Marc Levinson

Category: Uncategorized

  • The Cost of Slow

    A few days ago, I chatted with a shipping executive who made a bold prediction. The future of ocean shipping, he told me, is slow: the maritime industry faces great pressure to reduce its greenhouse gas emissions, he said, and steaming at lower speeds is the only way to do it. If my friend is right, he has identified an additional drag that will depress the growth of goods trade in the years ahead.

    After ocean carriers first tried out “slow steaming” around 2007, container ships required three or four additional days to cross the Pacific and as much as an extra week to steam between Asia and Northern Europe — long before pandemic-induced backups at major ports. Steaming slower still will make it even less attractive to send goods pegged to fashions and fads long distances by water. Manufacturers and retailers may choose instead to relocate time-sensitive parts of their supply chains closer to their customers, even if that means higher factory production costs.

    Slower steaming will influence globalization in less visible ways as well. As container ships travel more slowly, each ship will complete fewer round trips each year. That will effectively reduce the shipping industry’s capacity. At the same time, each voyage will entail more days of crew wages and mortgage payments than a similar trip today. This combination of factors means container freight rates are likely to remain higher than they might otherwise be. Containers themselves will have to be leased for a longer period in order to complete a shipment across the oceans, adding to the freight bill.

    And then there is the matter of inventory costs. In recent years, with interest rates near zero, the shippers who own the goods aboard those vessels queuing for a berth at major ports haven’t faced much of a financial penalty due to longer transit times. But interest rates aren’t zero any more, and the cost of owning goods during longer trips across the seas is no longer negligible.

    As I wrote in Outside the Box, trade in manufactured goods is likely to grow more slowly than the world economy in the years ahead. While container shipping rates seem to be descending from their pandemic peaks, slower steaming means that the days when transport costs were an afterthought may not return soon. Companies will have to take this into account as they decide what to make where.

  • American History, Revised

    It’s natural, I suppose, that we place ourselves in the center of history. Generations of American school kids have learned history as if Isabella and Ferdinand, Elizabeth I and George III, the French traders who founded Detroit and the Dutch who colonized New York all were obsessed with the land that would become the United States. The story we are taught revolves around us.

    The reality, though, was rather different. Until well into the nineteenth century, North America lay on the fringe of the world economy and was a minor concern of the various European powers that claimed parts of it. The real action was elsewhere.

    Howard French’s wonderful book Born in Blackness, which I’ve just finished reading, challenges our understanding by placing Africa at the center of modern history. It was African gold, he shows, that drew European powers, starting with Portugal in the fifteenth century, into colonial adventures — at a time when several African kingdoms were strong enough to dictate terms to the Europeans. That gold, moreover, provided European royals the wherewithal to finance exploration and settlement, including sugar plantation in places like Brazil, Barbados, and Saint Domingue (now Haiti) that would be populated by enslaved Africans. These sugar colonies became the major source of wealth for Europe in the seventeenth and eighteenth centuries, French asserts, while the main role of North America was to provide the foodstuffs that kept the slaves in the sugar colonies alive. It was only the boom in cotton in the second quarter of the nineteenth century, grown by slaves whose forebears came from Africa, that made the United States essential to Europe.

    In contemplating French’s argument, I got to thinking about another terrific book, William Dalrymple’s The Anarchy. The content of Dalrymple’s book has nothing to do with Africa; it’s mainly about how the British East India Company ravaged India. The commonality is that eighteenth-century India, like Africa in earlier times, loomed far larger in European minds than North America. One reason those disgruntled colonists in Massachusetts and Pennsylvania failed to get George III to strike a deal in the early 1770s may have been that the king’s attention was on India, which he correctly thought mattered more to Britain’s prosperity.

    Both of these well-written books shed new light on how the world economy developed. They’re well worth reading.

  • Is Flight from Big Cities Propping Up Trade?

