The Box - Marc Levinson [141]
Big shippers typically signed dozens of loyalty agreements covering different routes, obtaining discounts in return for commitments to ship all of their freight with conference members, and then dealt with hundreds of individual conference carriers. The result, often enough, was unsatisfactory. A loyalty agreement did not guarantee space on a ship; if the manufacturer had cargo to ship to India but no space was available on a conference member’s vessel, the cargo had to wait until a conference ship had room. Sending the freight on an independent liner or a tramp ship violated the contract and would expose the shipper to a heavy fine from the conference. If the only available conference vessel was making multiple port calls before heading overseas, the cargo would have to wait while the vessel loaded other freight in each port. Managing relationships with ship lines and doling out cargo were administrative nightmares for major manufacturers, requiring large numbers of staff.30
As ship lines combined their forces to gain market power, manufacturers responded aggressively. The first step was to look beyond the conferences.
Nonconference carriers had always played a role in the major trades, but a small one. The biggest shippers rarely used them. Independents, as the nonconference lines were known, offered discounts of 10 to 20 percent from conference rates, but most of them were too small to provide frequent service on the routes they plied. If a shipper used an independent carrier and then required service that the independent could not provide, it would end up paying a conference line more than if it had signed an agreement with the conference in the first place. Shippers that had a highly predictable flow of cargo could handle that risk. For manufacturers, who might have a sudden need to ship an unanticipated order, sticking with the large conference carriers, even at higher cost, was the safer strategy.31
When containers came on the scene, the economics of container shipping were thought to work against independent lines. The costs were so high that small operators could not enter the business on a whim. Establishing a viable container operation in the United States-Asia trade, one economist estimated in 1978, would require $374 million to buy five ships plus containers, chassis, and cranes. Common sense suggested that anyone putting up that much money would join conferences in hopes of keeping rates high enough to recover costs. But in the second half of the 1970s, it turned out that the barriers to entry were not as high as they seemed. Shipbuilding costs, which had risen 400 percent from the end of 1970 through the end of 1975, began to fall as the collapse of the oil tanker market left shipyards bereft of orders. Builders slashed prices and extended loans just to keep their yards at work. Bargains on new vessels allowed traditional ship lines such as Maersk of Denmark and Evergreen Marine of Taiwan to elbow their way into container shipping. Maersk and Evergreen operated as independents on most routes, with rates far below what the conferences charged. As they added ships, they became credible competitors, drawing shippers that had been wedded to the conferences. Neither company had owned a containership before 1973. By 1981, Maersk’s twenty-five ships made it the world’s third-largest containership operator, while Evergreen,