a16z Podcast - Of Container Ships, Supply Chains, and Retail

Episode Date: December 3, 2019

This podcast rerun -- first recorded over two and a half years ago, now being rerun as one of our evergreen classics on the tails of the world's largest designated shopping days (Black Friday, Singles Day in China, Prime Day online, and so on) -- is ALL about the container ship. Also known as "The Box", with author Marc Levinson (in conversation with Sonal Chokshi and Hanne Tidnam). But this episode is really about connecting the dots between logistics, transportation, infrastructure, and much more.What do we make of the so-called "death of retail", especially when seen through the retail history of the once-largest retailer in the world? How are supply chains changing today? One thing's for sure: the shipping container made the world much smaller... and the world much economy bigger. image: Kevin Talec / Flickr

Hi everyone, welcome to the A6 and Z podcast. I'm Sonal. In this episode, we're resurfacing one of our favorite episodes on one of the most seemingly boring, but not to us, topics, containerships, the logistics of supply chains, and more. In this episode, first recorded over two and a half years ago in Washington, D.C., we interviewed the box author Mark Levinson. Here's the original intro with more details about what follows. Hi everyone, welcome to the A6 and Z podcast. I'm Sonal. Today's episode with me and Hannah is another one of our podcasts from our recent road trip with voices from the ground in Washington, D.C., though this one actually takes us all around the world. Our guest is economist, historian, and journalist who was last at The Economist, Mark Levinson, the author of the beloved book, The Box, which is about how the shipping container made the world smaller and economy bigger. But this hallway-stall conversation is actually a quick tour through all his books, starting from his most recent one in extraordinary time, where we touch briefly on the topic of the golden age of productivity and beyond, to the topic of the death of retail and his book The Great A&P, to finally wrapping up on logistics, transportation infrastructure, supply chains, and touching very briefly on the future of work. And where government comes in policy-wise and all this or doesn't. We're so excited to have you. Welcome, Mark.

Thank you. Glad to be with you. So those seem like really different topics. What's a big idea that drives the thrust of your work that kind of connects all the dots? I'm really interested in the connections between economics and the world we live in. A lot of my work starts out at a microeconomic level, looking at particular companies, looking at particular industries, and tying the developments there to broader trends that really affect how we live, affect our standards of living. More recently, I've been focusing on some of the trends in productivity. growth because I believe that a lot of the improvement in our living standards really comes out of these kind of micro improvements at the private sector level rather than as a matter

of great policy. And what that means, and this is a frustration for public officials, is that there are no easy government solutions. We've now been through generations in which politicians and the economists who advise them said that they had the cure for poor productivity growth. I argue in an extraordinary time that actually this was what was behind the political swing to the right in the late 1970s, early 1980s when we got Margaret Thatcher and Ronald Reagan because the more social democratic type of governments before that hadn't been able to restart productivity growth. And so voters turned to people with other ideas, but the people with the more free market ideas proved no more successful than the people with the more statist idea. What are we actually comparing to as we're thinking about these? Well, this is not good enough. What are we holding up as something that we prefer it to be?

The end of the post-war boom and the return of the ordinary economy. The story I'm telling is that the quarter century after the war was an unusual period of very rapid economic growth. The period from 1948 to 1973 was probably the period of the fastest economic growth in the history. of the world. GDP around the world grew at more than 5% a year. Now, at 5% a year, something doubles in 14 years, quadruples in 28 years. So even with some population growth, people's incomes were growing very rapidly. People's living standards were rising in a way that was visible to them. They were able to buy houses for the first time and cars for the first time and send their kids to high school and maybe even college, and we had all kinds of very rapid advances in living

standards. What was that due to? What was the big driving force? We had an unusual confluence of factors in the post-war period that people have really forgotten about now. One is that there was a great deal of underused capacity, underused resources in the economy. I'd like to remind people that at the end of World War II, we still had three million mules. on farms in the United States.