    This week brought a flurry of articles about people fleeing many big cities for places that are warmer or cheaper. Collectively, they don’t make much sense — but they may explain some of the changes in consumption patterns that have overwhelmed manufacturers’ and retailers’ value chains.

    This all started with a Census Bureau press release reporting that a number of the nation’s most populous counties lost population between April 2020 and April 2021. The New York Times followed with an article asserting that movement out of places like New York and Los Angeles led to the slowest year of population growth in U.S. history. Many newspapers and TV stations piled on, publishing similar reports about their own communities.

    On its face, the assertion that movement from some places to other places within the country should have any effect whatsoever on the national population growth rate is illogical. If there is any causality at all here, it probably runs in the reverse direction, with slow national population growth contributing to population declines in some areas.

    More perplexing is that the assertions of population decline contradict other evidence. The average home selling price in Los Angeles County rose 19% last year, according to S&P — at the same time as the county’s population fell 2%, according to Census. Washington, DC, supposedly experienced the largest percentage population decline in the country in 2021, 2.9% — but at the same time, the median selling price of homes in the District rose 10% and average rents broke records. Also, according to Census data, the percentage of housing units that are vacant across the country is the lowest in at least 23 years. Those people who are supposedly moving out of big cities aren’t leaving empty homes behind. Somebody is paying high prices for them.

    What’s going on here? What we may be seeing is that a lot of college students were living in their parents’ homes rather than in dorms as of April 2021; in that case, we can expect the numbers for 2022 to show a population boom in the same places that endured a bust in 2021. Another possibility is that an overheated economy has brought rapid growth in the number of families who own more than one home. Credible data on this point are scarce, but more people furnishing second homes could explain some of the outsized growth in spending on durable goods that has propped up merchandise trade and kept container ships full over the past two years.

    Which raises some interesting questions. With energy costs, interest rates, and service workers’ wages on the rise, owning a second home is likely to become more burdensome for family budgets. If households have to direct more of their income to maintaining a second house, will they have less available for other sorts of consumption? If mortgage rates move even higher, will second homes lose value, leading the families that own them to be more cautious about their spending? If so, the greater popularity of second homes, which has boosted trade since the start of the pandemic, may turn into a drag on trade in the months ahead.

  • Disconnect

    If you believe what you read, 2022 will be a banner year for the freight industry. Wall Street analysts are bullish on container shipping. Logistics experts foresee strong demand for goods leading to continued supply-chain chaos. Ship lines, enjoying profits that were unimaginable only a year or two ago, are ordering new vessels at a record pace. Trucking companies are poaching one another’s drivers. Ports are rushing to deepen their channels and make space for bigger terminals, and new distribution centers seem to be under construction everywhere.

    I don’t understand, though, how anyone could have a view about the prospects for trade and supply chains without having a view about the world economy. There’s a disconnect between the optimism about trade and shipping and the current economic reality.

    Two years ago, as I like to remind people, ports, ship lines, land transporters, and even distribution centers on several continents were mired in excess capacity. The COVID-19 pandemic changed that. Governments, fearful of a deep depression, massively stimulated their economies by handing out money to businesses and families. Central banks pushed short-term interest rates close to zero and loaded up on bonds to push long-term interest rates down as well; millions of homeowners took advantage of the opportunity to reduce their monthly payments by refinancing their mortgages, freeing up even more money for other purposes. Consumers in the wealthy countries, their incomes largely intact but their favorite restaurants and vacation destinations out of reach, abruptly shifted their spending to goods, especially durable goods.

    But take a look now.

    -Central banks, led by the Federal Reserve, are starting to tighten monetary policy by scaling back their bond portfolios and pushing interest rates up; even the Bank of Japan, which has kept its short-term interest rate at or below zero since 2011, is preparing to change course. As rates tick higher, the wave of mortgage refinancing that bolstered so many U.S. households’ buying power has crested, while the air is coming out of the property bubble that has supported the Chinese economy over the past several years.

