The world watched when the container ship Ever Given blocked the Suez Canal this March. Some people made sites, many people made memes; I made a children’s book. It seemed almost comical: A patch of bad weather drove the 1312-foot long, 200000 tonnes-heavy container ship Ever Given askew, wedging her into the narrow canal at an angle. She was stuck.
It may have delighted the internet, but it also cost the world time and money — diverting up to 450 other vessels (about 30% of the world’s shipping container traffic) and costing up to 0.4% in trade growth worldwide: about 10 billion U.S. dollars in just one week. In response, the Suez Canal Authority is now widening the waterway by 131 feet. Only it’s going to take two years to do it, and it still won’t allow a massive ship like Ever Given to spin sideways in the canal.
This is not a one-off disaster or an outlier case of outdated infrastructure in a country on the other side of the world. It’s an omen — of a global problem.
For all we may talk about software eating the world, it’s clear (and became a lot clearer during the PPE shortages of the early pandemic) that the physical world still matters. From a logistics standpoint, the mobility of goods and the exchange between trade partners is what enables innovation. Tech pundits may talk about going from atoms to bits or bits to atoms, but it’s the interplay between the two that makes the world go ‘round. And amid a frenzy of global trade demand, the world’s shipping infrastructure is starting to break.
A standard for innovation
Before the containerization of shipping, cargo was loaded and unloaded by longshoremen. The process was practically random by today’s standards — bulky, non-standardized cargo shipments loaded in whatever order seemed best to the workers on the ground at that moment.
In 1956, the year of the first container-ship sailing, hand-loading a ship cost $5.86 per ton. That figure dropped dramatically to 16 cents per ton with containers — and sped up the process considerably.
The idea for containerization came from a trucker, not a shipper. Malcolm McLean started out hauling empty tobacco barrels with his family in North Carolina in 1935. At that time, entire trucks would drive onto ships, wasting both a ton of potential cargo space, plus a chassis that could be on the road moving goods. McLean developed plans to use the so-called trailerships for travel from North Carolina to New York, but U.S. regulations didn’t allow one person to own both a trucking and a shipping company at the same time. So McLean did what any innovation-minded entrepreneur would do: He dumped the trucking company, took out a $22 million loan, and, in January 1956, bought two World War II T-2 tankers.
And so, on April 26 that year, the SS Ideal-X was loaded and sailed from the Port of Newark, New Jersey, for the Port of Houston, carrying 58 containers. Each was 35 feet long, and they were called trailer vans. (As expected, the International Longshoremen’s Association was not pleased. When asked for an opinion, a top official replied, “I’d like to sink the son-of-a-bitch.”)
McLean later opened a new 101-acre port facility in Newark, and a decade after the milestone of the first container shipping, service commenced between New York and Rotterdam, Netherlands; Bremen, Germany; and Grangemouth, Scotland. Through the late 1960s and early 1970s, these container networks grew, entering Hong Kong, the Philippines, Singapore, South Vietnam, Taiwan, and Thailand. By the end of the 1960s, McLean’s company had 36 ships with more than 27,000 containers, with access to over 30 port cities. (Governments and regulatory agencies took notice and soon also bolstered McLean’s efforts.)
This rapid growth was a result of multiple factors, including post-World War II prosperity and a burgeoning interest in globalization. Container shipping provided the perfect platform to drive global connectivity — not least because they were intermodal, traveling across the very different modes of land, sea, and air, all in one form. They connected all the dots through transportation, infrastructure, supply chains, and logistics, making the world smaller and the world economy bigger.
According to a recent report cited by the St. Louis Fed, between 1970 — by which time this network was established — and 2018, total world exports increased more than 65 times, from $384 billion to $25 trillion. Even after adjusting for inflation, total exports have still grown 10 times. Perhaps more importantly — since GDP is traditionally the measure of productivity — global GDP went from 14% to more than 30% through internationally traded goods and services (for the U.S. alone, this ratio went from 5.6% to 12.2%). The Fed notes that the “key factor spurring this rapid globalization was the pervasive adoption of containers and corresponding infrastructure.”
The shipping container is truly the unsung hero of logistics. Containers hold cargo in standardized sizes that fit on ships, rail, and trucks. When there’s any discussion of supply chains or port bottlenecks along vital trade routes — the movement of goods — we’re almost always talking about container movement.
The other key feature of containers besides (and building on) their intermodal nature, however, was standardization.
The International Maritime Organization (IMO) published a set of shipping container standards in the 1970s. Standard shipping containers are 8’ wide by 8’6” high, while high-cube units measure 9’6” high; about 90% of the world’s containers are 20 feet or 40 feet long. These standards were created by the International Organization for Standardization, the independent, non-governmental body responsible for establishing standards in information technology, graphics, photography, mechanical engineering, transport, non-metallic materials, health, medicine, and laboratory equipment.
Four years ago, they released a set of standards designed to include considerations for ships over 18000 TEU, a direct successor of the original framework. During the late mid-century era, though, the common container was 20’L x 8’W x 8’6”H, which is known as the “20-foot equivalent unit” or TEU, the standardized measurement unit of global trade today.
How were such standards enforced? Initially, they were held up by incentive: Only ships that were built to carry standard sizes were eligible for federal subsidies. Later, the ISO standardized container corner fittings, too, which made it possible to standardize the cranes and other equipment required for moving containers.
A universal language for global trade
Standardization is a magical thing, cutting across both atoms and bits. Take the internet as a prime example: The HTTP standard catapulted the internet to its current ubiquity by creating a uniform way to exchange information.