Wow, such a technical post-industrial revolution time. You don't even realize it. You had millions of people, and not just in the United States, European peasants and Japanese farmers are owned half an acre of land, who could be moved from very low productivity jobs into very high productivity jobs in the cities. And we had a lot of that in the 50s and 60s. So that was one big boost to productivity. We had very rapid increases in education.

education levels. And we know that education is associated with productivity. In the United States at the end of World War II, going to college was not common. It was just a few percent of the population of 18-year-olds actually went on to college. And the average education level was around 8th or 9th grade. So in a very few years, government spent a lot of money building a more educated workforce and it paid off. The government was the one that seeded that? Or was that just a shift in the fact that adolescence existed and child had changed? No, this was heavy expenditures, building universities all over the place. Take a look at how many universities in the United States started after World War II. Okay, that's when a lot of government money started. It was no longer an elite thing to go to university. And how about women entering the workplace? Well, women entered the workplace. The other thing I think that was really consequential in this quarter century I'm describing was that we had the growth of,

of motorways, the interstate highway system in the United States. So public infrastructure, like the tax. Infrastructure, and think about what that does. If you are a manufacturer or a retailer, that lets you sell over a wider area, lets you operate your facilities more efficiently. You don't need a warehouse in every town. You can have one that will serve a large area. If you're an employer or a worker, it's changed the size of your labor market.

I mean, in Silicon Valley, San Jose and San Francisco are now part of the same labor market, right? That wasn't the case after World War II. These were very different cities and they were a considerable drive apart. And so that creates a better fit between people and jobs and then leads to higher productivity. They can't be repeated. Once you've moved those sharecroppers to the cities to take jobs in industry using heavy machinery, they've moved. And you don't have those underused resources again. Right. There were countries around the world that literally went 25 years from 1948 to 1973 without a single year of recession. We had countries that had less than 1% unemployment back then. So how did this burst of productivity, this golden age,

actually come to an end? Well, in 1973, we really saw a trend change. That was the year of the great oil crisis that some people may remember. What we have moved into since 1973 is really an environment in which economic growth has been slower. The improvement in living standards has been slower. The unemployment rate in most countries has been permanently higher. We have not been able to recapture the very unique good times that we had in this golden age. And I think that we're not going to be able to. What we're experiencing more recently is actually normal. This is the way most economies work most of the time. And how it worked before this golden era? The golden age was actually the exceptional time.

It's not normal that economies grow at a rapid pace. It's not normal that incomes double or triple or quadruple in the matter of just a few years. And I don't think we should expect that to recur. I view this is analogous to child development and how a human body and adult develops because there's a rapid development that happens in the birth of a child. And then there's another big rapid issue that happens in adolescence. And then you continue to grow, but it's a little slower. And in fact, thinking about the natural conclusion of your,

argument is that that growth is now shifted to other countries like India, China, where they are now experiencing the kind of boom that you were describing that happened pre-1973. That's a great analogy. Take Japan, which in the 1960s, early 70s, was growing at 7 or 8% a year, and then it downshifted, and then it downshifted some more. More recently, China went through a period where it was growing at 10% a year. Although in China's case, we do have to take the numbers with the big grain of salt. Even so, people were extrapolating and saying, you know, when China grows at 10% a year for the next century, its economy is going to be twice as large as the rest of the world put together.

But China's not going to grow at 10% a year for the next half century. It's becoming much more like a normal, mature economy in which the growth rate is a couple of percent a year. And that's all they're going to be able to expect. But it doesn't mean necessarily that, like, in adolescence or growing a, a human being, you only get one burst. These things can come in waves. There can be other kind of confluence of these factors. When you were talking about the Japanese farmers with their mules and the sort of move

towards the way automation may end the move to cities increased productivity, are there any inklings that you're starting to see of possibilities like with the automation we're starting to see happen today and maybe even with autonomous cars, new infrastructure might, you know, city infrastructure. Are there things that give you any sense of maybe a new era might be coming at some point? Or just even a way to juice the body on steroids, like just inject some more steroids into this economy. You're asking great questions here. And the answer is maybe.

I think that these are things we really can't predict. If you look at past episodes of fast productivity growth, in general, they weren't predicted very well. For example, we had a spurt of productivity growth, which translated into faster income growth in the late 90s and the first years of the 2000s. This is the famous internet boom, you may remember. Oh, we remember it. But in 1992, no one predicted this. What happened was that there had been investments in infrastructure. There had been developments in technology decades earlier. And finally during this period of time, they all came together. But I think a lot of people would argue that we're in a moment like that again now. I think that's a question which we can't answer. So if you take a look at a technology,

Will it actually revolutionize the way certain industries work? I don't exclude the possibility. But you have to keep in mind that there are also a lot of complications. You're seeing this right now as we go through this rather brutal shakeout in retailing. Yes, everybody knows that you can order goods on the Internet. That's not news these days, okay? But the reality is that for a lot of retailers, there's a problem here because they're maintaining an Internet business.