    -Governments are becoming more cautious about pumping money into their economies as inflation-fighting becomes a priority. Inflation is already eroding buying power, and less generous payments to workers who lose their jobs will further crimp consumer spending.

    -Many of the families that binged on exercise bikes and lounge chairs and extra-wide-screen televisions over the past year are done with durables. They’re ready to return to their normal, services-heavy spending habits, and the impending drop in COVID cases will encourage them to do so.

    All of these factors are likely to retard spending on the sorts of products that fill container ships and freight trains and over-the-road trucks. All along the supply chain, the return to normalcy may come as an unpleasant surprise.

  • Growing Slowly, Growing Old

    Recent census reports have confirmed that the populations of the world’s two largest economies are growing more slowly than previously believed. This reinforces my belief that once the pandemic-driven boom is over, merchandise trade will be anything but robust.

    On December 21, the U.S. Census Bureau announced that the U.S. population was 331.9 million in April 2021, a scant increase of 0.13 percent from April 2020. This was the lowest annual population growth rate since the country was founded, and it followed news that the 7.4 percent population increase between the 2010 and 2020 censuses was the slowest decennial growth rate since the Great Depression. Across the Pacific, China’s National Bureau of Statistics released the first results of China’s 2020 population census, reporting an average annual growth rate of 0.53 percent since 2010. This was the slowest annual growth rate since the People’s Republic took its first census in 1953. Worldwide, the Census Bureau reports, population growth fell below 1 percent in 2021 for the first time since it has estimated that statistic.

    This matters immensely to the future of globalization. As I wrote in Outside the Box, demand for the sorts of goods that move in metal containers is likely to become steadily less important in the years ahead because the world is aging.

    The median age of the global population, 23.3 years in 1985, was 31 years in 2019. According to the Central Intelligence Agency, over half the people in Japan and Germany are over age 47, and the median age in Canada, Italy, Poland, Russia, Spain, and several other countries tops 40. Thailand (39.0), the United States (38.5), and China (38.4) are not far behind. The share of Chinese residents in the 15 to 59 age group fell by a whopping 6.79 percent between 2010 and 2020, while the share of the population age 60 or over rose by almost as much.

    A high median age means that a country has a large proportion of people who are beyond their peak years of goods consumption. Their spending patterns are different from those of younger families: bigger shares of their incomes go for vacation trips, restaurant meals, medical bills, and other sorts of services, and smaller shares for stuff. Older households have had years to accumulate furniture and carpets and wardrobes full of clothing, and they are not eager to acquire more of the sorts of products turned out by manufacturers’ global value chains. This is why I assert that the next phase of globalization will have more to do with trade in services and ideas and less to do with trade in goods.

    Yes, there are countries whose populations are younger and are growing quickly, mainly in South Asia and Africa. But incomes in those regions are comparatively low, and it will be many years before the spending power of affluent young families in Pakistan and Kenya is large enough to make up for the sluggish growth in goods purchases among households in North America, Europe, and East Asia.

  • The Conglomerate Isn’t Dead Yet

    It’s been a big week for bust-ups. General Electric announced it is breaking itself into three. Toshiba plans to do the same. Johnson & Johnson says it will separate its consumer health business from its pharmaceutical business. Predictably, the death of the conglomerate is again in the news.

    Trouble is, the story isn’t true. On the contrary, the conglomerate seems to be very much in fashion.

    Take a look at a few of the world’s largest, and most profitable, corporate giants. Apple is famed for its factory-made devices such as the computer on which I’m writing this, but during the third quarter of its fiscal year, 21% of its sales — and a third of its gross profit — came from fitness programs, music streams, television shows, and other products that aren’t designed by industrial engineers or assembled on a factory floor. Alibaba Group, best known as China’s largest retailer, runs video, cloud computing, mapping, food delivery, and logistics businesses, among other things, as well as a big piece of Ant Group, a financial services company. Far from being an asset-light “new economy” company, Amazon.com sells space on 78 cargo jets, plus trucks, oceangoing ships, and in hundreds of millions of square feet of warehouses, even as it earns nearly half its profits from cloud computing services.

