counterpart of the Internet, gave people in one location current information about prices in another. Traders found it easy to increase imports whenever domestic prices rose or domestic wages got out of hand.
The globalization caused by containership is quite different than its predecessor. While the globalization in the nineteenth century was mostly the globalization of final products, the globalization in the late twentieth century is the globalization of the production process itself. Because of this globalization process, a new type of industrial paradigm, so-called just-in-time manufacturing, becomes possible.
Asia, in particular East Asia, benefits the most from the just-in-time manufacturing, which partly contributes to the prosperity in the region. Now it is quite typical for American businesses to succeed without get their hand dirty at all by “low-level” hardware business. What they need to do is to design and innovate, and then send the specification to Original Equipment Manufacturers (OEMs) in East Asia. For example, when an American consumer purchases an iphone on the Apple’s official website, the iphone will be shipped from factories in China directly rather from some warehouse in the United States. It would not be possible if the shipping cost is high.
Why Asia? The most important reason is the abundance of cheap and skilled labors in this region. Technology companies in Silicon Valley are more inclined to outsource their labor-intensive departments, like hard-ware manufacturing departments, to China and Malaysia, than set up a factory in Rocky mountain states. The human labor in U.S. is just too expensive, plus that the transport cost between Rocky mountains and Silicon Valley is also higher than that between Shanghai and Silicon Valley.
Containerization has made geographical disadvantage a more serious problem. For those regions with geographical disadvantages, like inland cities, local business may survive in case that international transport cost is high because people in the coastal area don’t have much option. However, the life of those inland businesses becomes much hard as the container age comes. They can be easily replaced by competitors overseas. For developing countries, this situation is more serious because coastal cities will absorb all the foreign investment and markets.
If you look at the Guangdong and the Jiangxi provinces in a map of China, you will realize that the two provinces are adjacent to each other, despite that Guangdong is coastal while Jiangxi is completely landlocked. However, the GDP per capita of Guangdong is almost twice that of Jiangxi. Shipping cost is the key reason for the difference. As reported by the World Bank in 2002, transporting a container from a central city to a port cost three times as much as shipping it from the port to America. As a result, Guandong quickly joined the globalization process and became an essential part of the global supply chain. At the same time, Jiangxi couldn’t enjoy such benefits. I am afraid that this gap will still increase in the near future. The only way to reduce is gap is to increase the investment of land-based and inland waters-based logistic system, which hopefully will bring down the inland transport cost. Although some improvements have been made in the past years, there is still a long way to go. Only when shipping cost in inland regions is comparable than that of coastal regions, different regions in China can develop in a balanced way.
Influence of Deregulations
In the history of containerization, U.S. government played an interesting role.
According to U.S. laws, the Interstate Commerce Commission (ICC) regulated the rates and services of both trains and interstates trucks. The regulation of ICC made the market quite fragmented. To make it worse, laws also prohibited corporations to be involved in both land-based and sea-based transportations. The initial goals of these regulations was to prevent monopoly and ensure a fair price for consumers. However, the lawmakers wouldn’t image their goodwills turned out to be a huge obstacle for advancement.
When Malcom Mclean, the father of containership, decided to explore the idea of containerization. U.S. regulations would not allow a trucking company to own a ship line. As a result, 1955, McLean sold his trucking company for $25 million and purchased the Pan-Atlantic Steamship Company and the Gulf Florida Terminal Company from Waterman Steamship Corporation.
The basic concept of the container was that cargo could move seamlessly among trains, trucks and ships. However this goal was not achieved 20 years after McLean invented the first container. The main reason is the government regulations. Although the regulations successfully prevent monopolies, it also made the cooperation among shipping, railway and trucking companies very hard because they cannot develop a long-term contract and trust between each other.
Deregulation, which dates back to bankruptcy of the Penn Central railway, changed everything. In two separate laws passed in 1980, Congress freed interstate truckers to carry almost anything almost anywhere at whatever rates they could negotiate. The ICC lost its role approving rail rates, except for a few commodities. As a result, truck and railcars that had often been forced to return empty were able to be filled in in the return trip. Besides, railroads and their customers could negotiate long-term contracts setting rates. After deregulation, the biggest customers can enjoy larger discount. 41,021 contracts were signed in fives years after the deregulation and by 1988 U.S. shippers saved nearly one-sixth of their total land freight bill.
The ability to sign long-term contracts gave railroads incentive to adapt containership. On average, it costs four cents to ship one ton of containerized freight one mil by rail in 1982 and that cost dropped 40 percent over the next six years, adjusted for inflation.
This is an interesting case in which the goodwills of governments turned out to be harmful. The right way for a government to encourage competition is not to legislate laws, but to keep itself away from the market in most of the time. The key issue of governments is that they are usually too slow to adjust themselves to the market due to bureaucracy, so the best way is to let the market speaks itself. I don’t mean that the government is completely useless, but the role of should be kept minimal. In other words, we should apply the Occam’s Razor to governmental regulations—”Entities should not be multiplied unnecessarily.”
Jing Conan Wang