Founders - #61 Malcom McLean: The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger

Episode Date: February 25, 2019

What I learned from reading The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger.----Such was the beginning of a revolution [0:01]The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use. [15:30]the basic idea was around for decades [17:30]Malcom's early life and first business [23:00]McLean had an obsessive focus on cutting costs [33:00]the beginning of Malcom McLean's idea [37:00]McLean's definition of total commitment [41:00]McLean's fundamental insight [48:00]fixing the business by focusing on the customer's real problem [53:40]the surprising reason containers are standardized [1:00:00]Daniel K. Ludwig and Malcom McLean [1:07:00]Malcom McLean sells his business [1:13:00]Starting another business [1:21:00] ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

On April 26, 1956, a crane lifted 58 aluminum truck bodies aboard an aging tanker ship moored in Newark, New Jersey. Five days later, the Ideal X sailed into Houston, where 58 trucks waited to take on the metal boxes and haul them to their destinations. Such was the beginning of a revolution. Decades later, when enormous trailer trucks rule the highways, and trains hauling nothing but stacks of boxes rumble through the night, it is hard to fathom just how much the container has changed the world. In 1956, China was not the world's workshop. It was not routine for shoppers to find Brazilian shoes and Mexican vacuum cleaners in stores in the middle of Kansas. Japanese families did not eat

beef from cattle raised in Wyoming and French clothing designers did not have their exclusive apparel cut and sewn in Turkey or Vietnam. Before the container, transporting goods was expensive. So expensive that it did not pay to ship many things halfway across the country, much less halfway across the world. What is it about the container that is so important? Surely not the thing itself,

a soulless aluminum or steel box held together with welds and rivets, with a wooden floor and two enormous doors at one end, the standard container has all the romance of a tin can. The value of this utilitarian object lies not in what it is, but in how it is used. The container is, at the core, of a highly automated system for moving goods from anywhere to anywhere with a minimum of cost and complication on the way. Okay, that is from the introduction of the book that I want to talk to you about today, which is The Box. How the shipping container made the world smaller and the world economy bigger.

If this is your first time listening to Founders, let me welcome you. My name is David. The premise of this podcast is really straightforward. Every week I read a biography, an autobiography, a book about the life story of an entrepreneur and I try to pull out ideas all of us can use in our lives. So let me tell you how I found this book. A few weeks ago I was listening to a fascinating podcast with the founder of Shopify. His name is Toby Lutke, I think is how you pronounce his last name. And I've heard him on

a few podcasts and I've just been fascinated with the way he thinks, like the way his mind works. And he said something that was really interesting um he he was asking if he he'd read any good books lately and he recommended this book the book that i have in my hand and he said the book is about the inventor of the shipping container an amazing entrepreneur named malcolm mclean who's the subject of today's podcast um and he he just he went on to talk a little about mclean but he he said McLean was the only person who cared about moving things. Everyone else was focused on a particular transportation method, be it trains or ships. But by focusing on the actual problem, which is what is the best way to move things around the world, he came up with a better solution.

We need more of that in the world. And Toby talked about how that even influences how he thinks about Shopify, where most people think of Shopify, what do they do? They make it really easy to have an online store to sell something. But that's not really what his customers care about. He says, frankly, my customers don't care about an online store. They care about the independence of entrepreneurship. So when he, when him and his company build products, they don't think how can we make the best online store? They try to solve the underlying problem, which is how do we make more people reach the goal with their ultimate goal, which is that of independence, self-employment.

And that's a really interesting distinction and something that he was referencing that, you know, a lot of people miss. You might have heard this concept before talking about, there's multiple examples how people don't want drills, they want holes. And so I've talked in the past that I keep a lot of quotes and things that are important to me that I need to reread on my phone in a special folder. And one of them is this idea that people don't want drills, they want holes. And this one entrepreneur realizing that. So let me just read this real quick. He says, I remember him saying,

I teach my people on day one, people don't want drills, they want holes. Meaning the people that go to the store and ask for a drill. So like, oh, I need to make the best drill possible. I was like, no, you need to look at underneath what your actual customer is trying to solve. And he said, after a week of reflection, I collapsed the firm from inside and rebuilt it from the ground up to never make this mistake again, meaning he was optimizing for the wrong thing. I rebuilt all my processes and everything was geared toward the fact that people don't want the technology. They want the solution it provides.

We have to stand behind the core problem we are solving for our customers, and we have to operate the whole way through to the point that they are raving fans. I hope this helps my fellow entrepreneurs. So that's exactly what Malcolm McLean does, and as we're going to learn today on the podcast. And I really appreciate toby picking up on that first of all reading the book and then also sharing hey like this this guy you can actually learn a lot from him because as i'll share with you in a little bit like this this

problem was was rather obvious and people had you know guesses on how to solve it but mclean was the first one to realize that the fundamental problem was just what's the best way to move things around the world? That's what our customers care about. That's why they're paying us. They're not paying us for our ships. They're not paying us for our trains, for our trucks. They don't care about any of that. They'll send their goods all over the world in the most efficient manner. So why don't we focus on that? So before I jump into the book, I just want to read some of the, well, first how the book part describes itself. So on the back cover, it says, the box tells the dramatic story

of how the drive and imagination of an iconoclastic entrepreneur turned containerization from an impractical idea into a phenomenon that transformed economic geography slash transportation costs and made the boom in global trade possible. And then just one of the blurbs, which I thought was good. I didn't read this till after I finished reading the book, but it says a perfect illustration of how an idiosyncratic entrepreneur brings something new into the world and a wonderful example of how business history can be made to sing,

which I particularly appreciate because, you know, and a wonderful example of how business history can be made to sing, which I particularly appreciate because this entire podcast is around business history. So let's jump into the book. I'm just going to move through like I normally do, just some highlights and ideas that particularly stuck out to me. So this book, as you can probably tell from the title, it's not a biography of Malcolm McLean. It's a biography of the shipping container. He just happened to be the one credited with making, he didn't invent

the container, but he invented the processes behind making it as broad and accessible as it is today. But embedded in this book is the life story of Malcolm McLean, including how he started, how he thinks about business, things that are important to us. So that's what we're going to be focusing on today. And so let me just jump into getting right back into this whole ship, the very first ship that used containers in this way, which is the Ideal X, the one I was just referencing. So it says, getting from the Ideal X to a system that moves tens of millions of boxes each year was not an easy voyage.

So let me just stop there right off that sentence. So again, big things start small. The very first inkling of the containerization industry, which is now massive, I've heard multi-trillion is the size of it, started with 58 boxes. So 58. Now they're saying tens of millions of boxes each year. Okay. Both the container's promoters and its opponents sensed from the very beginning that this was an invention that could change the way the world works.

It's kind of. So I'm reading from the introduction. Later on in the book, though, it becomes apparent a lot of people dug their heads in the sand. And the reason I think I'll talk about on the podcast, but just in case I don't, it took an outsider. Malcolm Killeen was not in the shipping industry. He was in the trucking industry. That's how he got to start. So everybody in the shipping industry was very hesitant once the technology was Appeared and I'll go into detail like how that once you see something I think was like a mad like an order of ten times cheaper to ship things just by using

Malcolm's system that it you know kind of forced kind of slaps you in the face like oh, okay the world has changed We need to embrace that. But as we know, we've now talked about 60-something, what, 60 different founders, all different industries, all through different times of period. You know, human nature is resistant to change, especially when your paycheck depends on it. Okay, so it says, that first container voyage of 1956, an idea turned into reality by the ceaseless drive of an entrepreneur who knew nothing about ships, unleashed more than a decade of battle around the world.

Many titans of the transportation industry sought to stifle the container. Powerful labor leaders pulled out all the stops to block its ascent, triggering strikes in dozens of harbors. There's an entire chapter dedicated to that. It's some really silly behavior. Some ports spent heavily to promote it, while others spent huge sums for traditional piers and warehouses in the vain hope that the container would prove a passing fad. We've seen that before.