    Truth be told, technology-driven changes in costs are forcing many successful firms to become conglomerates if they want to be players on a global scale. Consider the shipping giant Maersk. Claiming to have abandoned the conglomerate model, it has dumped an oil company, a manufacturer of refrigerated containers, and even a stake in a supermarket chain. At the same time, though, it has gone on a buying binge, expanding into air freight, warehouses, and trucking. These acquisitions arguably have little to do with Maersk’s core business of operating container ships, but they have a lot to do with managing logistics for the same customers that may send their freight on Maersk’s vessels — and, Maersk hopes, with reducing its dependence on what until the pandemic had been a low-margin commodity business, carrying metal boxes aboard ships.

    All of these firms are conglomerates. They are continually diversifying into new products, new markets, and new customer bases rather than confining their activities to some imagined “core competency.” If anxious investors are attempting to punish them by applying a “conglomerate discount” to their shares, their stock prices seem to show no ill effects.

    Investors, I suspect, are less concerned with conglomeration than with the managerial hubris that so often accompanies it. Toshiba was famed for its inbred sense of superiority. General Electric prided itself on having great managers, schooled at its training center in Crotonville, New York, and capable of managing anything. Yet Toshiba’s bosses steered the company into an accounting scandal that nearly sank it, and GE’s, apart from their ill-fated decision to make a massive move into financial businesses, failed to grasp how digital technology would transform manufacturing: recall the advertising campaign the company ran a few years ago, seeking to convince young job-seekers that GE was really a tech company, or the decision to move headquarters from suburban Connecticut to Boston in 2016 just to seem cool. A corporation that is so certain that no one can challenge it is vulnerable to competitors who think otherwise, conglomerate or not.

  • What Caused the Supply Chain “Crisis”?

    Why are container ships queuing by the dozens outside terminals on three continents and retailers apologizing that coveted holiday merchandise may not be on the shelves before Christmas? The ship lines are blaming terminal operators for underinvesting in modern equipment. The terminal operators point the finger at dockworkers’ unions and at land transporters whose failure to move cargo out of the ports is clogging up storage areas. The railroads protest that their own terminals are chock-a-block, knocking cargo owners who postpone collecting their freight because their warehouses are full. Truckers complain about delays at marine terminals and about a shortage of the chassis they need to haul containers, not least because the U.S. government imposed whopping tariffs on Chinese-made chassis after finding that subsidized imports from state-owned manufacturers were harming U.S. chassis makers.

    All these explanations, as one journalist commented to me recently, leave the impression of a circular firing squad at work. None of them do much to get at the causes of logistical overload.

    So what are those causes? Mostly, well-intended government policies meant to mitigate the effects of the COVID-19 pandemic. Across much of the world, governments and central banks have pumped money into their economies to keep the pandemic from turning into a depression. Those measures, in general, have been extremely successful: with ample cash in hand and interest rates at rock bottom — British homebuyers can still get a five-year mortgage for 1.04% — consumers have plenty of spending power. But from March 2020 until the past few months, many of the services that households normally consume, from vacation trips to restaurant meals to late nights at a dance club, have been limited by COVID-related restrictions. Unable to buy services, people gorged on goods.

    A few days ago, the U.S. Bureau of Economic Analysis published new data showing how intense this shift was in the United States. BEA’s quantity indexes don’t normally get much attention, but for this purpose they’re useful: you can think of them as measures of the amount of goods and services people consume, rather than their value. The indexes show a trend change in the first quarter of 2020, when purchases of services collapsed, and again in the second quarter, just after enactment of the Coronavirus Aid, Relief, and Economic Security Act on March 27. That law provided for direct payments to families, unemployed workers, businesses, hospitals, and local governments. Almost immediately, consumers went crazy on the sorts of goods that have global supply chains and move in containers, especially durable goods like furniture and vehicles.