They're also maintaining a retail store business. because some customers want that. So in some cases, their costs have gone up. They have not become online retailers. They have become bricks and mortar slash online retailers. Right. And they're showrooming for the online sometimes. They've got multiple channels that they're having to service. And that's actually made their operations less efficient in certain way.

I would actually say there's a flip side of this, though, again, which I think is really fascinating. Because when you think about the internet economy, birth of Amazon, which is, let's face it, the behemoth and everything, the everything store, the everything, everything. And they recently, as we know, started doing physical brick and mortar bookstores. The differences that they started online and they went into physical using data to help stock and think differently about how to create their store in an internet native way in the physical world. So I also wonder if while the debt of retail might be on the horizon, if after that there might be an entirely new post boom, a new boom around retail that's completely reshaped by new technologies. We don't know.

That's entirely possible, but just to give you something to think about, Amazon's problem in terms of getting its books into its physical stores is entirely different from its problem getting its books ordered online to you, the customer. Yes. So now it needs a different kind of logistical system. It needs to figure out how to distribute to retail stores like the ones that apparently is building. that's going to have a lot of costs attached. It may have some inefficiencies attached, at least while they're developing it.

So my point is to say that the path of, you know, sometimes people who are involved in the tech industry kind of get very romantic about how quickly these great technologies are getting absorbed. But in reality, life is messy. And some of these technologies take a while to be used efficiently. And some of them will never be used efficiently. That's right. There are more failures in their success. There's no question about that. So does it remind you at all of the sort of death of the supermarket that you talked about in your book, The Great A&P?

In the Great A&P, I was writing the history of what was for about 50 years, the largest retailer in the world. People forget this now, but the Great Atlantic and Pacific. Is that what A&P said for? I had one in my town. I didn't even know that. Yes, it was a Great Atlantic Pacific. It was so named in 1869 for the Transcontinental Railroad. Wow.

And at one point, it had more than 16,000 stores. in the United States. So it was a behemoth. It was the Walmart of its day. But one of the things that kept it so vibrant is that it remade itself continually because shopping trends change. Consumer expectations changed. From what to what? It started out as a seller of coffee and tea and spices. It made itself into a small grocery chain. And then in 1912, it developed the idea of having an economy grocery chain, which is to say it would have a very bare-bone store and sell products much cheaper than the competition. And that's what drove its growth in a small period of years. It integrated vertically. So it made its own chocolate, its own macaroni,

its own canned its own salmon. And so then had a huge network of manufacturing plants. And again, we're in the 1920s here. And then it started building supermarkets. It was not. not the innovator in any of these things. A&P did not develop the idea of supermarkets, but once it saw how supermarkets would work and how they would fit with its business, it started building supermarkets all over the place, and by the end of the 1930s was the biggest supermarket operator in the country.

So what ended up being its downfall? The company stopped innovating. The company stopped remaking itself. It was big. It was fat. It was happy. The two brothers who had controlled it for decades both died, in the 1950s, and it was then run by people who had been with the company for decades

and whose idea was to preserve it rather than to keep it changing. You know, the beat that keeps coming up in this is that basically the tension between in this idea that you can innovate, but then you get too good at what you do, too comfortable, too complacent. Okay, so what's the big then lesson or takeaway from that, you know, from your work on the great A&P to this narrative around the death or retortment? retail today. Retailing is full of dead bodies. People like to talk about how unfair competition is sometimes because the big companies have more power than the little ones. But when you are a big

retailer, you can't change so easily. If you own one store and you think you need to do something else, you go in there with a hammer and some plywood and you can do it. If you own a thousand stores, you're stuck. Okay, you've got your locations, you've got your product line, you've got your brand name, and you can't change easily. It's a really difficult situation. And so a lot of stores end up dead. It's the innovator's dilemma, classic case. So the other theme that's come up and that connects all the dots with this entire conversation,

that this post-boom world was one of the drivers was this like rapid development of infrastructure. Amazon exists because of logistics and infrastructure, like innovations and being able to ship things and deliver things fast. You know, we talk about the supermarket and the growth of suburbs around railroads and transportation. Transportation and logistics and infrastructure is like the thread that connects and drives all economies. So let's talk about the box, which is all about logistics and infrastructure in the form of container shipping. You chose one very specific thing in the box to talk about that had this massive effect on a global economy. Give us a little bit of a sense of what that story was like.