Governments reacted with confusion, trying to figure out how to capture its benefits without disturbing its profits, jobs, and social arrangements that were tied to the status quo. I'm probably going to mention this multiple times on the podcast. There's so many times I'm reading this book, and we could change out containerization with the internet and the exact same behavior by governments, by powerful leaders, by entrenched incumbents it's the same behavior over and over again and i just kept getting slapped in the face um with that thought as i was reading this book so it says you know governments reacted with confusion trying to figure out how to capture its benefits without disturbing the profits jobs and social arrangements that were tied to the status quo problem is when you have fundamental changes in technology, as we've seen in the past, you can't stop it once it starts.

So they're saying they don't want to disturb the profits. Well, the profits got disturbed. They don't want to disturb the jobs. The jobs got disturbed. And the social arrangements tied to those jobs and profits certainly got disturbed after this. OK. Even seemingly simple matters matters such as the

design of the steel fitting uh steel fitting that allows almost any crane in any port to lift almost any container uh were settled only after years of contention in the end it took a major war the united states painful campaign in vietnam to prove the merit of this revolutionary approach to moving freights. Okay, so now at the core of why this was necessary is think about how much of our economy relies on building something in one place and then having to move that elsewhere, whether it's just short-term across town or across the entire globe. So applying efficiencies to such a massive industry, which is basically at the heart of what McLean did, not only did it make him a very wealthy man, but similar to when we were studying John Bogle a few weeks ago, what did we learn in one of John Bogle's books is that

the estimates of him passing on the savings from index funds to the investors, his career contributed to about $250 billion, about a quarter trillion dollars of savings. So who knows what that number is with now we're going, what, 70 years of containerization. It's probably much larger in McLean's case. But at the core, it's transportation efficiency. So that's what we're going to talk about here transport efficiencies though hardly though hardly begin to capture the economic impact of containerization the container not only lowered freight bills it saved time and that's really hard to um put a value on that because it's priceless um it's literally the

only currency that humans have that is non-renewable. Quicker handling and less time in storage translated to faster transit from manufacturer to customer, reducing the cost of financing inventories that were sitting unproductively on railway sidings or in pier-side warehouses awaiting a ship. The container combined with the computer made it practical for companies like Toyota and Honda to develop just-in-time manufacturing in which a supplier makes the goods its customer wants only as the customer needs them and then ships them in containers to arrive at a specified time. I just found a book written by the founder of Honda. It's like 30 years old, maybe 35 years old. So I'm waiting for it to arrive But eventually that's going to be a future

Founders episode Such precision unimaginable Before the container had led to massive reductions In manufacturers inventories And correspondingly huge cost savings Which I just touched on a little bit there So this is very fascinating This is one of the books where I'm almost like which I just touched on a little bit there. So this is very fascinating.

So this is one of the books where I'm almost like, dang, man. I know I'm on this cadence of a book a week for you guys, but I feel like there's almost a benefit if I read a book, and then the following week I reread it because you know there's all these things that you don't understand until, like, you know the whole story and you can go back and see, like, the different meanings of things. Something that happens in my own life is I don't watch much TV, but my favorite show is Game of Thrones. And every year, like, there's a huge gap between seasons. I usually, me and my wife usually rewatch the series from the beginning to catch up. And then you pick up on so many things you didn't know. And then we go deep dive into like subreddits and YouTube videos. But I just

think it really enhances like your appreciation for what it is that you're studying. And the reason I bring that up is because the paperback version of the book I have in my hand is like 400 pages, right? No, it's more than that. It's 510. 400 is the story, right? Then this guy's got like 100 pages of notes and bibliography. So the amount of research he did is just fascinating. So I'm going to just see. He goes back in history, tries to compare what's happening with the containers with stuff in the past.

So I'm just I'm not going to harp too much on that because I want to focus on Malcolm. But I like this part about like think about how important Thomas Edison's invention is. Right. The incandescent light bulb. It was amazing, like an amazing like they lived in a time where you had no like you were lighting candles but there was no electricity in your house and as jeff bezos says it's not like the killer app for electricity they weren't putting electricity in the house they were putting lighting you know another way to think about if you're actually solving your the root of what your customers uh problem is right which i think the closer you can get to that the customer the solution the actual solution they want the

better company to be but anyways he just has this point about like as as great as this invention was it took forever to spread so he says although thomas edison invented the incandescent light bulb by 1879 only three percent of u.s homes had electric lighting 20 years later that's insane that's insane three percent in 20 years the economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use. I don't have any tattoos, but if I did, we should tattoo that on ourselves.

The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use. Amen. Okay. Oh, so here's another interesting part. Remember, this basic idea was around for a very long time. That's why this whole idea like, oh, it's too late to start a company, or it's only too late if you're going to copy. But there's tons of opportunities hidden in plain sight. You just have to go looking for them and have the time to do that. I know it's really hard if you have a full-time job, a family, hobbies, and everything else,

but you have to dedicate yourself to getting in the mind frame, the mindset to constantly look like, hey, why are things done this way? I think it was, what is his name? Josh Wolf, I think is his name. I took notes on him for Founders Notes. But he says a good way for entrepreneurs to find opportunity is ask themselves what sucks, like what in your life sucks? And you realize, like, why is it done this way? And then most likely you'll find opportunity.

But let's focus, I guess, I'm getting a little off topic. Let me just read this part about, like, this was a giant opportunity hidden in plain sight. The solution to the high cost of freight handling was obvious. Instead of loading, unloading, shifting, and reloading thousands of loose items, which is exactly what they were doing at the time, which is why you had so many, like, manpower to do this, which now in the world we live in, you know, we know we most of people probably listening to my voice were born after the containerization um like it just seems so bizarre that they would do stuff like this like this seems very wasteful like you're you just put a bunch of random stuff in a box and then you ship it and then on the other end you have you know 20 30 50 100 people going and using muscle power to take

this out and you wonder why it's so inefficient. So it says, so instead of unloading, shifting, and reloading boxes of loose items, why not put the freight into big boxes and just move the boxes? The concept of shifting freight in large boxes had been around for decades. The British and French railways tried wooden containers to move household furniture in the late 19th century, using cranes to transfer the boxes from rail flat cars to horse carts. Oh my goodness. At the end of World War I, almost as soon as motorized trucks came into wide civilian use, the Cincinnati Motor Terminal Company hit upon the idea of interchangeable truck bodies that were lifted onto and off of wheels with a crane far-sighted thinkers were already proposing a standardized unit container in the form of a deep of a demountable closed auto truck body so kind of close which can be readily transferred

by cranes between railroads flat cars auto chassis warehouse floors and vessels okay so these ideas were out there. Malcolm's the first one to integrate them all into one solution. So just describing what the author, just with one sentence, describing what everybody was trying to solve. All of these undertakings were modest in scope, but all of them had the same aim, to cut the cost of moving cargo through slow and inefficient ports by the

early 1950s there was little dispute that freight terminals were a transportation chokehold so there's just going to be a lot of stuff there's it'd be impossible for me to to share in the podcast because this book is so long um but what they're talking about chokeholds it's not only where their processes are inefficient but there was a bunch of competing interests and a bunch of uh just like theft violence cronyism nepotism strikes um the whole time i'm just sitting here reading uh what's going on in this industry and you know thinking of it through the terms of like if i was running this business and i'm like oh there's just no way i would deal with all this like you're this behavior is incentivizing the people that own the company to find other solutions like you're not helping

yourself i don't know who's advising you but this is a very bad idea um okay uh let's see so everyone in the industry knew about the problem no one one could solve it. So they actually – there's like a bunch of not only governments but also companies. They do really strange things. And we're going to compare and contrast the way they solve problems with the way Malcolm does. We're not there yet. But they hire like – they commission studies to be done and malcolm was not big on that he went by intuition and just like i'll just have a problem and i'm going to move about this problem very quickly and then i'm going to learn through trial

