The a16z Show - On container ships, supply chains, and the physical world

Episode Date: November 2, 2021

"Beyond the Meme: Ever Given, Supply Chains, and the Physical World" -- by Ryan Petersen (June 2021). Bio + essay details/ originally appeared at: https://future.a16z.com/beyond-the-meme-ever-given-supply-chains-and-the-physical-world/More read-alouds at: https://a16z.com/tag/read-alouds/ Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hi everyone, welcome to the A6 and Z podcast. I'm Sonal, and as part of our occasional series where we or the authors read out loud written articles and audio form, which are released here in this feed every so often. You can actually find the first one way back in episode number 544 where Mark Andreessen read out loud it's time to build. Today, I'm reading out loud a piece on containerships, supply chains, and much more, as it's very top of mind right now in the news. It's by Ryan Peterson, founder and CEO of Flexport. And first, appeared on Future in June this year. You can find the full original with subheads and graphics, which I don't actually include here for obvious reasons, at future.com slash beyond ever given. You can also check out another related episode of the A6 and Z podcast from our archives, number 311, on the golden era of productivity, retail, and supply chains with Mark Levinson, author of the popular book The Box, now available with transcript at future.com. Thank you for listening and reading. I'll begin the read out loud now. Beyond the meme, Evergiven, Supply Chains and the Physical World by Ryan Peterson.

The world watched when the container ship Evergiven blocked the Suez Canal this past March. Some people made websites, many people made memes, I made a children's book. It seemed almost comical. A patch of bad weather drove the 1,312-foot long, 200,000-10-heavy container ship, a skew, wedging her into the narrow canal at an angle, she was stuck. It may have delighted the internet, but it also cost the world time and money, diverting up to 450 other vessels, about 30% of the world's shipping container traffic, and costing up to 0.4% in trade growth worldwide. That was about $10 billion U.S. dollars in just one week. In response, the Suez Canal Authority is widening the waterway,

by 131 feet. Only it's going to take two years to do it, and it still won't allow a massive ship like ever given to spin sideways in the canal. This is not a one-off disaster or an outlier case of outdated infrastructure in a country on the other side of the world. It's an omen of a global problem. For all that we may talk about software eating the world, it's clear and became a lot clearer during the shortages of the early pandemic that the physical world still matters. From a logistic standpoint, the mobility of goods and the exchange between trade partners is what enables innovation. Tech pundits may talk about going from atoms to bits or from bits to atoms, but it's an interplay between the two that makes the world go round. And amid a frenzy of global trade demand,

the world's shipping infrastructure is breaking. A standard for innovation. Before the containerization of shipping, cargo was loaded and unloaded by Longshoremen. The process was practically random by today's standards. B bulky, differently sized cargo shipments loaded in whatever order seemed best to the workers on the ground at that moment. In 1956, the year of the first container ship sailing, hand-loading a ship cost $5.86 per ton. That figure dropped dramatically to 16 cents per ton with containers, and it sped up the process considerably. The idea for containerization came from a trucker, not a shipper.

Malcolm McLean started out hauling empty tobacco barrels with his family in North Carolina, 1935. At that time, entire trucks would drive onto ships, wasting both a ton of potential cargo space, plus a chassis that could be on the road moving goods. McLean developed plans to use the so-called trailerships for travel from North Carolina to New York, but U.S. regulations didn't allow one person to own both a trucking and a shipping company at the same time. So McLean did what any innovation-minded entrepreneur would do. He dumped the trucking company, took out a $22 million loan, and in January 1956, bought two World War II T2 tankers.

And so, on April 26th that year, the SS Ideal X was loaded and sailed from the port of Newark, New Jersey for the port of Houston carrying 58 containers. Each was 35 feet long, and they were called trailer vans. As expected, the International Longshore Men's Association was not pleased. When asked for an opinion, a top official replied, I'd like to sink the son of a bitch. McLean later opened a new 101-acre port facility in Newark, and a decade after the milestone of the first container shipping, service commenced between New York and Rotterdam, Netherlands, Bremen, Germany, and Grangemouth, Scotland. Through the late 1960s and early 1970s, these container networks grew, entering Hong Kong, the Philippines, Singapore, South Vietnam, Taiwan, and Thailand. By the end of the 1960s, McLean's company had 36 ships with more than 27,000 containers with access to over 30 port cities.

