The Box - Marc Levinson [123]
The wolf was at the door even sooner than anticipated. In early 1967, less than a year after fully cellular containerships entered the trade, the North Atlantic conferences cut rates for containers by 10 percent—an action that a leading U.S. shipping executive termed “a disaster.” That was only the beginning. With too many ships chasing too little cargo, the long-standing structure of ocean freight rates began to fall apart.22
Prices for international shipping, unlike domestic shipping, usually were not set by government regulators. Instead, rate setting was the realm of liner conferences, voluntary cartels of the operators on each route. No fewer than 110 different conferences set rates on routes to or from the United States, and similar conferences governed routes elsewhere in the world. The conference members negotiated a rate schedule among themselves and often assigned each member ship line a percentage of the total traffic. All shippers using conference carriers were supposed to pay the official rates, with no special deals, although cheating was common; “rebating,” secretly refunding part of a shipper’s payments, was a widespread if illegal practice. Conferences in trades serving the United States were required to publish their rates and to be “open”—that is, to accept new lines that wished to join—but many other routes around the world featured confidential rates and “closed” conferences that excluded newcomers. On most routes, governments did not require ship lines to be conference members—but if a carrier began operating as an “independent,” it was likely to find the conference letting its members slash rates and add capacity in order to destroy the intruder. Most of the time, all carriers had an interest in going along with the system.23
The conferences structured their rates very much as railroads did. There was a separate rate for each commodity, or sometimes two rates, one measured by weight and one by volume. For breakbulk shipping, there was logic behind this: some commodities were more complicated to load than others, some took more shipboard space and some less, and different rates were a way to recognize the differing costs. Applied to containers, the commodity-based system made no sense at all: a ship line’s cost to move a 40-foot container of bicycle tires was identical to its cost for a 40-foot container of table lamps. When containers appeared, though, the conferences, dominated by companies that still sailed breakbulk ships, relied on the tried-and-true system of commodity-based rates. On the North Atlantic, the rate per ton for a product shipped in a container was the same as if it were shipped breakbulk, with a discount of 5 to 10 percent for a full container of a single commodity. Rates for mixed freight made even less sense. When the Europe-Australia conference set container rates in 1967, a year before containership service opened, it decreed that each commodity in a mixed container would be charged the per-ton rate for that commodity. The only way to find the correct rate was to open the container and weigh every single item inside.24
This economically illogical system could not last. Ship lines had no reason to care what was inside the containers they carried, and with rampant excess capacity they were willing to accept any payment that exceeded their cost to carry the container. By early 1967, Waterman Steamship, Malcom McLean’s former company, switched to a flat rate for shipments from the United States to southern Europe: $400 for a shipper-owned 20-foot container, $800 for a 40-foot container, regardless of the contents. Waterman did not yet have any containerships and its rate structure had no imitators, but its move reveals the pressure on prices. Carriers began threatening to leave their conferences unless rates came down. The conferences struggled vainly to keep the rate structure intact. In the summer of 1969, the transatlantic conference system blew apart. Eight lines formed a new conference with the aim of leaving commodity-based rates behind and