and error so somebody i can't tell who though there's i'm going to read the results of this study unfortunately i lost track of who actually did this. It says, the authors went... This is the result. Okay, hold on. Okay, here we go. The authors went beyond the normal admonishments to improve longshoremen's productivity

and eliminate inefficient inefficient work rules and urged a fundamental rethinking of the entire process perhaps the remedy lies in discovering ways of packaging moving and stowing cargo in a manner that break bulk is avoided they wrote so they're going to use that word break bulk a lot that's just moving things as individual units instead of in containers. Interest in such a remedy was widespread. Shippers wanted cheaper transport, less pilferage, less damage, and lower insurance rates. Ship owners wanted to build bigger vessels,

but only if they could spend more time at sea earning revenue and less time in port. Truckers wanted to be able to deliver to and pick up from the docks without hour upon hour of waiting. Business interests in port cities were praying for almost anything that would boost traffic through their harbors. Yet despite all the demands for change, I think about all the different people like stakeholders in this entire process. Yet despite all the demands for change, despite much experimentation, most of the industry's efforts

to improve productivity centered on such time-worn ideas as making drafts heavier so that longshoremen would have to work harder. No one had found a better way to ease the gridlock on the docks. The solution came from an outsider who had no experience with

ships and this is where we're going to be introduced to malcolm mclean and they call him the trucker because that's what he was so this is a little bit about malcolm mclean's early life and his first business reshaping the business of shipping was left to an outsider with no maritime experience a self-made trucking magnet named malcolm mclean mclean was born in 1913 deep in a swamp country of southeastern north carolina at the time of mclean's birth about 3 500 residents and they're talking about the city he lives in it was called called Maxton. So they had about 3,500 residents and it was very rural and very poor. Upon Malcolm's graduation from high school in 1931 in the depths of the Great Depression, family ties got him work stocking shelves at a local grocery store. So this was one of his first jobs. And then he starts working. This is how he's

going to stumble into business. Those local local connections what they're talking about here are family connections it's not like high socioeconomic status connections it's that like there's such a small town that everybody was related um so it says those local connections helped uh once more when an oil company needed a gas station manager a family friend um so he starts working at a gas as a gas station manager and then he realizes that he could make money just trucking gasoline for the company instead of working in the store so his family friend lent mclean the money to buy his first load of gasoline his rise began when he learned that a trucker earned five dollars for bringing the station's oil from fayetteville which was 28 miles away mclean proposed to do it himself the station's oil from Fayetteville, which was 28 miles away.

McLean proposed to do it himself. The station owner let him use an old trailer that had been rusting in the yard. McLean Trucking Company opened for business in March 1934, with McLean still running the service station as the sole driver. And so look, check this out. So he graduates in 1931. Three years later, he already has his own company. So he's a very, very driven person, as we're going to see. And unfortunately, some of that drive winds up leading to a downfall later in life. Okay, so it says, a local man agreed to sell McLean a used dump truck on installments of $3 a week.

With that truck, McLean won a contract to haul dirt for a federal public works program. Even after hiring a driver, McLean earned enough money, earned enough to buy a new truck to haul vegetables from local farms. So he's gonna basically do everything, start out doing gas, I'll take your dirt, I'll take your vegetables,

I'm just in the transport business, right? According to a much-repeated tale, one trip found McLean so poor that he couldn't afford to pay the toll at a bridge along the way. He left a wrench with the toll collector as a deposit, redeeming it after selling his load in New York City. So what do they mean? One sentence they're telling you he's making enough money to buy trucks. The next sentence they're telling you he's too poor to pay a toll. Welcome to Malcolm McLean's modus operandi of pushing it to the limit.

Again, it gets him in trouble later on in life. So it says, the rags to riches tale fails to do justice to McLean's immense ambition. By 1935, at 22 years of age, and with just one year of experience as a trucker, McLean owned two trucks and one tractor trailer. He employed, so let me, so he's

22 and he's only been open for one year, right? So he's got two trucks, one tractor trailer, and nine drivers who own their own rigs and had already hauled steel drums from North Carolina to New Jersey and cotton yarns to mills in New England. By 1940, so now he'd be 27 at the time, as preparation for war revived the economy, the six-year-old McLean Trucking owned 30 trucks and grossed $230,000. That's in 1940 dollars. McLean built his operation during the war, gaining additional routes. A massive merger among seven of his competitors, which he opposed unsuccessfully all the way to the US Supreme Court barely affected the truck line at the war end at the war's end in 1945 World War two Malcolm McLean controlled a thriving business with a hundred and sixty two trucks mainly hauling textiles and

cigarettes from North Carolina to Philadelphia New York and southern New England okay so let's see. He started the company in 19, what's that, 1934, and now we're talking about 11, excuse me, now we're going to go into 1946, so that's 12 years later. It says revenues in 1946 were $2.2 million, nearly 10 times the level of 1940. McLean, already wealthy at age 34,

viewed this as just the beginning. As he wrote a few years later, "'I saw that my only opportunity "'was to build and build and build, "'to make a big trucking company "'out of a relatively small one.'" Okay, so now his business is up and running. This is how he got around

what he would consider corrupt regulation. So there's this, it might still be around today, but his industry, trucking industry at the time, was regulated by the ICC, which is the Interstate Commerce Commission. And there's some very strange objectives for the ICC. So let me start there. The ICC's concern was not efficiency but order. Regulation protected the interest of established truck lines, also known as regulatory capture, still happens today. So that, again, very bizarre, right?

Not really serving the interest of the consumers. Like, why would you keep artificially high... You're keeping artificially high prices for businesses that want to ship things just because you want to protect the railroad industry. More than anything else, the ICC wanted to keep the transportation industry stable. So there's this you know this um

present uh behavior by humans throughout history of this idea of you know artificial control over the economy over businesses this idea that you can you know somehow keep things stable which i i think is you know probably false Regulation damped competitive spirit in the trucking industry. Showing the sort of ingenuity that would characterize his career, McLean found ways around the regulator's obstacles. If winning new route authority was too arduous, why not buy a carrier that already had attractive routes? And if buying another truck line was too expensive,

why not lease one? a carrier that already had attractive routes. And if buying another truck line was too expensive, why not lease one? The labor unrest that followed the war left many truck lines struggling. Remember, we're still in the 1940s here. And McLean repeatedly seized opportunities. Between 1946 and 1954, McLean Trucking bought or leased routes in at least 10 different transactions, expanding its network from Atlanta to Boston. The company added 600 trucks between 1947 and 1949. That's crazy. Using the government as the unwitting financier. So this is a really interesting idea.

Check this out. So this is how he was able to get all those trucks in so fast and have the U.S. government foot the bill. Veterans of the war were eligible for cheap government loans to set themselves up as independent truckers. So McLean encouraged veterans to become owner-operators, brought them together. What that means is they drive the truck and they own the truck that they drive. I know a little bit about this because my dad's a truck driver. Brought them together to purchase equipment in a single large order

and sign them to haul freight from McLean Trucking. So he's kind of like the Uber of trucking. But with military veterans financed by the U.S. government and no app. So he's getting the business, but they own the rigs that they're driving and they're doing all the driving.

So he brings them together, they purchase equipment in a single large order so they have some benefits for efficiencies there and then sign them the whole freight from a clean trucking so very similar okay so this is really important um something that i harp on all the time i actually just saw you know what i wasn't expecting to talk about this let me grab this real quick because uh this whole idea of frugality that we that you know for whatever reason seems to be uh really present with um with uh with a lot of the founders that we cover so uh berkshire hathaway warren buffett just wrote this letter just think it came out a few days ago but he he has a this idea on um like his philosophy on on debt and um and i saw a lot of people commenting on twitter they're like 100

concur with this berkshire philosophy um it's more even more appropriate for certain companies but it's counter to the vast majority of vcs on boards recommending taking debt. So he's saying, this is now Buffett talking, we use debt sparingly, and remember this whole debt thing because this is going to come to play later in our story. We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners, and these more venturesome CEOs will be right most of the time.