I remember Tim describing when he pitched your book this incredible scene of how just the giant mountains of peanuts in the ships. Like how quickly did shippers see this possibility and start using it? Was it fast or slow? Well, let me give you just a quicky history here. The idea that you could save money by shipping goods in containers came along in the 1700s. Okay, this was an old idea. And nobody had ever figured out how to make money out of it. Because what would happen was that, where you'd make a container out of wood and nails,

and you'd put your goods in it, and then at the other end of the trip, somebody would break the container apart and use it for firewood. That was a pretty inefficient system. And nobody ever found this to be viable. It actually cost more to ship goods in containers. What made this whole thing work was the arrival of a guy named Malcolm McLean, who was a trucker. So he didn't come from the shipping industry. And he understood that what was needed was not particularly a container, but a new system for moving freight.

And the container was just a piece of what... It was just a container. It was just a container. And a lot of people back in the 50s and 60s who were in the shipping industry were very enamored of their ships and they thought they were in the shipping business. And McLean's basic position was

nobody cares about your ship. They just want to get their goods from here to there and let's design an efficient system for doing that. So shipping containers first came into use in the United States in 1956. They started being used internationally across the Atlantic in 1966, and the industry was pretty substantial by the 1970s, by that time most of the older vessels had gone out of service. But it was really in the 1980s when modern

logistics took off. There were a couple of things that happened. You had in this country, freight deregulation, which meant that you could actually sign a single contract to import products and that would cover delivering the goods to a port and moving them inland by rail to a final destination, or having a truck pick them up and move them to a final destination. So you could actually integrate all these modes of transportation and have some assurance that the goods would get there. And then you had improvements in communications. This was referred to as electronic data interchange. So all of a sudden it became possible to run an international supply chain in the 1980.

Now you could send instructions across the ocean quickly about how you wanted something shipped or how you wanted something made. And so this innovation, the container, that had really come about in the 50s, started to make a substantial difference in the world economy in the 1980s when we had the birth of modern supply chains. The most fascinating thing to me, the idea that astounded me most about the box was the idea that the containerization of moving goods was allowed things to travel multimodally. that because of that, this modularization, you can now break things across ship to train to plane across the world. And that is like a really eye-opening idea. And I think it's really interesting that you reference the EDI because the analogy that I was thinking of was actually packets in moving data across lines like the Ethernet.

And that packetization of data also led to this thing where you can move things across phone lines, Ethernet lines, other computer lines, broadband, et cetera, and essentially reassemble them at the other end. That's a good analogy. It's a really, really mind-blowing idea. So I guess a question I have is what's happening next and now that you think is interesting in the next evolution in supply chains that is along these lines? Well, there are a couple of things that are going on in supply chains, and they're not necessarily good.

International trade and manufactured goods actually grow more slowly than the world economy for the past six or seven years. That's a big reversal from the previous trend. Why is that? One of the reasons is that supply chains have become worldwide. less reliable. These ship lines went out and purchased very, very large vessels, and I'm sure your listeners have seen these vessels can carry.

I've actually seen them firsthand because I went to the Panama Canal. And it's incredible. Panama Canal doesn't handle the biggest one. That's right, because they're actually really limited by the Panama Exhib. The biggest container ships now at sea can carry more than 10,000 truck-sized containers. Wow. That's amazing. These are enormous vessels.

So what has happened? Well, imagine you've got a port. But instead of having a ship carrying 2,000 containers showing up every day, now you've got a ship that carries 10,000 containers showing up once a week. You've got a mess on your hands because you've got this enormous load of traffic, which you need to get all these containers out of the port. You need to get a bottleneck congestion. Yeah, that's right. You've got a bottleneck. And this has come at a time when growth in trade has been pretty slow.