Before HTTP, computers could only exchange information if they were on the same network. Different network types couldn’t connect to each other. This disconnect limited the size and scale of online communities. Now, the world relies on HTTP as a means for devices to exchange information to or from anywhere in the world. Information packets move along these networks (and, as The Economist once described, just like a packet of data, “a container is just a box with an address”).
Our computers, laptops, tablets, phones, and more can all connect quickly to the information we seek thanks to standardization. And while today’s global trade network is kind of like an internet of physical goods, it’s missing a standard like HTTP. The same way data passes between devices via the internet, goods pass between ocean ports, airports, warehouses, and other entities to reach their final destination. Without a logistics standard to act as a request-response protocol, all the players — suppliers, drayage, ports, warehouses, buyers — have to stitch their networks together manually.
Information gets lost; layers of redundancy, designed as backups given low visibility, slow the exchange: connections end up being very brittle. Let’s say there’s a shipment scheduled to arrive in Long Beach on Tuesday. But which terminal exactly and what pier number? What time is pickup? How long before late charges are incurred? Finding these answers is labor-intensive and imprecise. Logistics managers end up consulting different sources on websites, via email, or in person.
The dirty secret of the industry is that no one really knows where their stuff is.
But if global trade were like the network of information as it is on the internet, we could simply type or speak into a search bar to ask and answer these questions, precisely.
This is not about the desired features of such a system, but rather about the need for standardization, the need for a universal language for global trade. Once this exists, the physical world, like software, becomes searchable, programmable, accessible — connecting a patchwork of country-specific regulations and more.
The recent Ever Given spectacle revealed the hard limits of the current system and the chaos hidden underneath all our global trade systems. Standardization could address this chaos.
Strengthen infrastructure, strengthen the world
It’s pretty much impossible to upgrade all at once the physical infrastructure that drives the movement of containers — and therefore trade and innovation. If it takes two years to make the Suez Canal 131 feet wider, imagine how long it would take to upgrade the entire world’s logistics infrastructure.
There are thousands of ports, harbors, and wharfs, not to mention over a thousand transoceanic mega-vessels. Containers travel on ships and planes, clear customs in the destination country, and get distributed to warehouses via regional rail and truck networks. In some instances, it can take up to 20 companies to move a single shipment — each with their own systems, processes, and documentation. It’s also a highly fragmented industry: While thousands of independent freight forwarders make up a $2 trillion business, the #1 freight forwarder in the world has less than 3% market share. That’s not a bad thing, but the remaining thousands of mostly regional distributors — who know the specifics of their local geography better than any big company — lack global visibility.
Information is accessibility, democratizing the playing field and reducing barriers to entry, not to mention reducing barriers to trade. A 1% increase in trade overall, according to economists, is associated with a 0.149%decline in poverty. Similarly, a 1% decline in the average tariff rate is associated with a 0.4% decline in poverty. To maintain or improve upon that progress, we need solutions that shore up physical infrastructure, so it can handle demand.
Because various cascading supply chain woes are only the beginning. At the onset of the pandemic, global trade skidded to a near halt, and then heaved back to life in a matter of weeks. And while the logistical impacts are ongoing, the economic impacts have been nothing short of devastating. The world experienced demand shock, spending plummeted; and then, demand for essentials spiked, marked by hysteria for toilet paper, hand sanitizer, and face coverings. Since then, rates for ocean shipping have smashed records. It’s not just China to the U.S. West Coast. Transatlantic rates are up 100% since 2019.
It’s a global traffic jam. Before the pandemic, transit times from mainland China to the West Coast took around 33 days. Now, it’s more like 60. There are shortages of vessel berths, cranes, truck chassis, truck drivers … and of course, containers, especially in Asia, where they’re needed the most.
So why not address all this physically, with bigger ships? Can’t someone just build a bigger ship to hold more containers? Well, yes, they can, and have been: More than 400 container ships, totaling 3.63 million TEUs, have been ordered new since late 2020. (Bigger ships also reduce emissions per container.)
Even the Ever Given, at 1312 feet and 20124 TEU, was one of the largest ships in the world when she first sailed in 2018. Now, only three years later, she’s one of seven holding 13th place for highest capacity. In 1869, when the Suez Canal opened, the HMS Newport was the first ship to sail the entire canal. She was 145 feet long, a good size in her day; a few decades later, under a new name, she explored the Arctic for Northern Sea routes. But she is tiny by today’s standards.
As they get bigger, these ships reach their physical limits when it comes to seaworthiness. During the two-month period between November 2020 and January 2021, almost double the annual average number of containers went overboard. Some of this was due to the winter season, which is when westerly winds across the Pacific Ocean blow strongest.
And, as we scale ships to hold more containers, we also need to scale rail and trucking accordingly. That isn’t happening. It’s just one more example of how demand for physical goods is dramatically outpacing infrastructure. Yet here we are, talking about expanding the Suez Canal by… 131 feet.
For consumers, for everyday people, the limits of infrastructure coupled with rising demand mean rising costs, creating a vicious cycle of scarcity. Standardization and more transparency will go a long way here, taking us from the pre-internet era to a post-internet era for shipping.
That’s the physical future we can build with software.
[also available as audio read-aloud in your a16z Podcast feed/ here]
Views expressed in “posts” (including articles, podcasts, videos, and social media) are those of the individuals quoted therein and are not necessarily the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.