The U.S. should underwrite Real Cases of Maritime Innovation
The MOC
By
John D. McCown
October 12, 2023
A recent Federal Register notice announced that the Maritime Administration (“MARAD”) is seeking public comments on how best to organize and structure a “Center for Maritime Innovation.” Around the same time, news was released that the Port of Seattle would provide $33 million to transform an historic port building into a “Maritime Innovation Center.” With such an alignment of interests, there is a collaboration that should be explored. To advance such discussions, this article suggests a specific initiative that would be innovative while benefiting the U.S. flag merchant marine and the Port of Seattle.
A Reasonable Collaboration
A physical location for a center focused on maritime innovation makes sense. The key advances in the major shipping sectors can be traced to specific examples of human innovation. D.K. Ludwig’s awareness of the economies of scale of supertankers, Ole Skaarup’s development of a special design to efficiently move dry bulk cargoes, and Malcom McLean’s invention of container shipping are all examples of creative minds developing a better way to transport things by sea.
Today, there is a need for innovative thinking specifically aimed at reversing the decline in the U.S. flag merchant marine sector. For commercial and national security reasons, the fresh thinking and innovative approaches that could come from a center focused on maritime innovation to grow the U.S. flag sector is in order. It would be appropriate to have MARAD provide a portion of the funding to staff a center built with funds from the Port of Seattle. The amount requires discussion. This would be influenced by the involvement of other organizations, including those with a role in the new center. For instance, the University of Washington and its Master of Supply Chain Transportation and Logistics program could play a role.
The Port of Seattle: An Ideal Location
Seattle would be an excellent location for the Center for Maritime Innovation. Being located far away from Washington, D.C. where it could focus on commercial issues without political interference is a plus. Another benefit of locating an innovation center in Seattle is that it is a hotbed of business innovation. Microsoft, Starbucks, Amazon, and Costco are all innovative companies with roots in that area. Few large cities are as linked to the maritime sector, evident by its major league baseball team, the Mariners.
Establishing that team in 1977 happened near the beginning of the Port of Seattle’s sharp growth in container shipping. Inbound container volume into Seattle would outpace all ports, being the closest U.S. port to Asia. The advent of double stack rail service to move containers to eastern points worked to the advantage of Seattle. For container shipments from Asia to the New York area when transit time is a prime factor, a vessel movement to Seattle followed by an intermodal rail routing offers the fastest transit time.
While transit time is an advantage for containers coming through Seattle, expansion of the Panama Canal allowing three times larger ships accelerated an eastward shift in entry ports driven by underlying cost differences. In 2016, when the Panama Canal was expanded, Seattle/Tacoma accounted for 7.70% of total inbound containers into the top ten U.S. ports. By 2022, that percentage decreased to 5.01%. The actual data points to those ports needing assistance. It should be noted that some of the volume loss has been to West Coast Canadian ports that share attributes of faster transit times to eastern U.S. points. That fact makes this situation one where MARAD should be supportive in actively looking into this initiative. The Center for Maritime Innovation would build on the relative advantage of Seattle while returning a U.S. flag service to a major international trade lane. If it is as successful as analysis indicates, it will become a model for future services that bring cost, emission, and congestion benefits to the U.S. transportation system.
Destination: China
The proposed new service would be a weekly service between China and Seattle with five vessels in a 35-day voyage rotation. It will move only 53’ containers on ultra large container ships specifically configured for that purpose. That size is legal in China (where all the 53’ containers used in U.S. are made) and is the same size exclusively used for domestic road and rail movements in the U.S. for two decades. Given the unique and different equipment configuration of a new service, it would not be of interest to existing carriers displaying no interest in differentiated service offerings.
A new service built exclusively around 53’ equipment will have certain cost advantages, but to incentivize a startup, MARAD primes this initiative by offering to pay the differential under the Maritime Security Program, currently $13,689 per vessel day, to the new operator selected. This would not be a permanent subsidy and would only be for the first five years. At that time, it is envisioned that the combination of the underlying cost advantages of a 53’ service and the marketing advantages of a U.S. flag service and the small differential relative to the operators’ total costs would have it continuing to operate a U.S. flag service without subsidy. This unique business model would take steps out of the typical process and reduce both cost and time. The first process that 53’ containers take out is container handling expense on both sides as a ship configured for 53’ boxes involve 33% less crane moves compared to a ship moving standard 40’ boxes.
