John McCown is founder of Blue Alpha Capital and an expert on supply chains and logistics. He offers views on China, national security, U.S. workforce needs, and challenges facing supply chains in the wake of the pandemic.
Federal Newswire:
What role does shipping play in the global economy?
John McCown:
Well, shipping is, really the way I see it, the backbone of the world economy. Something on the order of 40% of the tangible goods move part or all of the way on a ship. We just wouldn't have the economy in the US or really across the world without the extraordinarily efficient shipping industry that we have. It really has had the effect of shrinking distance.
But I agree completely with your reference to this great thinker in terms of the importance of sealift. I think a lot of people tend to think that's something more in the past, but it really exists even today. We're getting a firsthand lesson with what's going on with Russia's terrible invasion of Ukraine, and the extraordinary importance of logistics.
One of my favorite sayings that comes to mind that was credited to General Omar Bradley ... Something along the lines of, "Amateurs talk strategy. Professionals talk logistics."
And that's obvious in World War II, but it really still exists today.
Federal Newswire:
How do you view the invasion of Ukraine?
John McCown:
From all the reporting, it seems like much of Russia's problem is the poor logistics pipeline from Russia to Ukraine. Now, that's a little bit of a different type of logistics. It's really Russia borders Ukraine, and it's more just over land problems. So it's not the sealift, which is the big thing. But it just underscores that if you don't have the logistics right, it significantly compromises any projection of military power.
And that's what the news reports emphasized over and over again, that so much of Russia's failure has been that. And that was a fairly short logistics supply lane, but it just underscores the importance of that. To me, it was a reminder that even in current times, it's an incredible ... When you're talking conventional war, and sadly, conventional wars have not gone away, it's really all about all that equipment and all the supplies. If that isn't kept constantly moving, the finest military force in the world just grinds to a halt and can't continue.
Federal Newswire:
How do you view our current supply chain problems?
John McCown:
I think it's fair to say over the last two years or two-and-a-half years, Americans across the board have learned much more about their linkage and products that they get every day. The linkage to logistics. With the news stories, whether it was the giant container ship getting stuck in the Suez Canal.
Or 110 container ships waiting off the coast of California. All of a sudden, a system that had worked extraordinarily efficiently and very much behind the scenes ... It used to be, before the pandemic, container ships. Container ships are what bring all of the products that most consumers get to them. Before the pandemic, container ships would operate like clockwork. They would get in a port within 30 minutes of when they were expected and it wasn't a problem.
And so, people took that for granted. A whole series of things came into being. A lot of it really was just a gridlock that had the effect of reducing capacity and volume was up. Particularly, in the US. But the bigger impact was that congestion. I use the analogy to people ... It's kind of like if you've ever driven in an urban area during Christmas. The gridlock where somebody gets stuck in the middle of the intersection. That stops not only them, but that stops everything.
Even the term, "Supply chain," was kind of a new thing to people before the pandemic, but people are well aware of it now. And it's still an extraordinarily efficient system. That congestion led to some sharp increases in shipping costs, and that's a pretty big contribution to inflation. But based on my analysis ... Overall container shipping costs are up about three times the freight cost prior to the pandemic.
But my analysis still has that at about 6% of the delivered cost of the goods. When you think about that, that's extraordinary. Going from 2% to 6% is up three times, but 6% still isn't going to always move the needle. And that really explains the explosion in world trade.
I happen to think that economists don't give as much credit to an extraordinarily efficient shipping industry, which is both from specialization and jumbodization, but it really has been a real catalyst for that growth. Before shipping was so efficient, it would often be 50%, 75%, 100% of the cost of the product to ship it.
And that prevented a lot of trade. But when you get into a low single-digit number, that makes a lot of trade available. Now, the flip side. A lot of people would say that's bad. But the reality is, you can't really get in the way of economic progress.
That took off. And that was kind of the explosion in world trade.
Federal Newswire:
What is China's role in all of this?
John McCown:
China is really in a broad sense, probably taking a page out of what many of the other export countries in Asia did. As it turned out, Mao Zedong and Deng Xiaoping, were pretty good students at looking at what was working for some of these other Asian countries. By definition, when you're an export-oriented country, shipping is very important. And so, the government became very involved.
Particularly, in the case of China, because they saw China in an efficient and large shipping industry that they controlled as part of what would help their larger issue of more exports and imports. And so, China has roughly 50% of the world’s ships that are dedicated to moving stuff to or from China.
It's been that big of an economy. Not all of those are Chinese ships. But China has the best way of looking at it, in two of the three major sectors have the largest shipping fleets in the world. Both in bulk ships and container ships. The growth is just extraordinary and everybody knows about that. But China has certainly actively supported its Merchant Marine. China's not under any delusion. They view Merchant Marine as part and parcel of their military strength, so it's been pretty impressive.
China today has the second largest navy in the world. Some people say it's the largest if you look at the number of ships, but I think really second to ours in terms of quality. But it also has the second-largest Merchant Marine. We on the other hand have the largest Navy. But we're the 21st largest merchant marine. And that's not a good gap.
Federal Newswire:
Talk about your writings on strengthening the US Merchant Marine system.
John McCown:
I see the Merchant Marine as not only important to us economically, but it does have a very special national defense. Actual national defense feature. People who don't think it does today aren't really analyzing the right facts.
I'm a big believer in it should be treated differently because of that national security interest. The term supply chain really needs to come into being when you look at that, because it's not really just the ships, it's everything that is linked to it. Obviously, the shipyards. We need to have strong shipyards.