At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. Yes, it does. A Russian roulette equation. Usually win, occasionally die. This may make financial sense for someone who gets a piece of the company's upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don't, this is such good old school advice, rational people don't risk what they have and need for what they don't have and don't need. Damn, that's a great quote.

Rational people don't risk what they have and need for what they don't have and don't need. Damn, that's a great quote. Rational people don't risk what they have and need for what they don't have and don't need. So the reason I bring that up is because he's preaching, in my opinion, responsible management of finances. So frugality is tied into that. Now, here's the weird thing. So before I finished, I don't know if I'm going to talk about this in the future, so I'll just talk about it now because I don't remember if I left it on the note.

But I'm reading this. Well, let me read this first, and then I'll tell you what I thought. So it says, An obsessive focus on cutting costs was the key to McLean's trucking success. We've seen this multiple times. The only way a truck line could attract much new business was by offering lower rates than competitors offered. It's kind of like a commodity product if you think about it. A trucking company salesman would call on a prospective client, learn how much cargo it

generated for various destinations, and then study the rates that its current carrier had filed with the ICC. The truck line could then propose a lower rate to win the business, but only if it could prove to the ICC that the proposed rate would be profitable. In practice, this meant that a truck line could not underprice its competitors unless it had lower costs. Malcolm McLean's sharp pencil was critical. So there's going to be multiple examples of his just fanatical focus on um frugality in this book and so then i was like wow this is amazing but as i'm continuing to read the book then i noticed wait a minute this is weird i don't i gotta ask uh the listeners if if they can remind me of a time because

this guy had obsessive frugality combined with unbelievable leverage. And those are usually, you know, they don't come from the same person. I can't think of another founder that we've covered that was excessively frugal yet highly, highly leveraged. And what did Warren Buffett just tell us about leverage? Because that's what debt is. He says,

it's a usually win, occasionally die strategy a russian roulette equation just like none of us would be think it's smart to play russian roulette yet many companies do do that with their their their business by taking on massive debt and i don't want to spoil the story but that's what happens in mclean so there's a lot we're going to learn on from him that he's really smart on and then you see that like he does things that a lot of people do um and it destroys him in the end so um yeah so i i don't know there's just that's just stuck out to me i can't think of anybody else that is it was as highly levered uh but through at time. Okay, so let's go more into his frugality before we get to that. Cost-saving innovations continually materialized as McLean Trucking grew.

The company opened one of the earliest automated terminals in the industry, using conveyors to transfer freight from one truck to another while saving labor. At a time when most, and this is, again, just a stream of good ideas from Malcolm, which all comes from questioning how things are being done. At a time when most trucks had gasoline engines, McLean Trucking was the first major company to install diesel engines in its tractors. And in an era when drivers typically bought fuel on their own, Malcolm McLean arranged a corporate discount at service stations along the company's routes and told drivers to fuel only at those stations. By the early 1950s, McLean Trucking was hiring young university graduates and putting them through one of the first formal management training programs in American business. Men just out of college would come to Winston-Salem where their first task was

learning to drive a truck. After six months of hauling freight, trainees were sent to a terminal and spent several months unloading trucks. This is just smart. Then came a stint in the office, learning the McLean trucking method for making a proposal to potential customers. Basically, what's that old saying by Samuel Zimuri? If you know your business from A to Z, there's no problem you can't solve. He's teaching them the business from A to Z.

So he's making a proposal to a potential customer, which required careful analysis on the cost of serving the business. Only then were trainees dispatched to their first assignments, usually selling freight in Raleigh or Boston or Philadelphia. McLean Trucking quickly became known

as a dynamic company in a very stodgy industry. That's an understatement. He understood, and then this is somebody, actually the person that was running some of the bank that was financing his operations, that bank actually turns into Citibank later on. But he's talking about McLean here. He says he understood cash flow.

You'd go to a railroad in those days and talk about cash flow, and they'd ask you what you meant. Of necessity, a highly leveraged company had to focus on efficiency for which malcolm mclean had a passion they knew every aspect of their business and they knew how to squeeze out costs okay so this is now we're getting into his idea the the beginning idea of the idea that's going to change the entire world. Malcolm McLean was not a man to sit and enjoy his success.

He was a restless soul, competitive, calculating, always thinking about business. He wouldn't be able to sit still for five minutes. His inventive brain churned out idea after idea for making money. One such brainstorm came in 1953 as McLean was fretting over increasing highway congestion and worrying that domestic ship lines, able to buy war surplus cargo ships from the government for almost nothing, might undercut his trucking business. Rather than driving down crowded coastal highways, why not just put truck trailers on ships that could ferry them up and down the coast? So that's the little tiny beginning of this massive idea.

By the end of that year, McLean was proposing to build waterfront terminals that would allow trucks to drive up ramps to deposit their trailers on board specially designed ships. These ships would move the trailers between North Carolina, New York, and Rhode Island, circumventing the worsening traffic jams at a time when expressways were few and far between. At the port of arrival, other trucks would collect the trailers and haul them to their destination. In the context of the 1950s, McLean's plan was revolutionary.

Law and regulation ensured that trucks and ships had nothing in common. Trucking companies ran trucks, and shipping companies ran ships. Remember how Toby was talking about everybody was just focused on either trucks or ships or trains. No one was looking for that complete solution to what the customer actually needed? That's an example of that. A few ship lines and barge companies carried trucks on their vessels,

as McLean planned to do, but they were simply offering water transportation to any trucker who would pay. The idea that a truck line would use its own trucks to drive its own trailers on board its own ships float the trailers down the coast and then drive them to their destination at the other end violated the icc's basic precepts even though it was the best idea at the time because remember he's not he doesn't care about trucks he doesn't care about boats i care about moving things

efficiently over around the world so if i can have a completely integrated system for that, why wouldn't I do that? So it said, no one had invested significant money in coastal shipping in 30 years. McLean's interest was entirely a matter of cost. The ICC had regulatory authority over domestic shipping and it allowed ship rates to be well below rail and...

Wait a minute, Let me back up. The ICC had regulatory authority over domestic shipping, and it allowed ship rates to be well below rail and truck rates to compensate for slower service. Sending his trucks by water would let McLean underprice other truckers. Another kind of clever workaround, right? I like his idea

of total commitment. Although, I liked it when I left this note. I didn't know how the story ends, so maybe I need to rethink this. What followed was an unprecedented piece of financial and legal engineering. First, to circumvent rules required ICC approval

for a truck line to own a ship line. McLean created an entirely new company, McLean Industries, in January 1955. Okay, so before I get into this, this is also going to show you how crazy this guy is. What he's about to do, remember, he has a wildly successful trucking company. He's already made them wealthy. He's doing fine. He's going to basically nuke his own company because he believes in this idea so much. Okay. So it says, first to circumvent rules requiring ICC approval for a truck line to own a ship line, McLean created an entirely new company.