Logistics
The next process that 53’ containers take out applies to the U.S. side and relates to follow-on land moves by rail. Because that is the segment the new service is targeting, it will involve most loads. In rail intermodal moves across the country, the cargo in 40’ containers is almost always transloaded into 53’s for the domestic leg. The cost and time of transloading three 40’s into two 53’ containers is justified by the linehaul cost efficiency of fitting with the size for U.S. domestic shipments. That entire step in the process and its cost and time is removed if the cargo moves in 53’ containers from China. This change also frees up trucking capacity, as the short drives in transloading activity are unnecessary.
MARAD could promote its support and invite companies to make proposals. They would determine the size of ships they would use for the new service. The average vessel size now in the Asia to West Coast Lane is 9,622 twenty-foot equivalent units (“TEU”), with the largest at 19,273 TEU. A 53’ container is equivalent to 3 TEU. In collaboration with the new maritime innovation center, a decision on which proposal to accept and commit to five years of subsidy payments is made.
J.B. Hunt and Amazon are among the companies that may make proposals. The former moves thousands of 53’ containers each week from western points whose cargo originates in marine containers. This new service extends a supply chain they know well. The latter is the world’s largest logistics company and is headquartered in Seattle. Both engaged in shipping initiatives during COVID-19 that involved moving cargo in Asia in 53’ containers. Other innovative domestic freight providers that could be expected to make proposals based on MARAD support to initially level the operating cost playing field.
If this initiative launched a regular weekly U.S. flag 53’ service between China and Seattle, it would accomplish a myriad of goals for MARAD and Seattle. For folks thinking this has MARAD picking favorites, such a service makes national sense, and the port pairs maximize the prospect of success. A key role of the center would be to carefully measure the cost and time benefits of the new service. If the initiative and subsequent analysis results in imitation, so much the better.
While 53’s have challenges in other lanes, they work in the China to West Coast lane. China is the source of almost half our inbound boxes. Our focus on maritime innovation should be what works best for us. A 53’ container service between China and the U.S. does precisely that. Promoting a startup of such a service by innovative American companies who will recognize the marketing benefits of ships flying the U.S. flag is sound policy ringing many bells.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown co-founded a U.S. flag shipping company he led as CEO and he also formerly managed transport investments at a large hedge fund. He holds an MBA from Harvard Business School and his analysis centers on merchant shipping and maritime commerce.
Center for Maritime Strategy
By John D. McCown
A recent Federal Register notice announced that the Maritime Administration (“MARAD”) is seeking public comments on how best to organize and structure a “Center for Maritime Innovation.” Around the same time, news was released that the Port of Seattle would provide $33 million to transform an historic port building into a “Maritime Innovation Center.” With such an alignment of interests, there is a collaboration that should be explored. To advance such discussions, this article suggests a specific initiative that would be innovative while benefiting the U.S. flag merchant marine and the Port of Seattle.
A Reasonable Collaboration
A physical location for a center focused on maritime innovation makes sense. The key advances in the major shipping sectors can be traced to specific examples of human innovation. D.K. Ludwig’s awareness of the economies of scale of supertankers, Ole Skaarup’s development of a special design to efficiently move dry bulk cargoes, and Malcom McLean’s invention of container shipping are all examples of creative minds developing a better way to transport things by sea.
Today, there is a need for innovative thinking specifically aimed at reversing the decline in the U.S. flag merchant marine sector. For commercial and national security reasons, the fresh thinking and innovative approaches that could come from a center focused on maritime innovation to grow the U.S. flag sector is in order. It would be appropriate to have MARAD provide a portion of the funding to staff a center built with funds from the Port of Seattle. The amount requires discussion. This would be influenced by the involvement of other organizations, including those with a role in the new center. For instance, the University of Washington and its Master of Supply Chain Transportation and Logistics program could play a role.
The Port of Seattle: An Ideal Location
Seattle would be an excellent location for the Center for Maritime Innovation. Being located far away from Washington, D.C. where it could focus on commercial issues without political interference is a plus. Another benefit of locating an innovation center in Seattle is that it is a hotbed of business innovation. Microsoft, Starbucks, Amazon, and Costco are all innovative companies with roots in that area. Few large cities are as linked to the maritime sector, evident by its major league baseball team, the Mariners.
Establishing that team in 1977 happened near the beginning of the Port of Seattle’s sharp growth in container shipping. Inbound container volume into Seattle would outpace all ports, being the closest U.S. port to Asia. The advent of double stack rail service to move containers to eastern points worked to the advantage of Seattle. For container shipments from Asia to the New York area when transit time is a prime factor, a vessel movement to Seattle followed by an intermodal rail routing offers the fastest transit time.