    Note that BEA’s data show that purchases of durables retreated over the summer, even as purchases of services grew. With the Fed starting to raise interest rates, however cautiously, goods spending is likely to weaken further. As it does, those picturesque queues of container ships will soon be getting shorter.

  • Fixing Chains

    “Shipping costs have finally slumped,” the Financial Times asserts. Bloomberg affirms that trend, contending that container shipping rates are past their peak. With retailers like Walmart and Target now taking charge of their supply chains by chartering ships to move some of their goods across the Pacific (albeit at extremely high cost), the supply-chain crisis may be starting to fade from the headlines.

    That’s not entirely a good thing, because many manufacturers and retailers still haven’t drawn the correct lessons from the past year’s confusion.

    Three factors caused international supply chains to seize up in the summer of 2020. First, starting early last year, governments and central banks everywhere stoked their economies to avert a pandemic-related depression, giving consumers massive amounts of money to spend. Second, COVID-19 forced a major shift in spending patterns in much of the world; with restaurants closed, vacation destinations off limits, and easy money burning holes in their pockets, consumers binged on the sorts of goods that move in shipping containers. Third, as I’ve written in Outside the Box, companies persistently misjudged the risks of long, complex value chains, focusing almost entirely on the production-cost savings of making shoes or dining tables in Asia without adjusting for the risk that the goods might not arrive as promised.

    The first two of those forces are how history: the economic stimulus that drove the consumer spending boom is gradually being withdrawn. The third, however, is still very much with us. There is surprisingly little evidence that major companies are moving to create redundant sources of parts and raw materials, to assemble their finished goods in multiple places, and to find multiple paths to move their goods to market. Even the threat that recurrent tensions between China and its trading partners will disrupt the flow of trade doesn’t seem to be making much of an impression on executives concerned about maximizing this quarter’s profits.

    The onus now is on investors. Careful questions are in order. How are firms building redundancy into their supply chains? How are boards overseeing supply-chain risks? Inattention to the risks of globalized manufacturing holds dangers for shareholders, and falling freight rates and diminished port congestion won’t make those risks go away.

  • The “Crisis” in the Ports

    “Ports face biggest crisis since the start of container shipping,” the Financial Times headlined the other day. At the time, according to the article, 353 container ships were queuing outside the ports to unload cargo. “Ports are in desperate need of investment,” John Manners-Bell, head of the consultancy Transport Intelligence, is quoted as saying. Even before the pandemic-driven rush of cargo, Soren Toft, the CEO of the huge shipping group MSC, told the FT, “Port complexes were becoming old, there were capacity restrictions [and] there were restrictions on the ability to serve the ever-growing size of ships.”

    When you hear that sort of thing, I advise clutching your billfold. Container ports are indeed crowded today, but “crisis” warnings are a clarion call for the public sector to make investments that should be funded by shippers and carriers, not the public purse.

    Until the middle of 2020, it’s worth remembering, the problem facing ports was not excess demand, but excess capacity. Some ports had overexpanded; others suffered because competing ports had taken their business. The arrival of megaships, some now carrying as much freight as 12,000 over-the-road trucks, meant that fewer vessels were calling at most ports, leaving storage areas and costly ship-to-shore cranes underutilized. Poor business prospects led to shotgun weddings among ports like Seattle and Tacoma in the United States and Yokohama and Tokyo in Japan, in hopes consolidation would help the ports cut costs to attract more business.