And some of these financial machinations that this guy does, I can't even read some to you because I was so confused by them. I had no idea what was taking on. They gave him credit for making the first leveraged buyout ever. And it's just insane some of the ideas this guy had. McLean Industries in January 1955. Okay, so he starts a new business, right? It's called McLean Industries, not McLean Trucking. Although McLean Industries had publicly traded stock stock it was clearly a family controlled business malcolm mclean was president his brother

james was vice president and his sister was secretary and assistant treasurer they uh malcolm james and clara then put control of the trucking company in a trust of which they were the beneficiaries malcolm mclean kept five million dollars of stock but the trustees were authorized to sell the rest as soon as the trust documents were signed the mcleans resigned as directors of mclean trucking and within an hour mclean industries took control over pan atlantic that's a shipping company he needs right the country's best known tr and this is the result in case that was all confusing to you because it was very confusing to me too. The author does us a favor and breaks it down

like we're five years old here. The country's best known trucking magnet walked away from the business he had built in order to build a new one based on some untested idea about shipping. In September 1955, the trustees sold off McLean Trucking stock

Making the legal issue Moot What they're talking about Is other people Like railroads and other trucking companies Like hey this guy's clearly He's getting around He's complying with the letter of the regulation

But not the spirit So then they sell off Now they don't own a trucking company. They just own a shipping company, right? So that makes the legal issues mute. Malcolm McLean did not fare badly in the process. He cleared $14 million in the sale of McLean Trucking. His net worth in 1955 was $25 million,

or the equivalent of $220 million today. Asked later whether he had considered Waste as sheltered some of his wealth from the risk of entering the maritime business, his answer was an unequivocal no. McLean explained, you've got to be totally committed. So he goes on in this idea and then idea and he realizes oh i made a mistake

um i actually there's an like we can continue to improve the efficiency of this idea so this is the more efficient idea mclean reconsidered his plan he had realized that carrying trailers on ships was inefficient why because the wheels beneath each trailer would waste a lot of precious shipboard space pondering that problem mclean came up with a still more radical idea. A government maritime promotion program made leftover World War II tankers available to ship lines very cheaply. Pan Atlantic, which is the company he bought, and he's running right now, and it's actually going to change its name again.

Pan Atlantic would buy two and convert them to haul truck trailer bodies, which is the containers, right, which are trailers detached from their steel beds, axles, and wheels. Subtracting the frames and wheels would reduce the space occupied by each trailer by one-third. Even better, the trailer bodies could be stacked, whereas trailers with wheels could not be. As McLean envisioned it, a truck would pull the trailer alongside the ship, where the trailer body, filled

with 20 tons of freight, would be detached from its steel chassis and lifted aboard ship. At the other end of the voyage, the trailer body would be lowered onto an empty chassis and hauled to its destination. And then the result of this more efficient idea,

container shipping, which is what would be known to be called, would be 94% cheaper than break bulk shipping of the same product, even allowing for the cost of the container. So this is an insane improvement that this guy is coming up with. So this is the first shipment where we talked about at the beginning of the podcast, the Ideal X. And so they fly uh it leaves in new jersey mclean and some of his people he works with fly to houston to wait for it and this is the result they were all waiting for the ship to arrive and as she came up the channel everyone else came to look no remember this is

never like now it's common like i kind of live close to a port, and I see, you know, these ships come in all day, every day. It's amazing to actually see up close. There's actually a park by my house that runs by a shipping channel to the port. And you can get, you know, you're maybe 20 feet, 30 feet away from these ships as they come in, and it's so eerie because of how big they are, stacked hundreds of these containers on them. And yet they're so silent.

It's fascinating. All right. So it says everybody came over to look. They were amazed to see a tanker with all these boxes on deck. We had seen thousands of tankers, but never one like this. So everybody looked at this monstrosity, and they couldn't believe their eyes. Remember, this is only 50. They have, like, what, 58, something like that on there.

For McLean though, the real triumph came only when the costs were tallied. Loading loose cargo on a medium-sized cargo ship cost $5.83 per ton. McLean's experts pegged the cost of loading the Ideal at $0.15 per ton. With numbers like that, the containers seem to have a future. So from almost $6 a ton to $0.15 a ton. And now this is, I just want to, I think it's probably somewhat, like you can kind of pick it up in the context so far of what I've pulled out of this book, but this is the explicit, like this is mclean's fundamental insights said there's a real problem

he's solving right going back to why we're studying him to begin with like this is it's it seems obvious but it's not when you actually look and examine like how different products or services that you consume are created like they have an idea of the problem but they're not completely focused on it like he was. The high cost of freight handling was widely recognized as a critical problem in the 1950s, and containers were much discussed as a potential solution. Malcolm McLean was not writing on a blank slate,

yet the historian's debate about precedence misses the transformational nature of McLean's accomplishment. While many companies had tried putting freight in containers, those early containers did not fundamentally alter the economics of shipping and had no wider consequences. Malcolm McLean's fundamental insight, commonplace today but quite radical in the 1950s, was that the shipping industry's business was moving cargo, not sailing ships. That insight led him to a concept of containerization quite different from anything that had come before. McLean understood that reducing the cost of shipping

goods required not just a metal box, but an entire new way of handling freight. Every part of the system ports ships cranes storage facilities trucks trains and the operations of the shippers themselves would have to change in that understanding he was years ahead of almost anyone else in the transportation industry. So the note I left myself on this next section is sometimes it's better not to overanalyze because you'll be able to talk yourself out of it. So it says, of course, there was no model of a pure container ship. He has to make this.

The metal cells did not exist and no one had ever stacked containers five or six high. How tightly should the containers fit into the cells? How would a stack of six containers behave when a ship rolled in heavy seas? And how could the vessels be unloaded at ports where there were no land-based cranes? So these are just some of the obstacles that other people would consider, right? But as his way, McLean did not preoccupy himself with such details. He simply told his staff to get the job done. He just figured, hey, I have an idea. I know there's going to be problems finding the solution,

but we're wasting time sitting around thinking about it. Let's just, let's move through trial and error and we'll find ways to solve all these problems, which is exactly what they did. Now this section just talks a little bit about how different, you know, he's entering a new industry. Now he's entering a new industry Now he's in the shipping industry, right? He's using that as a vehicle to get to really To transport goods And he just realizes that

This industry is ridiculous Because they've been protected by regulation The ICC is Is setting the It's actually It's the ICC On the land But then you have like the maritime is setting the, it's actually, it's ICC on that land, but then you have like the maritime, something called MARAD,

which is the maritime, it's the maritime regulatory body. I'm sure I'll come up, I'll figure, I'll read the full name, but just know there's just another governing body that's setting prices and basically just kind of protecting the incumbents so Sid McLean was not deterred pan-atlantic problems which is the the company's running at the time that eventually turns into this other company called seal and he determined were their problems he determined were rooted in the maritime industry's passive slow-moving culture domestic ship lines

operated in highly highly regulated environment that left little room for entrepreneurial spirit. American-owned lines operating internationally, such as Waterman, another company that he's going to overtake, were allowed to join international rate-making cartels. So you have the domestic rates set by the regulatory body, and then you have these cartels doing the international rates so it says they're rate making cartels there's a huge flow of US government shipments including military cargo and many lines

received government operating subsidies as well so these are the players in the industry he's in this sheltered culture led to excesses like waterman's headquarter building in mobile alabama with its revolving globe in the lobby and the lavish executive suite on the 16th floor it did not breed the sorts of creative aggressive hungry employees that suited malcolm mclean he talks about when they build, he built a new headquarters, but it's very, it's like in a, he like repurposes like a big cargo, like a hangar.

I guess, I don't know what they're called when they're next to water, but it looks like kind of an airport hangar, but the one's next to the water. So it's the kind of opposite. And again, he has to be frugal. He is frugal. And then of course we learned that he has to be frugal. He is frugal, and then, of course, we learn that he has to be frugal

because he's highly leveraged too. So the container business is up and running, right? That's what he's now all in. He's got, for the first few years in the industry, it's just McLean and then another company called Mattson. I think the breakdown would be like, let's say McLean has like 60% of the market and Matson may have 30, like that kind of thing. But they're very, very different. And this is just

McLean had a couple of your head start because of this is how Matson moved. Matson moved deliberately. Pan Atlantic under McLean's control was a scrappy upstart building a brand new business. And it risked little by by acting quickly Matson had no such haste it had a large existing business to protect and its directors were tight with the purse strings after commissioning outside studies for two years the same two years it took Malcolm McLean to move from concept to a functioning business Matson created an in-house research department in 1956 so they they're very slow. Once they get going, they do become competitors,

but they're run by completely different people. And this is another example of fixing things by focusing on the customer's real problem. The problem McLean decided was that maritime mindset. The Pan-Atlantic staff, experienced in the slow-moving ways of the maritime industry did not know how to sell to an industrial traffic manager. Okay, so that's who they, to earn their business,

you have to convince this one guy, right? The industrial traffic manager. But now they're going to get to what does an industrial traffic manager actually care about? The industrial traffic manager who cared not about ships, but about getting freight to the customer on schedule and at a low cost. McLean brought in a team of aggressive young trucking executives to turn the business around. So he starts recruiting former employees of McLean Trucking into his new business. So one of the people that he hires is a guy named Richardson.