While transit time is an advantage for containers coming through Seattle, expansion of the Panama Canal allowing three times larger ships accelerated an eastward shift in entry ports driven by underlying cost differences. In 2016, when the Panama Canal was expanded, Seattle/Tacoma accounted for 7.70% of total inbound containers into the top ten U.S. ports. By 2022, that percentage decreased to 5.01%. The actual data points to those ports needing assistance. It should be noted that some of the volume loss has been to West Coast Canadian ports that share attributes of faster transit times to eastern U.S. points. That fact makes this situation one where MARAD should be supportive in actively looking into this initiative. The Center for Maritime Innovation would build on the relative advantage of Seattle while returning a U.S. flag service to a major international trade lane. If it is as successful as analysis indicates, it will become a model for future services that bring cost, emission, and congestion benefits to the U.S. transportation system.
Destination: China
The proposed new service would be a weekly service between China and Seattle with five vessels in a 35-day voyage rotation. It will move only 53’ containers on ultra large container ships specifically configured for that purpose. That size is legal in China (where all the 53’ containers used in U.S. are made) and is the same size exclusively used for domestic road and rail movements in the U.S. for two decades. Given the unique and different equipment configuration of a new service, it would not be of interest to existing carriers displaying no interest in differentiated service offerings.
A new service built exclusively around 53’ equipment will have certain cost advantages, but to incentivize a startup, MARAD primes this initiative by offering to pay the differential under the Maritime Security Program, currently $13,689 per vessel day, to the new operator selected. This would not be a permanent subsidy and would only be for the first five years. At that time, it is envisioned that the combination of the underlying cost advantages of a 53’ service and the marketing advantages of a U.S. flag service and the small differential relative to the operators’ total costs would have it continuing to operate a U.S. flag service without subsidy. This unique business model would take steps out of the typical process and reduce both cost and time. The first process that 53’ containers take out is container handling expense on both sides as a ship configured for 53’ boxes involve 33% less crane moves compared to a ship moving standard 40’ boxes.
Logistics
The next process that 53’ containers take out applies to the U.S. side and relates to follow-on land moves by rail. Because that is the segment the new service is targeting, it will involve most loads. In rail intermodal moves across the country, the cargo in 40’ containers is almost always transloaded into 53’s for the domestic leg. The cost and time of transloading three 40’s into two 53’ containers is justified by the linehaul cost efficiency of fitting with the size for U.S. domestic shipments. That entire step in the process and its cost and time is removed if the cargo moves in 53’ containers from China. This change also frees up trucking capacity, as the short drives in transloading activity are unnecessary.
MARAD could promote its support and invite companies to make proposals. They would determine the size of ships they would use for the new service. The average vessel size now in the Asia to West Coast Lane is 9,622 twenty-foot equivalent units (“TEU”), with the largest at 19,273 TEU. A 53’ container is equivalent to 3 TEU. In collaboration with the new maritime innovation center, a decision on which proposal to accept and commit to five years of subsidy payments is made.
J.B. Hunt and Amazon are among the companies that may make proposals. The former moves thousands of 53’ containers each week from western points whose cargo originates in marine containers. This new service extends a supply chain they know well. The latter is the world’s largest logistics company and is headquartered in Seattle. Both engaged in shipping initiatives during COVID-19 that involved moving cargo in Asia in 53’ containers. Other innovative domestic freight providers that could be expected to make proposals based on MARAD support to initially level the operating cost playing field.
If this initiative launched a regular weekly U.S. flag 53’ service between China and Seattle, it would accomplish a myriad of goals for MARAD and Seattle. For folks thinking this has MARAD picking favorites, such a service makes national sense, and the port pairs maximize the prospect of success. A key role of the center would be to carefully measure the cost and time benefits of the new service. If the initiative and subsequent analysis results in imitation, so much the better.
While 53’s have challenges in other lanes, they work in the China to West Coast lane. China is the source of almost half our inbound boxes. Our focus on maritime innovation should be what works best for us. A 53’ container service between China and the U.S. does precisely that. Promoting a startup of such a service by innovative American companies who will recognize the marketing benefits of ships flying the U.S. flag is sound policy ringing many bells.
John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy. Mr. McCown co-founded a U.S. flag shipping company he led as CEO and he also formerly managed transport investments at a large hedge fund. He holds an MBA from Harvard Business School and his analysis centers on merchant shipping and maritime commerce.