The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (8 page)

Regulation damped competitive spirit in the trucking industry. Showing the sort of ingenuity that would characterize his career, McLean found ways around the regulators’ 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? The labor unrest that followed the war left many truck lines struggling, and McLean repeatedly seized opportunities. Between 1946 and 1954, McLean Trucking bought or leased routes in at least ten different transactions, expanding its network from Atlanta to Boston. The company added six hundred trucks between 1947 and 1949, using the U.S. government as the unwitting financier: veterans were eligible for cheap government loans to set themselves up as independent truckers, so McLean encouraged veterans to become owner-operators, brought them together to purchase equipment in a single large order, and signed them up to haul freight for McLean Trucking.
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An obsessive focus on cutting costs was the key to McLean Trucking’s success. The only way a truck line could attract much new business was by offering lower rates than competitors offered. A trucking company’s 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. Malcom McLean’s sharp pencil was critical. In 1946, for example, McLean made a deal to lease the routes of Atlantic States Motor Lines, which had been closed down by a strike. Among its other attractions, Atlantic States was entitled to use highways that let McLean Trucking shave seventy miles off runs between North Carolina and the Northeast. The shorter trip meant fewer driver hours and therefore lower rates. By purchasing route authority from Garford Trucking in 1948, McLean Trucking gained southbound cargo from New England, so that trucks that hauled cigarettes north would not have to return empty—which meant that the company could charge less for the northbound trip.
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One hotly contested rate case illustrates McLean’s handle on costs. In March 1947, McLean Trucking proposed to cut certain rates for cigarettes almost by half, charging $0.68 per hundred pounds to haul full truckloads from Durham, North Carolina, to Atlanta, and $1.10 to carry partial truckloads. At the time, other truck lines were charging $1.34 for full truckloads and $1.70 per hundred pounds for partial loads. McLean even wanted to underprice the much slower railroads, which protested the proposed rates as “unfair and destructive.” Laying out its costs in great detail, McLean Trucking argued that tobacco products were cheaper to transport than other commodities because its administrative costs for cigarettes were 1.02 cents per vehicle-mile below its average for all freight, its sales and marketing costs 50 to 60 percent less, and its terminal costs 3 cents per vehicle-mile less than for full truckloads of other freight. After weighing such considerations as the density of tobacco products and McLean Trucking’s insurance claims experience on cigarette shipments, the ICC rejected the proposed rate for partial truckloads but found the proposed full-truckload rate to be “just and reasonable,” opening the way for McLean Trucking to vastly expand its business with the tobacco industry.
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Cost-saving innovations continually materialized as McLean Trucking grew. The company opened one of the earliest automated terminals in the industry, in Winston-Salem, North Carolina, using conveyors to transfer freight from one truck to another while saving labor. 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, Malcom McLean arranged a corporate discount at service stations along the company’s routes and told drivers to fuel only at those stations. The sides of the company’s truck trailers were crenellated, not smooth; Malcom McLean claimed that experts at the University of North Carolina had told him crenellation would reduce wind drag and thus fuel costs. 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. Then came a stint in the office, learning the McLean Trucking method for making a proposal to a potential customer, which required careful analysis of the cost of serving the business. Only then were trainees dispatched to their first assignments, usually selling freight in Raleigh or Boston or Philadelphia.
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McLean Trucking quickly became known as a dynamic company in a very stodgy industry. By 1954, it had become one of the largest trucking companies in America, ranking eighth in revenue and third among all truck lines in after-tax profit. Assets, $728,197 in 1946, increased to $11.4 million in 1954 as the McLean fleet grew to 617 company-owned trucks. The only way to grow so fast was to borrow money. McLean Trucking’s $200,000 of long-term debt in 1946 increased 31-fold to $6.2 million by 1951 as the company ordered more and more trucks. “He was a highly leveraged fellow,” remembered Walter Wriston, who started lending to McLean on behalf of National City Bank in 1954 and later headed the company when, under the name Citibank, it became the largest bank in the world. “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.”
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Heavy indebtedness, of course, was risky. Any slowdown in revenue growth could make it hard to service debt. Of necessity, a highly leveraged company had to focus on efficiency, for which Malcom McLean and his brother Jim, who ran day-to-day operations, had a passion. They knew every aspect of their business, and they knew how to squeeze out costs. Recalls one former employee, “When you reported for duty, you drove the truck through the gatehouse, you were weighed, and the truck was sealed. They started the tachometer, and you were given specific directions: ‘You will proceed up Route 3A to Secondi’s filling station, then you will proceed …’ You didn’t have any discretion at all.” But after years behind the wheel themselves, the McLeans understood that the easiest way to control costs was to get employees involved. Holding down insurance and repair bills, for example, meant having safety-conscious drivers. Novices were trained by being paired with senior drivers on the run from Winston-Salem to Atlanta. The senior driver got a bonus of one month’s pay if a man he had trained made it through his first year without an accident. The incentives were powerful: the veteran had a strong financial incentive to train the newcomer well, and the new driver understood that he had best drive very carefully if he wanted to stick around.
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Malcom McLean was not a man to sit and enjoy his success. The civic and philanthropic involvements common to successful businesspeople did not interest him. He was a restless soul, competitive, calculating, always thinking about business. “He wouldn’t be able to sit still five minutes,” a longtime colleague recalled before McLean’s death. “You’d either have to play gin rummy with him or discuss business with him. Can’t go quail hunting with Malcom without him betting on the first, the most, the biggest.” His inventive brain churned out idea after idea for making money.
