Matt Rourke/AP Photo
A crane lifts a shipping container in Gloster City, New Jersey, October 22, 2021. Three large Chinese companies produce approximately 82 percent of all ocean shipping containers.
This story is part of a new Prospect series called Rollups, looking at obscure markets that have been rolled up by under-the-radar monopolies. If you know of a rollup like this, contact us at rollups(at)prospect.org.
What’s underappreciated about our global supply chain woes, which have continued amid the war in Ukraine and COVID outbreaks in Asia, is that the whipsawing between shipping delays and surges disrupts the delicate dance of equipment that’s vital to keeping things moving. For example, shipping containers are needed to move goods across the ocean, and truck chassis can take those containers out of the ports and into the interior. If too many container ships wait on the open ocean, fewer containers are available for loads. If there aren’t enough chassis, containers pile up in the dockyards. There’s a tempo to the supply chain, and any break in that tempo in any part of the process will cause gridlock.
This can be counteracted with abundant supply of core equipment: containers and chassis. But an unheralded report from a commissioner on the Federal Maritime Commission (FMC) reveals a shocking truth: Almost all of the containers and chassis in the world are made in China, by state-owned monopolies that have the power to manipulate prices and weaken global rivals.
Three large Chinese companies—CIMC, Dong Fang, and CXIC—produce approximately 82 percent of all containers, according to the report. Combined with some smaller firms, China makes over 95 percent of these containers, and the only other ones produced are for specific regional markets or in nonstandard sizes.
So essentially all standard-sized containers used in global shipping, roughly 44 million boxes, were manufactured in China, as well as around 86 percent of all intermodal chassis. China’s state-owned container manufacturers benefit from large government subsidies and other benefits. And in seemingly coordinated fashion, they slowed production of new containers when demand initially rose during the pandemic, leading to prices nearly doubling from early 2020 to today.
More important, container and chassis shortages hamper the entire supply chain, and the just-in-time logistics philosophy that dominates business means that these shortages magnify. “Our Nation recognizes the need and value of certain types of products like semi-conductors,” notes FMC commissioner Carl Bentzel in the report, “but in this author’s view, has not yet recognized our Nation’s absolute reliance on containerized shipping, and therefore our complete and utter reliance on the lowly shipping container.”
AS AMIR KHAFAGY reported for the Prospect, the standardized container (typically 40 feet long, and later 53 feet) unlocked the magic that is global shipping. Containers could be stacked on top of one another for travel across an ocean, and could be loaded off ships and onto chassis for hauling via truck, or used as rail cars and transported by train. That created the intermodal system and significantly streamlined the supply chain.
Containerization led to bigger ocean vessels, because a ship carrying more containers could deliver more goods at a lower cost. That naturally fed consolidation in the industry, as only the biggest companies could run the biggest ships. From 25 major shippers in the 1990s, shipping narrowed to nine companies, segmented into three ocean carrier “alliances.”
The dynamics of containerization also fed global production, as companies could exploit cheap labor in poorer countries while keeping shipping costs low. A clustering emerged: The “container manufacturing base typically follows the … retail product manufacturing base,” the FMC report explains.
The Chinese government has recognized the opportunity of maritime shipping dominance since the beginnings of intermodalism in the 1970s, and made shipping a part of its recent “Made in China 2025” plan. Two of the top three ocean carriers are China Merchants Group Limited (CMG) and China Ocean Shipping Company Limited (COSCO), both state-owned enterprises (SOEs) benefiting from government financial support. The defined goal was to create “national champion” companies that could control this key industry, and the government facilitated mergers to reach that goal. A 2015 merger made CMG the largest logistics company in the world, and a 2016 merger created COSCO.
Financial support for SOEs comes in the form of direct subsidies for exports, insurance, and R&D; tax abatements and rebates; reduced port fees; below-market loans from state-owned banks “with reduced or no expectation of repayment”; indirect subsidies on land, electricity, and component parts that make production cheaper; and ownership requirements that force any international maritime company operating in China to give over control to a Chinese investor.
China took control of container manufacturing in the 1990s, stealing market share from South Korea, according to FreightWaves. A coalition known as the China Container Industry Association, or CCIA, directs most of the activity, and it’s dominated by CIMC, the world’s largest container manufacturer, producing about 40 percent of the world’s containers.
The FMC report details how shipping giants CMG and COSCO were once the two largest shareholders in CIMC, and several CMG and COSCO employees sit on CIMC’s board. A 2015 government investigation into CIMC found that the company benefited from Chinese subsidies by up to 28 percent, and a separate investigation confirmed that CIMC is government-owned and government-controlled. Today, a majority of CIMC shares are owned by the State-owned Assets Supervision and Administration Commission (SASAC), a division of the Chinese government.