Governments and regulatory agencies took notice and soon also bolstered McLean's efforts. This rapid growth was a result of multiple factors, including post-World War II prosperity and a burgeoning interest in globalization. Container shipping provided the perfect platform to drive global connectivity, not least because they were intermodal, traveling across the very different modes of land, sea, and air all in one form. They connected all the dots through transportation, infrastructure, supply chains, and logistics, making the world smaller and the world economy bigger. According to a recent report cited by the St. Louis Fed, between 1970, by which time this network was

established, and 2018, total world exports increase more than 65 times from $384 billion to $25 trillion. Even after adjusting for inflation, total exports have still grown 10 times. Perhaps more importantly, since GDP is traditionally the measure of productivity, global GDP went from 14% to more than 30% through internationally traded goods and services. For the U.S. alone, this ratio went from 5.6% to 12.2%. The Fed notes that, quote, the key factor spurring this rapid globalization was the pervasive adoption of containers and corresponding infrastructure, end quote. The shipping container is truly the unsung hero of logistics. Containers hold cargo in standardized sizes that fit on ships, rail, and trucks.

When there's any discussion of supply chains or port bottlenecks along vital trade routes, the movement of goods, we're almost always talking about container movement. The other key feature of containers besides and building on their intermodal nature, however, was standardization. The International Maritime Organization, IMO, published a set of shipping container standards in the 1970s. Standard shipping containers are 8 feet wide by 8 feet 6 inches high, while high cube units measure 9 feet 6 inches high. About 90% of the world's containers are 20 feet or 40 feet long. These standards were created by the International Organization for Standardization, the independent non-governmental body responsible for establishing standards

in information technology, graphics, photography, mechanical engineering, transport, non-metallic materials, help medicine and laboratory equipment. Four years ago, they released a set of standards designed to include considerations for ships over 18,000 TEU, a direct successor of the original framework. During the late mid-century era, though, the common container was 20 feet long by 8 feet wide and 8 feet 6 inches high, which is known as the 20-foot equivalent unit, or TEU, the standardized measurement unit of global trade today. How were such standards enforced? Initially, they were held up by incentive. Only ships that were built to carry standard sizes were eligible for federal

subsidies. Later, the ISO standardized container corner fittings too, which made it possible to standardize the cranes and other equipment required from moving containers. A universal language for global trade. Standardization is a magical thing, cutting across both atoms and bits. Take the internet as a prime example. The HTTP standard catapulted the internet to its current ubiquity by creating a uniform way to exchange information. Before HTTP, computers could only exchange information if they were on the same network.

Different network types couldn't connect to each other. This disconnect limited the size and scale of online communities, Now, the world relies on HTTP as a means for devices to exchange information to or from anywhere in the world. Information packets move along these networks, and, as the economist once described, just like a packet of data, quote, a container is just a box with an address, end quote. Our computers, laptops, tablets, phones, and more can all connect quickly to the information we seek, thanks to standardization. And while today's global trade network is kind of like an internet,

of physical goods, it's missing a standard like HTTP. The same way data passes between devices via the internet, goods pass between ocean ports, airports, warehouses, and other entities to reach their final destination. Without a logistics standard to act as a request response protocol, all the players, suppliers, drayage, ports, warehouses, buyers have to stitch their networks together manually. Information gets lost, layers of redundancy, designed as backups given low visibility, slow the exchange, connections end up being very brittle. Let's say there's a shipment schedule to arrive in Long Beach on Tuesday, but which terminal exactly and what peer number, what time is pickup, how long before late charges are incurred? Finding these answers is labor-intensive and