He comes up with a very good idea on how to sell the industrial traffic managers. Richardson's secret weapon was a simple form with the pompous title, Total Transportation Cost Analysis. The form provided a side-by-side comparison of the cost of shipping a product by truck, rail, and container ship, including not just transportation rates, but also local pickup and delivery, warehousing, and insurance costs. Salesmen were instructed to add up each column to show the saving containers would bring and then multiply by the number of loads

the company shipped over the course of the year, which is also public information. So instead of, it says, the bottom line was the total annual saving, a number much more likely to be large and memorable than the traditional measure of a few dollars per ton. So that's just a good idea. It says, hey, I'm going to save you $2 a ton or 50 cents a ton or whatever the case is.

Hey, I'm going to save you a million dollars a year. Do you want to do this? Which one sounds better? Okay, so this is Malcolm's, a little bit about his management style and more on his relentless focus on costs. When refrigerated containers were needed, managers would spend two days debating on how many to buy, only to hear McLean say, I appreciate the exercise,

but I've already signed a contract for 500. Above all, he kept his eye on the money. There was an endless stream of demands for better cost control. Shaving 1.6 cents off the cost of handling 100 pounds could save $14,000 a year. One more container lift per gang hour, which is what they call the unloading from the ship to land, would save $180,000. So one more container lift per gang hour would save $180,000 on a yearly basis. Limiting long-distance telephone calls to three minutes would save $65,000 a year.

Probably more attention was paid to financial results there, meaning McLean's company, than you find in any company around today. And that's a quote from the chief financial officer of the company, and the company at this point is now, it has been renamed Sealand. Okay, so the book goes into quite a bit of detail about how the ports and all the different governing bodies and unions and all this other stuff reacted to this. I'm going to skip over most of that.

I do want to pull out this because what's happening is New Jersey embraces the container. New York doesn't. And as a result, the ports in New York City are kind of destroyed. And this reminds me of there's this quote in that book I read on Paul Allen when he was talking about that he felt Microsoft and Bill Gates had ignored Google and kept saying, oh, we'll catch up in search, we'll catch up, we'll catch up. And they basically ignored them too late. And the takeaway Paul Allen had was that history shows that you ignore emerging platforms at your peril because one of them might make you irrelevant. This is an example of that here. As containers supplanted conventional ships,

New Jersey's share of the port's general cargo reached 63%. In New York City, though, only destruction was visible. The container is digging our graves. That was the president One of the presidents of the labor unions in Manhattan In 1963 to 1964 Manhattan employers used 1.4 million days Of longshore labor

Okay, so 1.4 million days of longshore labor each year And now we're going to say 10 years later That number drops down to 127,000 in 1975, a 91% decline in longshore employment in 12 years. It's a little longer a decade then. So I think Paul Allen is describing exactly what happened here. New York kind of stuck their head in the sand like, no, no, this might be a fad. We don't have to worry about it. New York's all powerful and New Jersey embraced it.

And that was the result. Okay. And this is the inevitable result of any new technology that takes hold. The container was not the sole cause of the surprising and painful economic changes of the 1960s and 1970s, but it was an important cause. Container technology developed far more quickly and affected transportation industries far more significantly

than even its most ardent proponents had imagined. New York was only the first established shipping center whose economy would be transformed in ways that were unimaginable before the container arrived on the scene so we talked about that before when these new technologies pop off the only thing we can be certain of is that things are going to change and that one and that two we're not going to uh be able to predict how those changes will play out in the future um president john f kennedy weighs in on this And a note I left myself

Is this 1962 or present day? So it says President Kennedy addressed the issue himself in 1962 I regard it as the major domestic challenge Really of the 1960s To maintain full employment At a time when automation Is replacing them

Isn't that freaky? When I read that I was like wow I hear that constantly now at a time when automation is replacing them. Isn't that freaky? When I read that, I was like, wow, I hear that constantly now. And he's saying that back in 1962. Oh, this was very bizarre to me. This is the surprising reason container sizes were standardized. So this is the governing body I was telling you about It's called MARAD So it said, MARAD's desire

Now we're into the 60s MARAD's desire to set common standards was supported by the Navy Which had the right to commandeer subsidized ships Meaning subsidized by the US government In the event of war And worried that a merchant fleet using incompatible container systems would come would complicate logistics that's that's isn't that strange so they were on a slightly unsuccessful in um in standardizing

from like the top down but they did set that those events into motion and the reason was because in case the navy had to confiscate the the ship they wanted it standardized um so there's like a there's an entire chapter in the book dedicated to this whole debate between the us government foreign, all the different shipping and trucking companies. So Malcolm goes and a bunch of other people have to testify. Then I just want to pull out a sentence in his testimony, kind of get you to understand the kind of person he was. He says, I don't care what size containers adopted as a standard. If the marketplace can find one that moves cheaper, that is the way the marketplace will dictate it. And we want to be flexible enough to follow the

marketplace. So he's very skeptical of this idea that then they had like a committee and all these people that were trying to figure out the optimum way. And as normal bottom up beats top down, he said, no one would declare that all of the subcommittees and tack forces came up with the optimum result they just started the process yet after 1966 as truckers ship lines railroads container manufacturers and the government's reach compromises on issue after issue a fundamental challenge or excuse me fundamental change could be seen in the shipping world so you had this governing body kind of say hey we need to we need to figure this out ASAP. They were unsuccessful in doing it on their own,

but once they invited all the other parties in, they wind up working it out to the point where now you can, like there were some companies that didn't want, let's say like their competitor, you were using their competitor because there's some other vertically integrated company. So let's say you wanted to ship your stuff with one shipping company, but you wanted another company to put on their railroad.

They would use different sizes. So their competitors' containers wouldn't fit on their trucks or their railroad. So they forced you to basically use them as the whole. Does that make sense? Like they would sabotage their competitors by not having standards. Eventually that was all worked out.

Oh, so this is interesting. This is just me reflecting on, I was wondering like, this is a good section on why so much innovation comes from outsiders. The leaders of the U.S. maritime industry were by no means unanimous that the container was the future.

The steamship business was as tradition-bound as any in the country. Many of its most prominent executives were men who reveled in the romance of sea and salt air. They worked within a few blocks of one another in lower Manhattan and spent well-oiled luncheons comparing notes with their peers. I've heard this kind of like when you have small clusters of people, some people call it a bubble.

I've heard somebody say it was incestuous knowledge and that you should avoid incestuous knowledge when you're building products I like that idea so that's what's taking place here says for all their earthly bluster their business had survived thanks almost entirely to government coddling on domestic routes government policy discouraged competition among ship lines on international routes for uh on international routes rates for every commodity were fixed by conferences which is a polite term for cartels and the most important cargo military fleet freight was handled handed out among u.s flag carriers without the nuisance of competitive

bidding so it's just it's not really a market it's all the books are cooked decisions about buying building or selling ships about uh ships are about leasing terminals about sailing new routes all dependent on government directives for men who had prospered in this environment an artificial environment malcolm mclean's wholly unromantic interest in moving freight in boxes had little appeal it was all well and good for visionaries to proclaim that containers were a must that That's Malcolm, right? But the collective wisdom, and that wisdom should be put in quotation marks, by the way, of the shipping industry held that they would never carry more than a tenth of the nation's foreign trade.