So there's considerable overcapacity in the industry. and even so, the reliability has fallen. So what you've seen is actually manufacturers and retailers contracting their supply chains. They would like to make things closer to where they're used because they think there's less risk. One of the things that I think happened in the growth of these international supply chains is that companies paid a lot of attention to cost. They said, you know, our hourly labor cost in China is a lot. cheaper than it is in Detroit. They didn't really pay much attention to risk. And risk is a cost factor. There were a number of U.S. companies that failed or came very close to failure because of

supply chain disruptions. Key merchandise wasn't available when they needed it for their factories or for their store shelves. I mean, this is the story of hardware startups. The problem isn't that they can't plan out and predict and build. It's that they need to lock down that supply chain inventory at the right time, but yet they have the issue that they don't know how many products or customers are going to buy, so they don't know how much to make. So there's a sort of chicken egg problem. The same thing in book publishing. So you've got the container ship lines that essentially created their own crisis. They got bigger and bigger ships because that was more efficient for their purposes. Their own costs running ships went down per container as the ships got bigger.

They didn't devote too much thought to the problems of the ports or the railroads or the truck lines, and all of them have had a lot of difficulty coping with this flood of containers. And so I think one question facing this industry going forward is whether these long-distance supply chains will continue. Well, I have to ask a question, though, is that necessarily a disaster? Because isn't that also the inevitable sort of cycle of things aggregating, unaggregating, lengthening and contracting, et cetera? And also in that same context, one of the arguments I've heard for, there's actually

advantages to shorter supply chains. For example, in the case of hardware and software innovation, there's this rapid iteration and back and forth that happens. So if you have a components manufacturer in Mexico and you're designing a chip or some piece of hardware, you could rapidly iterate on your designs without the long delay that happens when you have a big time difference and a bunch of other logistical issues with someone doing the same thing in China. So there's some argument that it's actually not a bad thing because it actually speedens

innovation almost in some cases. In some cases, it may speed innovation. In general, I think that manufacturers and retailers are expecting that it's going to reduce risk. Another trend that you see is that many manufacturers and retailers are now looking to multiple sourcing. Now, in many industries, it's cheaper to have a single source, right? Because you've got huge economies of scale. One factory makes a ton of stuff. And that's great so long as it's working. It's cheaper because of the Chinese stuff, right? It's cheaper. But maybe it's worth paying a little bit more and have an extra warehouse. We're seeing a lot of that now. We had, for example, a work stoppage out at the port of Los Angeles, actually the West Coast ports in general, in the early part of this century, a lockout by the port employers. How did that affect companies? Lockout, you mean like it was like...

They locked out the union workers as part of a labor dispute. Right. And so a lot of companies said, well, maybe we ought to redirect some of our traffic to ports on the U.S. East Coast. Okay. So they still call, they still send their goods to Los Angeles or Long Beach or Oakland, but they also send a portion of them now to Savannah or New York because they want to have options. They want to not have the risk that their supply chain will be shut down. There's another fascinating analogy with the digital world here, because it reminds me of the time of the early days of the internet when as the internet became super popular and more multimedia started coming online. There were tremendous bottlenecks in data traveling through pipes. And so

they had to figure out new methods to essentially reroute and decentralize it from these central choke points. So it's kind of a fascinating thing. And also now, by the way, explains when I was in Panama, I was a little struck by this thing where every single ship that goes through spends a day being inspected before you can even put it through. And it costs like a million dollars per ship to put it through or some, I forgot the amount, but it's some significant amount. And it just blew my mind, like, there's so much extra work. But now I understand because of one ship bottlenecks that entire thing, nothing gets through for like the entire day. And that's a huge blockage. Yeah, exactly. It's kind of fascinating. So what we're seeing in container shipping now is a lot like what

we saw in the United States with the railroads in the 1870s, 1880s, 1890s, when many railroads went bankrupt. We went from a country that had hundreds of railroads each a few miles long to a relative handful of large railroad networks. We went through something similar when we had airline deregulation starting in 1978. You may remember we used to have lots of regional carriers around the country. Had a number of national airlines and only two international airlines that were heavily protected by the government. Now there's a lot more potential competition, and of course, the carriers have dealt with that by merging. So you've actually now got a situation in which you're supposed to have cutthroat competition, but they've tried to find a way around it by

merging and reducing the number of airlines. The inevitable cycle. We're headed in the same direction with container shipping now. Many container carriers are in financial distress. A lot of them have merged into the big carriers, there are now probably three so-called alliances of container carriers that kind of dominate world trade. So we may be in an environment in which there are few enough players that they'll be able to have a better handle on prices, on shipping rates. And that will mean less competition. That will be good for their shareholders. It probably won't be good for shippers. Okay. So the wrap up, we started this with your view that connects the dots between all these books. And you have this.