    Things have been very different over the past 14 or 15 months due to COVID-19. Consumers in the wealthy economies, flush with economic stimulus and unable to enjoy vacation trips, live concerts, or visits to the spa, have been spending like crazy on bicycles, appliances, furniture, and the like, creating blazing demand for imports. But only a portion of the seemingly endless supply-chain delays that are hampering manufacturers and retailers can be blamed on the ports. Importers, their distribution centers overwhelmed, are leaving their inbound containers stacked in ports and rail terminals for several days longer than normal, hindering the routine movement of freight on railroads as well as ships. Those loaded containers are effectively unavailable to exporters, further interrupting supply chains. Shoppers can’t get their goods. Factories can’t get their components. Delays cascade, and everyone engaged in international trade points the finger at everyone else.

    Disentangling this mess will take a while. But we’re not back in the boom decades between 1987 and 2008, when trade grew twice as fast as the world economy. As vaccines slowly quash the pandemic — and as central banks cautiously cease lubricating the world with cheap money — international commerce will revert to its previous pattern, growing more slowly than global GDP. The pressure on ports will ease accordingly.

    And what of calls for new investment? Most of the world’s big container terminals are either owned by large multinational operators or by the major container lines themselves. If they think there’s a case for building high-density storage areas, lengthening wharves, or buying bigger cranes, more power to them: they are run by smart people who are paid to make hard-nosed investment decisions.

    The risk comes when the ship lines and their consultants try to squeeze money out of governments that are unlikely to be as sophisticated. Publicly owned container terminals that expand at the peak of the market may end up with more capacity than they need in a slow-growing world. State-sponsored dredging projects to accommodate the largest vessels may have little payoff, especially as the number of container ships calling at most ports will continue to decline. Since its inception, container shipping has been a boom-or-bust industry, and that pattern does not seem likely to change.

  • My Supply Chain Problems

    I got a ring today from Haverty’s, the furniture store. Last winter — January 16, to be precise — my wife and I purchased a sofa there, with delivery promised for May. In March, I got a phone call: there were delays, and the sofa would arrive at the Haverty’s warehouse, in Atlanta, on July 13. That schedule has now been abandoned. Today’s news was that our sofa is expected in October. By then, Haverty’s will have had the use of our money for nine months and delivered us nothing in return.

    The sofa, by the way, is to be made in Mississippi. The problem, it seems, is that the blue fabric that is to cover the frame and the cushions comes from China. It apparently hasn’t been delivered. The salesperson explained that the entire furniture industry is having supply-chain problems. My response to her was that I don’t accept this excuse. As far as I’m concerned, the problem lies not with China or with the ship lines that are to carry the fabric, but with Haverty’s. The company has badly mismanaged its supply-chain risk, and my wife and I, as its customers, are bearing the cost.

    Let’s be clear: supply-chain interruptions aren’t always avoidable. Things happen. Earthquakes and fires disrupt factory production. Ships and trains run behind schedule. Deadlines are missed. No business operates a hundred percent according to plan.

    But well managed businesses seek ways to control those risks. They purchase inputs from different places (no one told Haverty’s to order all its upholstery fabric from China). They ship those inputs via different routings (overdue ships may be bobbing in a long queue outside Long Beach harbor, but there aren’t long delays in Houston or Savannah). They use multiple plants to turn those inputs into finished goods. They build resiliency into their supply chains, which usually means building redundancy into their supply chains.

    If Haverty’s had done that, it might have had some options to offer us when it first informed us in March that our sofa would not arrive on schedule. Perhaps we could have switched to a different upholstery fabric, not made in China, that would have been available sooner. Perhaps we could have changed our order and selected a different sofa, assembled in a different location, that wouldn’t have taken so many months to produce. Instead, its failure to manage supply-chain risk left us, its customers, exposed to its inability to make good on its promises.

    Alas, our sofa is only a small part of a much larger story. Many, many retailers and manufacturers have misjudged the risks of long and complicated supply chains. In seeking to minimize costs, they have failed to incorporate the risk of business interruption into their cost calculations. The cost is very real: finding customers is a significant expense for most businesses, and driving them away by failing to live up to promises is money down the drain. Once potential business interruptions are accounted for, many of today’s supply chains may not make sense.