So what they're telling you is like, no, no, we know what's going on. This is like a little, you know, you can have your tiny, small niche business, whatever, but it's never going to get to more than 10% of the market. That's obviously not. That just didn't happen. The opposite was true. So that's, again, why so much innovation comes from outsiders. We have this incestuous knowledge, this undying need to conform to people around us,

to engage in groupthink that not many good products come out of. You have to think differently. Let's see. So, okay, I already talked about this part, so I'm going to skip over it. But this is what needed to be solved for massive growth. So it said they had the container technology settled, but it says not until container technology affected land-based transportation costs would the container revolution take hold and that that had to come from standardization because like i just said they were they were trying to sabotage each other by using proprietary even though they were operating on railroads and with trucks that could have been

standardized they were they were uh trying to say oh no this size is proprietary you can't use it and trying to make them incompatible as like a strategic advantage, which seems to be a really bad idea. Another reminder that big things start small. Container shipping looked to be a viable enough business, producing $94 million of revenue for Sealand in 1964, but it was a niche business. The way most manufacturers, wholesalers, and retailers

moved their goods had hardly changed. So let's see, the first ship takes off in 1956. Now we're eight years later. He's making 94 million in revenue a year, but it's still just echoing back to what they said about Thomas Edison. Like 20 years later, they've only penetrated about 3% of the market. We're seeing a similar occurrence here. It says, no one was more aware that the world was about to change than Malcolm McLean. He was already fully committed to the container. Oh, so this is interesting.

I discovered, so I've talked about this idea many, many times. I keep talking about it because I think it's important. Books are the original hyperlinks. They lead us from one idea to another. This is another example of that. I just ordered this guy's really expensive old biography. I've never heard of him before this book. But we had some guy trying to compete with Malcolm, but this guy is much older.

And he just decides he's going to invest in Malcolm instead when he realizes he's not going to compete. But let me just tell you a little bit about this guy. Daniel K. Ludwig, a man who had much in common with Malcolm McLean. Ludwig was born in 1897, had entered the shipping business at age 19 by transporting molasses around the Great Lakes. Like McLean, he ran his business with a legendary focus on costs. According to one famous story, he bought a tanker called the Anahok and decided to keep the name

because it would have cost $50 to paint it out. By the 1950s, his National Bolt Carrier, that's the name of it would have cost $50 to paint it out. By the 1950s, his National Boat Carrier, that's the name of his company, was the largest American-owned ship line, and Ludwig was one of the world's wealthiest men. So remember a few pages back, they were talking about, oh, like, you know, this little container business is small, it's never going to capture more than 10% of the market. This is an example of how fast things change A few years later And this is the result in the industry

Companies that had watched containerization from a distance for years Curious but non-committal Now felt that they had to put up real money Or be swept away in the flood And I just find that This thing First the rejection of the the new thing and then the the drastic move to realize oh wow we need to jump on this is like

part of human nature i think it's present with almost any new technology there's examples of the internet uh paul allen was talking about search being one uh crypto you start to see that as well. So again, people are like, oh, they kept an eye on it. They were curious, but they weren't committing. And now we're in a rush to put up serious money. And these companies started investing the equivalent of like $60 billion, something like $60 billion in today's money in this.

And it's actually going to cause a huge bubble. And that bubble bursts, of course. Okay, so this is just another straightforward understanding of what McLean's vision on how things should be based on the customer's actual problem. Malcolm McLean had a different vision. For him, railroads, trucks, and ships were in the same business, moving freight. So he kind of just focuses on that. And this is his integrated solution that he proposed. He wasn't able to actually achieve the railroad part of this. Let me just read this

to you. So his idea was, McLean Industries offered an audacious proposal to build railroad yards in Chicago and St. Louis at its own expense. Freight forwarders owned by McLean Industries would collect freight from shippers, consolidate it into McLean-owned containers, and load the containers aboard McLean-owned railcars.

He wants to control the entire, give them one unified solution. And this is why. So it would also contain, not only would he own the shippers, the shipping, I can't speak. He'd own the ships. He'd own the railroads. He'd own the rail, or the railway, what are they called, rail cars? Trains, David, come on. He'd own the railroad yards.

He'd own the containers, and he'd own the trucks. So then the Pennsylvania Railroad would pull McLean's all-container train straight to a rail yard that he would own, which would then pull it to a dock, which he would build, and arriving to meet a Europe-bound ship, which he would own, which would then pull it to a dock, which he would build, and arriving to meet a Europe-bound ship, which he would own, which would in turn connect with trucks and trains on a European dock. And this is the end result. That was really confusing. I'm sorry if

I'm supposed to be simplifying things for you, and I'm confusing myself and probably you. Okay, so this is the end result, the most important part. For the first time, a shipper 1,000 miles from sea would be able to buy not just international transportation, but tightly scheduled international transportation. A seller could tell its customers when the goods were to arrive with a reasonable likelihood that the schedule would be met. So what we're talking about there is like before this, the projection, like, yeah, it's going to get there 40 40 days maybe 90 days later they don't know because like you're there was no one company holding uh taking care of that that freight from beginning to end they would have to enter interact and interchange with all these different companies and then sometimes you'd have like a

strike or there'd be like a fire or there'd be all kinds of different things that are outside of the control and you'd have to wait for another company to fix. So this is Malcolm trying to solidify like the entire – basically the entire solution the customer needs. The problem was you had like people went crazy. They started lobbying against it. Like they had the ICC turn them down all these other different people basically say you can't you did one company can't own everything I guess they were I mean they do have some somewhat of an argument that you know

kind of monopolizing it but in any case so what had this is what happens if you wait too long but just a reminder it's only too late if you copy. But as container shipping made the transition from the emerging technology of the early 1960s to the booming business of the early 1970s, remember now we're close to 15 years after Malcolm McLean started, the opportunity for ports to establish themselves as major maritime centers was diminishing rapidly, meaning the ports that had the advantage were the ones that jumped on all the technology and environment that needed for the container ships, including how deep the water was, the cranes needed, etc., etc. The maintenance of a major port in every major coastal city, which is what was happening before when it was all manual labor, is no longer justified, a government report declared in the early 1970s.

Such long-standing ports as Boston and San Francisco, Gulfport, Mississippi, and Richmond, California would have to find other roles in the container age. Okay, so now we're going to get to the point. This is when I have a sad face. So there's a boom and bust, and then it's interesting. I don't know the quote, but it's like what your strengths are

could also lead to your weaknesses. Somebody said it a lot more eloquently than that. We're going to see that his hard-charging nature, the way he was aggressive, the way he kind of did things by intuition benefited him all the way up until the point it did not. And that's what I think makes entrepreneurship so difficult and why I recommend just exposing yourself to the thought processes of the people that have built companies because there's not like a way no one can teach entrepreneurship but you can take ideas from other people's experiences keep them in your tool belt and then use them when

you feel the time is right so this is him selling his company and then what happens when inevitably he comes to regret that decision on January 10 1969, the maritime world was shaken by an unexpected piece of news. Malcolm McLean, the father of container shipping, was selling out. Once again, his timing was impeccable. Three years earlier, at the start of 1966, container shipping had been an infant industry. Almost none of the international trade was containerized. Most of the world's manufactured goods and foodstuffs moved as they had for 100 years, painstakingly loaded piece by piece into the holds of break-bulk ships. A leading maritime executive could still hold the opinion voiced in 1966, and this is an

actual quote from a leading maritime executive, I do not think the time for all container ships is now nor in the next decade. Fast forward three years and the world had changed the equivalent of 3400 20 foot container of commercial imports or exports past the u.s ports each week okay so let me just there's 3400 of of these containers going through the ports each week three years previously previously, that number was zero. Revenues at McLean's Sealand Service, his company, whose 31 ships made it far and away the largest container operator in the world,

had mushroomed from $102 million in 1965 to $227 million in 1968. But remember, we talked about this guy's pensions for being highly leveraged, something that Warren Buffett had just warned us against. Sealand's debts at the end of 1968 reached $101 million. The financial demands would only grow for the maritime equivalent of an arms race was underway.