BY THE TIME THE PANDEMIC HIT, container production was already far behind historical output, and remained low throughout 2020. This was in response to low prices and profit margins for container manufacturing. “The three main companies decided to try to support some kind of pricing for the dry freight boxes,” John Fossey, head of container equipment and leasing research at top freight analyst Drewry, told FreightWaves. “They basically got together and said, ‘Look, we’re not going to produce these containers at a loss.’”
The seeming manufacturing suppression coincided with a host of shipping delays in the pandemic. Initially, as spending of all kinds slowed in the lockdown, fewer vessels were put into service to transport goods. This meant that empty containers stayed at ports and were not repositioned to where they would be needed. When demand spiked as consumers turned to goods spending over services, equipment was not available where it needed to be to move those goods along. China in particular has major needs for empty containers because of its trade surplus.
The surge also led to large backups at the ports that can handle mega-ships. Every day a large container ship sits in the ocean means that those containers are out of operation. Reduced workforce at the ports due to chronic COVID infections and safety measures also slowed the turnaround time for containers, from 60 days to 100 days. Whereas a container once did 10 to 12 round trips across the Pacific annually, that number went down to three to five round trips.
Chassis availability was also low and misplaced. While the report does not intimate that chassis were underproduced as well, it’s certainly true that the same Chinese companies that manufacture virtually all standardized containers also manufacture almost all standard chassis.
Breaking the container monopoly could align with the general business shift to diversify suppliers, rely more on domestic production, and avoid single points of failure in the supply chain.
Shipping companies that were “desperate for more capacity” raised prices to account for the lack of availability. Increased ocean shipping rates alone are responsible for 1.5 percent of global inflation, according to a U.N. report, which doesn’t take into account increases for trucking and rail and other cargo fees.
The shortages put container prices at a premium. In the second quarter of 2021, prices for a 40-foot container were $6,500, the highest level on record and four times the pre-pandemic rate. They settled down, but even now, according to the FMC report, the average price is $3,500 per cost equivalent unit, up from $1,800 in early 2020.
The Chinese production increase in 2021 was mostly making up for the record lows in 2019 and 2020, when production fell below the amount needed to replace aging containers. Bentzel, the FMC commissioner who produced the report, has publicly stated that China artificially and deliberately suppressed container supply to boost prices. “The shipping lines that were reviewed for this report all indicated severe frustration, and experienced both delays in orders, and increases in price that they admitted were impacting service ability and reliability,” Bentzel explained in the report, while adding that the circumstance could have been “a deliberate strategy to manipulate prices.”
China has an interest in making lots of containers, of course; its producers need empties to ship goods around the world. But that mainly extends to the countries where China engages in significant trade; other Asian countries in particular, which are competing with China for exports, don’t get the same benefit, and suffer with few containers for their own goods.
THE CRAZIEST PART of the Chinese container and chassis monopolies is that they are standard goods, with standard dimensions and parts that are easily understood. It is simply not the case that only China can make containers or chassis. But the subsidization of the industry means they can significantly undercut rivals; and once their monopoly is secured, they can turn the dial on production to boost prices and harm competing exporters. Because reliability is central to a functioning supply chain, this monopoly endangers global commerce.
With regulators like Bentzel starting to recognize this, production is slowly ramping up outside China. New tariffs placed on Chinese chassis production have led to companies looking to Mexico and elsewhere for this equipment. One Chinese manufacturer recently opened a plant in the United States, and another manufacturer is building a chassis facility in Texas.
The chassis market doesn’t start in the same place as containers, where really nothing is produced outside of China. The report notes that a new “smart” container, with tracking and security features and built with composite materials, has begun production in Maine, and there are similar efforts just under way in Europe. But competing against state-owned and -subsidized companies is difficult. And steel being more than half the cost of a container, as well as cheap Chinese steel given over to their container “national champions,” creates a bigger struggle.
Yet, Bentzel concludes, “the level of interconnectivity” in container shipping “poses the greatest threat to economic welfare,” and “the fact that the PRC controls an industry that has a near defacto worldwide monopoly in the production of shipping containers should be deeply concerning.” This dependence on China, just like Europe’s dependence on Russia for natural gas, could prove unsustainable.
The FMC could provide some of the solution by using the 1988 Foreign Shipping Practices Act to penalize China for “restrictive trade practices that adversely affect U.S. carriers in foreign trade.” The penalties could include limited sailings to U.S. ports, suspension of service contracts or rights to operate in the country, or penalty fees. Bentzel doesn’t recommend this action, which is rare, so much as he lays it out in the report.
More realistically, breaking the container monopoly could align with the general business shift to diversify suppliers, rely more on domestic production, and avoid single points of failure in the supply chain. If more production is moved onshore, the impetus to build containers near those manufacturers would increase. And virtuous circles around domestic steel and other inputs could form.
It’s incredible that anyone could manage to secure a monopoly on a 40-foot box. But as the promise of globalization reveals itself as problematic, these absurdities may finally be rooted out.