perspective of this economist historian. And, you know, the question is, is it good to know that this is an ordinary economy or are we just talking about cycles of things that are just going to inevitably decline and grow? How do you know it's just not a typical waning and that it's actually really is something different? I think this actually has a lot of political implications. For decades and decades, we've trained people to believe that the government can provide a very steady income can provide low unemployment can provide rapid economic growth. And I think the government's ability to do this is limited. What we're seeing, I think, and not just in the United States, is somewhat of a crisis of expectations. It's a reckoning. If you take a look at

what's going on now in Europe or in Korea or in Taiwan, people expect more of the their public officials, then their public officials can deliver. People want their incomes to grow quickly. Their public officials promise, yeah, we'll bring back the good old times. We'll make your incomes grow quickly. But in reality, we're in a normal age in which people's living standards rise slowly. I feel like while you're saying this, all I can think is like, well, only really time can teach us that that's not. You know, there's, because I'm trying to think like, well, what can we do to reset those expectations? But we can't, really. It's just time and not understanding possibly. Well, and not having the same

growth, right? Getting used to not having the same growth, which is sort of disheartening when you think about it. It is, because my question is like, so how did we move beyond that? On one level, it's disheartening. On another level, I think we have trained people to believe that government can deliver things that really can't deliver. So how do we start to undo that? There is a question about how the available income is distributed, which is really quite separate from the question of how fast productivity is growing, how fast the economy is growing. And I think we have to have a real discussion about how income is being distributed and how automation is going to affect our workforce. This is top of mind for everybody, including us, our guests, everybody.

And I bring this up not really in an economic sense, but almost more in a psychological sense. There's a lot of concern about where the jobs are going to be for people in the future. I'm not too concerned about that. I'm pretty confident that we'll have ways in which people can earn livings. But so many people get some degree of satisfaction from their work. And if what we've got is a world in which people are doing part-time work, occasional work, unsteady work. I mean, work itself has become containerized. That's right.

What are people going to be moored to in this sense? And we can do anything we want to guarantee your income. But the fact is if all you do is wake up in the morning and watch television because you've got nothing else to do, you're not going to be very happy. So I think we have an issue here that really goes beyond economics to finding meaning in our lives as human beings. To the human condition. One last thing. You talk about a crisis of expectation, but the reality,

and this is actually another theme that connects the dots, that these problems are multifactorial, multimodal, there's crisis of expectations around the world, and they're playing out in ripples and waves

in different ways across, you know, France, Europe, the U.S., in so many different ways. So I also wonder if there's some change in the geographic or governance structures

that we have to think about. Do you have any thoughts on sort of the geopolitical implications of this? There's any like last party thought on that front. We've seen, obviously, a big shift away from faith in the nation state and people to people wanting power and control closer to home. I think we've seen over the centuries cycles in that that sort of comes and goes. Will city governments be able to

deliver satisfaction in a way that national governments can? I'm not convinced of that. But in some issues, some areas related to people's quality of life, they can be very important. I think another issue that we face is that there are things we know that will improve productivity over time. We can't predict how that will work. And we still need to make those expenditures. So, for example, we know that improving education levels is in general, good for a country's productivity. So we need to invest in education. But can we say if we spend an extra billion dollars in education now that it will improve productivity three years from now?

We can't say that. We're doing this somewhat unfaith. Especially if the skills and jobs of the future change. Well, that's correct. We know that as a general proposition, it's been important for economic growth that we've had scientific research going on. Does that mean that if we put more money into scientific research now that we will be able to benefit it from the consequences at any predictable time in the future? The answer to that is no. Right. And these are the reasons exactly why we tend not to make these decisions. That's exactly right. That's exactly right. These are very tough choices because you're asking for our tax money to be spent and you really can't promise the return. It's like investing in the future, difficult to do. Well, Mark, thank you for joining

the A6 and Z podcast. Thank you so much for having me. It's been great fun. Thank you.