Nobody ... I think even the people that are against the Jones Act, they're not going to advocate we build our carriers and our cruisers in foreign yards. But it's also the seamen. And then, on top of it's the mini professionals that are tied into this very large supply chain. Professionals and vendors. It's a big system.
Federal Newswire:
The Jones Act relates to the ships that operate in and out of American ports, they have to be crewed by Americans and they have to be ships that are built in the United States. What will happen if we lose the ability to repair our own ships?
John McCown:
You're completely correct. There are a whole series of things that are linked. You can't really just say, "Well, I don't like that piece." Because if you take that out, other parts will wither. Like shipyard workers. As more shipyards closed down, that's going to reduce the number of skilled shipyard workers. And if that goes on long enough, that's a permanent reduction.
I use the expression that our having an insufficient merchant marine isn't a problem until it is a problem. And it's a really big problem. This isn't something that you can correct overnight. It's really all of these things that are linked together. And if somebody's looking at it purely economically, of course, there's a cost difference. But that difference is routed. It can be explained by our safety, labor, and tax laws, regulations, and practices.
There's no mystery. Both the ship building and the ship operating, these are domestic industries. What always gets me is the people that are against the Jones Act ... They want to take this one domestic industry and almost because it occurs over water, maybe out of sight, they somehow think it's not really a domestic industry. But you could do that with any industry. If you were to say on this industry our safety, labor, and tax laws, regulations and practices, they're going to be exempt. Then, you would have a big difference.
All of that cost difference can be explained by that fundamental difference of what we really call our American system.
Federal Newswire:
Are there challenges with the Jones Act?
John McCown:
The biggest one and the consistent one is a very selective cherry picking. And it's always focused on picking the thing that is the biggest difference in cost. And then, they highlight that to the exclusion of anything else. I'm specifically thinking of the Cato Institute and some of the think tanks that are going against this.
In the case of Cato, what they love to do is talking about the building cost differential. And it's meaningful. My own analysis, on an apples to apples basis, a tanker is going to be three times as much to build here, a container ship four times.
But if you back away and say, "Well, US per capita income is five times the rest of the world," you start to understand it. But what Cato and other people do ... First, they exaggerate. For a while, Cato would say, "It's six to eight times more to build a ship in the US." They keep on pounding on that. Because what they want to do is imply that means it's six to eight times higher cost to whoever's using it.
That's where it really falls apart. Particularly, in container shipping. Container shipping domestically, the ship itself is only about 25%, 30% of your total cost. There are a whole bunch of things that aren't impacted at all by the Jones Act. The cargo handling your biggest ship cost of fuel is the same. A whole array of costs, sales, equipment have nothing to do with it.
The container sector is the biggest part of the Jones Act. If you go through a real analysis, it does work out to a cost difference. I have no bones about acknowledging that, but it works out to about 15% to 20% of the total cost that the carrier is responsible for. It's much more modest. But the exaggeration on the part of Cato, in particular ... It's just head-scratching. And it's all purposeful. They know that they're exaggerating these things.
Federal Newswire:
You've talked about the need for a shipping act. What would you want to see in this shipping act?
John McCown:
I think that what is needed in my view is a real national maritime strategy.
That not only really relates to ships and Merchant Marine, but really a strategy to prepare our maritime system, our ports, for the further growth that we know we're going to have. Looking at things in a national strategy galvanizes a lot of decisions, in terms of what is the smartest thing to work at.
There are a whole set of initiatives that can be supported with government support and government action, but you can choose what's the most efficient way. Whether it's requiring additional cargo preference to move US Flag or additional government support. What's the most efficient way the government can use funds and new legislation to build our Merchant Marine? Because I think you need to find a situation where we can have some organic growth.
I see an array of further initiatives. Particularly, domestically, where if you understand the numbers ... There's a host of other areas we can get involved and compete with the other modes. Compete with rail, compete with truck, where we're kind of on an apples to apples basis in terms of US labor costs.
Internationally, I think we need to do a lot more also. I've been an advocate of somebody looking into a new Trans-Pacific service. Actually, my analysis is that there could be a cost-efficient, and in some respects, even a low-cost US Flag operator if it had a new service from China to the West Coast, but it was built exclusively around 53-foot containers.
Because 53-foot containers are the size that all freight moves domestically in the US and has moved for 20 years. That would be a way of taking cost out of the process. Taking out stevedore cost, inland cost. I've suggested ...
Federal Newswire:
When you have containers that are not 53 feet long and they come to the United States, is there a cost that has to do with transferring cargo inside containers from one container to another?
John McCown:
Exactly. And that's mostly on the West Coast. Almost half of the cargo that comes over the West Coast will go much or all of the distance across the country to the Midwest and the East Coast. But before it does that, most of that will be transferred from 40-foot containers to 53.
Three 40-foot containers become two 53s. And that's because that's the most efficient way of moving domestic freight. But that takes a couple of days time. That takes additional cost. The other unknown thing. That is a big part of the use of crooking capacity on the West coast. You're really layering on top the congestion.
And if you had a service from China to the US with just 53s ... China is where they make all the 53s. Somebody like a J.B. Hunt buys 15,000, 20,000, 53-foot containers from China anyway. So it ties into that. I've suggested that the ideal operator for that would be J.B. Hunt or perhaps Amazon. It's going to be somebody that appreciates the economics of 53s.
But my analysis is … The ships would be built overseas, but they'd be flagged US. On the large ships that are being built today, your incremental US Flag crewing costs would be almost de minimus relative to the total cost. And yet, you would more than pay for that with 53s. Now, I don't think any existing operator is going to do that.
I think a new operator, it makes a lot of sense for them to look into it. And that's an example of an organic way of growing our Merchant Marine.