This is the bubble I was referencing earlier. Now everybody's jumping it in, so costs for everything because they're being poured into the industry are skyrocketing so now he actually he's like i gotta get out of here like i have too much debt the company's large it's not profitable enough let me go find somebody with deeper pockets no conglomerate chieftain was more was a more average reader of financial reports than malcolm mclean he knew what the cost of competition was going to be, and he knew that Sealand, its balance sheet stretched almost to the limit, had no hope of borrowing money. McLean turned toward an entirely unexpected source of funds, R.J. Reynolds. This is the cigarette company. Its cigarette business threw off cash by the bucketful, and its managers were

using that cash to turn the company into a conglomerate. So this time there's a lot of regulation coming down for cigarette companies, including their inability to advertise, so they're trying to diversify into other businesses. Reynolds offered $530 million for McLean's company. Remember that Ludwig guy that I told you that was going to compete with McLean and didn't and said invested a few years earlier? He says the $8.5 million that Ludwig had invested in Sealand in 1965

was now worth $50 million. So he wound up doing really, really well. Okay, so he sells the company. He stays on with R.J. Reynolds. And he's still running the company, but they own it. And, you know, that's not going to work out for somebody like him. But this is an important part because somebody said, like, the hard part of entrepreneurship is not only, like, it's when you're hearing, like, advice. It's, like, you have to figure out who to listen to and when.

So, like, some advice is good, but it's not always good at the right time. Like it's dynamic, right? It changes. Well, this is a crazy thing because here you're seeing Malcolm learn something. And then in a few minutes, you're going to realize that he, that, that learning was accurate for the time that he learned it, but it was no longer accurate for the time he was applying that knowledge, if that makes sense. It says Malcolm McLean acting per usual on intuition rather than caution

analysis had overridden objections from sealand's board to move ahead with the sl7 in 1968 so remember sl7 um it's their their ships the costliest merchant ships ever built were also the thirstiest each burning 500 tons of fuel per day. At full speed, they consumed three times as much fuel per container as a competitor's vessels. When the price of bunker fuel jumped from $22 per ton to $70 within a matter of months, the SL-7s became a crushing burden. So he was optimizing for speed. What happens when you go faster? Well, it consumes a lot more fuel, and if that fuel cost goes up, you're screwed, right?

So a settling of scores was inevitable. McLean, unhappy with Reynolds' bureaucratic ways, began selling his stock in 1975 and left the board in 1977. A few years later, Reynolds got out of this business. They're like, I don't want any part to do with this business. And their reasoning was, investors who might be interested in owning RJR stock were not the type who ordinarily would be interested

in a capital-intensive, cyclical transportation company. That's a good way to describe the entire industry they're in, which, again, is commoditized it's very hard to make money in those those kind of markets right um so it says mclean was frustrated by the tobacco giants bureaucracy and bewildered by its repeated changes of strategy most of all though he was restless and this is him talking i am a builder and they are runners. You cannot put a builder in with a bunch of runners. You just throw them off kilter.

Meaning the board, they can run companies, but they don't know how to build companies. Okay, so what happens here though, right? So this guy is now, he's not a spring chicken anymore. He's rather old. And for somebody that started working at the beginning of the Depression, now we're in 1977. So he sells his company, makes a ton of money, obviously, and regrets it, which we hear a lot. He's bored.

He's looking for something to do And he wants to try again So I think like this is An interesting What's a dichotomy of entrepreneurship Where you have a lot of people that like The exit for them is What they think

Is what they want and then when it happens They regret it they're like damn it now I'm sitting here If you're an entrepreneur that means you're a builder you just have you have to do something the idea that you can just make a ton of money and be content sitting down we know for fact that's not true because we have a lit like an entire roster of history to see this happens over and over again and undoubtedly what these people do is they try to start another company but usually they had they already had their best idea they should have stuck with their best idea because the best things in life come from compounding right for sticking with that idea for a long period of time and so what does he do he

sells his company right and then he starts another one so he buys to the surprise of almost everyone he arranged to buy united states lines and this is going to end in tragedy. So this is, we got to the part of the book where we stopped learning what to do from Malcolm. We learned not to do. And I just think this is a very common set of emotions for entrepreneurs, builders. And I think the solution is just keep your company. I mean, there's some cases you have to sell

or whatever the case is. Maybe you accidentally started a company, but if you're like a builder at heart, you're not going to be happy just sitting on your ass with a bunch of money in the bank. That's just not going to happen. Okay, so, and here's his downfall. Remember I said frugality, yes. Leverage, no. So he has this idea.

He's going to say, hey, I'm going to do him and this other guy named – he's competing with this other guy named, let's see, Chang Young Fane who owned this company called Evergreen. And they decide – they both decide that they're going to do – instead of like what was common, like you'd have boats in the Atlantic or boats in the Pacific, he's like, my boats are going to, both of them said they're just going to do around the world trips. That's the new thing. And so it says, McLean's strategy was different from Chang's. His ships would circle the globe only in an eastbound direction, and they would do so slowly.

Now, here's what I mean about misapplying the lesson, right? Especially when you think some of these things are out of your control. The price of oil is always outside of your control. Don't lever yourself up and then be dependent on something that's outside your control. That's not smart. It says McLean had learned from his mistakes with the speedy SL7s, whose fuel bills ate up their profits. So he's like, okay, I'm not going to make that mistake again, right?

The new ships were built for an era of expensive oil. So he's like, I'm going to build ships that go slower, and so if oil costs are expensive, I'll be okay. They would conserve fuel by sailing at only 18 knots, taking longer than Evergreen's vessels to sail around the world. McLean dubbed his new vessels econ ships because their fuel economy, along with the scale economies created by their enormous size, would produce the lowest cost per container of any ship anywhere.

So they're bigger and they move slower and therefore they can ship things for lower than their competitors. Here's the problem. The ships alone cost $570 million. McLean had no difficulty raising the money. The world was eager to invest with the founder of container shipping as he turned United States Lines, which is his new business, into a global bus service, and that's how he described it.

It's a global bus service. Now here's the problem oh this makes me sad disaster was not long in coming instead of rising from 28 to 50 a barrel as mclean had expected oil prices collapsed to 14 this is in 1985 he's in his 70s at the time. Maybe 60s. United States lines slow fuel conserving ships were suddenly the wrong vessel for the market. And the oil sheikdoms of the Middle East could no longer afford the limitless quantities of imports that were supposed to keep the econ ships filled with cargo. After posting a $62 million profit in 1984, McLean Industries reported a $67 million loss in 1985.

So think about that. That's what, 129,000 swing or whatever that 125, whatever the number is. That's a hell of a, like, going from making $62 million one year and then losing $67 million next year. It gets worse. That was in 84 and 85. Now what happens in 1986?

In the first nine months of 1986, McLean Industries lost $237 million. Staggering under $1.2 billion of debt, McLean Industries suspended all service and filed for bankruptcy. Malcolm never got over the U.S. line's bankruptcy. He went into seclusion, shunning journalists and avoiding public appearances. His failure followed him, the knowledge that he had hurt thousands of people, a constant source of shame. So that's where I'm going to leave the story of Malcolm. If you want to learn more,

I'd recommend reading the book, especially if you're into the history of how technology changes things, because there's so much more in the book that I just barely scraped the surface. And like I said, this guy's done an insane amount of research and then distilled all that research down to us in a book that's over 400 pages. It's quite remarkable. Now I need to ask for your support. If you get value from my work and you want to support this podcast, I have one thing to ask of you. Please subscribe to Founders Notes. Founders Notes is my subscription service where I let you know what other founders are thinking. I listen to podcasts with entrepreneurs, talks, things like that. I write

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