imprecise. Logistics managers end up consulting different sources on websites via email or in-person. The dirty secret of the industry is that no one really knows where their stuff is. But if global trade were like the network of information as it is on the internet, we could simply type or speak into a search bar to ask and answer those questions precisely. This is not about the desired features of such a system, but rather about the need for standardization and the need for a universal language for global trade. Once this exists, the physical world, like software, becomes searchable, program accessible, connecting a patchwork of country-specific regulations and more. The ever-given spectacle revealed the hard limits of the current system and the chaos hidden

underneath all our global trade systems. Standardization could address this chaos. Strengthen infrastructure, strengthen the world. It's pretty much impossible to upgrade all at once the physical infrastructure that drives the movement of containers and therefore trade and innovation. If it takes a time, it takes a It takes two years to make the Suez Canal 131 feet wider. Imagine how long it would take to upgrade the entire world's logistics infrastructure. There are thousands of ports, harbors, and wharfs, not to mention, over a thousand trans-oceanic mega vessels.

Containers travel on ships and planes, clear customs in the destination country, and get distributed to warehouses via regional rail and truck networks. In some instances, it can take up to 20 companies to move a single shipment. each with their own systems, processes, and documentation. It's also a highly fragmented industry. While thousands of independent freight forwarders make up a $2 trillion business, the number one freight forwarder in the world has less than 3% market share. That's not a bad thing, but the remaining thousands of mostly regional distributors

who know the specifics of their local geography better than any big company lack global visibility. Information is accessibility, democratizing, the playing field and reducing barriers to entry, not to mention reducing barriers to trade. A 1% increase in trade overall, according to economists, is associated with a 0.149% decline in poverty. Similarly, a 1% decline in the average tariff rate is associated with the 0.4% decline in poverty. To maintain or improve upon that progress, we need solutions that shore up physical infrastructure so it can handle demand.

Because various cascading supply chain woes are only the beginning. At the onset of the pandemic, global trade skidded to a near halt and then heaved back to life in a matter of weeks. And while the logistical impacts are ongoing, the economic impacts have been nothing short of devastating. The world experienced demand shock, spending plummeted, and then demand for essential spiked, marked by hysteria for toilet paper hand sanitizer and face coverings.

Since then, rates for ocean shipping have smashed records. It's not just China to the U.S. West Coast. Transatlantic rates are up 100% since 2019. It's a global traffic jam. Before the pandemic, transit times from mainland China to the west coast took around 33 days. Now it's more like 60. There are shortages of vessel birds, cranes, truck chassis, truck drive, and of course containers, especially in Asia where they're needed the most. So why not address all

this physically with bigger ships? Can't someone just build a bigger ship to hold more containers? Well, yes, they can and have been. More than 400 container ships totaling 3.63 million TEUs have been ordered new since late 2020. Bigger ships also reduce emissions per container. Even the ever-given at 1,312 feet and 20,124 TEU was one of the largest ships in the world when she first sailed in 2018. Now, only three years later, she's one of seven holding 13th place for highest capacity. In 1869, when the Suez Canal opened, the HMS Newport was the first ship to sail the entire canal. She was 145 feet long, a good size in her day. A few decades later, under a new name, she explored the Arctic for northern sea routes,

but she is tiny by today's standards. As they get bigger, these ships reach their physical limits when it comes to seaworthiness. During the two-month period between November 2020 and January 2021, almost double the annual average number of containers went overboard. Some of this was due to the winter season, which is when westerly winds across the Pacific Ocean blow strongest. But as we scale ships to hold more containers, we also need to scale rail and trucking accordingly. That isn't happening.

It's just one more example of how demand for physical goods is dramatically outpacing infrastructure. Yet here we are talking about expanding the Suez Canal by 131 feet. For consumers, for everyday people, the limits of infrastructure, coupled with rising demand, mean rising costs, creating a vicious cycle of scarcity. Standardization and more transparency will go a long way here, taking us from the pre-internet era to a post-internet era for shipping. That's the physical future we can build with software.