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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? 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. The ships would move the trailers between North Carolina, New York City, 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 destinations.
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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. 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. The truck-ship plan was startling as well because coastwise shipping was widely seen as a dying business. New York’s docks were handling only half as much domestic cargo in the early 1950s as they had in the depressed 1930s. No one had invested significant money in coastal shipping in thirty 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 truck rates to compensate for slower service. Sending his trucks by water would let McLean underprice other truckers running between North Carolina and the Northeast.

Late in 1953, a real estate firm working on McLean Trucking’s behalf began looking for terminal sites. The timing could not have been better. The Port of New York Authority, an agency set up by the states of New York and New Jersey, was eager to expand its tenuous foothold in the port business. It had taken charge of the money-losing docks in Newark, New Jersey, in 1947, and it was eager to draw new business to what had been a sleepy lumber port. As it happened, the port at Newark, across the harbor from New York City, was uniquely positioned to serve McLean Trucking’s needs. There was plenty of space to marshal trucks and easy access to the New Jersey Turnpike, which had opened in 1951. Even better, from McLean’s point of view, the Port Authority had the power to issue revenue bonds; it could build the terminal and lease it to McLean Trucking, reducing the need for the company to raise funds. The Port Authority was so taken with McLean’s concept that Austin Tobin, its executive director, and A. Lyle King, the director of marine terminals, became early and very public apostles of transporting truck trailers by train and ship.
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While the Port Authority prepared McLean Trucking’s new waterfront terminal, Malcom McLean’s own ideas were evolving. His 1953 proposal had involved buying S. C. Loveland, a small barge operator, in order to gain its coastal operating rights. Now, he was thinking bigger. In 1954, while still pursuing Loveland, he came upon the Waterman Steamship Corporation in the pages of a
Moody’s
financial manual. Waterman, based in Mobile, Alabama, was a large, well-established operator sailing to Europe and Asia. Its tiny subsidiary, Pan-Atlantic Steamship Corporation, operated four ships along the coast between Boston and Houston. McLean immediately spotted the companies’ attractions. Pan-Atlantic had been hurt badly by the 1954 longshore strike in New York, completing only 64 voyages the entire year, but it owned valuable operating rights to serve 16 ports. Its parent, Waterman Steamship, was debt-free, with assets including 37 ships and $20 million in cash. McLean made some preliminary soundings and found that Waterman could be bought for $42 million.
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What followed was an unprecedented piece of financial and legal engineering. First, to circumvent rules requiring ICC approval for a truck line to own a ship line, McLean created an entirely new company, McLean Industries, in January 1955. Although McLean Industries had publicly traded stock, it was clearly a family-controlled business; Malcom McLean was president, his brother James McLean was vice president, and his sister Clara McLean was secretary and assistant treasurer. Malcom, James, and Clara then put control of the trucking company in a trust, of which they were the beneficiaries. Malcom McLean kept $5 million 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 of Pan-Atlantic. The country’s best-known trucking magnate walked away from the business he had built in order to build a new one, based on some untested ideas about shipping.
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Several railroads protested the transaction, claiming that the McLeans were effectively controlling both McLean Trucking and the ship line in violation of the law. The ICC eventually agreed but noted that “the procedure followed was on the advice of counsel, and was not a deliberate violation of the act.” In any case, in September 1955 the trustees sold off McLean Trucking’s stock, making the legal issues moot. Malcom McLean did not fare badly in the process. He cleared $14 million on the sale of McLean Trucking. His net worth in 1955 was $25 million—the equivalent of $180 million in 2004 dollars. Asked later whether he had considered ways to shelter some of his wealth from the risks of entering the maritime business, his answer was an unequivocal “No.” McLean explained: “You’ve got to be totally committed.”
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Pan-Atlantic was just an appetizer. In May 1955, McLean Industries bid for Waterman itself. McLean and his bankers concocted a hugely complex financial transaction. McLean Industries would pay Waterman $75,000 to cease all domestic service and surrender its ICC operating certificate in an attempt to eliminate the ICC’s jurisdiction over the purchase. Then, McLean Industries would borrow $42 million from National City Bank, an amount approaching the bank’s legal limit for a single loan. McLean Industries would raise additional money through a $7 million issue of preferred stock. When the deal closed, Waterman’s $20 million of cash and various other assets would be used to repay half the loan. Wriston’s superiors at National City went apoplectic at the thought that $22 million of National City’s money would still be at risk. Who knew whether anyone would use McLean’s truck-ship service? Who would finance all the equipment? Would the trailers even survive a storm at sea? At the last minute, the bankers ordered the deal called off. Wriston phoned McLean at the Essex House, McLean’s New York hotel, and told him, “You’d better get down here. Things are falling apart.” When McLean arrived at National City’s headquarters on Wall Street, Wriston advised that McLean himself would have to convince the bank’s top loan executives to approve the loan. The bankers told McLean that the loan was too risky and Wriston too inexperienced. “He’s just a trainee,” one of them said. “He may just be a trainee, but he’s going to be the boss of both of you pretty soon,” McLean shot back. As McLean remembered later, “They said, ‘Maybe we’ll take another look.’” The loan was approved.
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