On Business: A standard agreement

Individual efficiency can lead to collective inefficiency as companies battle to protect their short-term interests.

by Marc Levinson, World Business
Last Updated: 23 Jul 2013

The shipping container was one of those ideas that made intuitive sense to almost everyone. But in the years after 1956, when road-hauling magnate Malcom McLean put large truck bodies aboard a specially refitted ship and sailed them from New Jersey to Texas, there were many notions of what the container should be.

Some shipping lines used boxes 35 feet long, some 24 feet, some 17 or less. Various railways offered containers that fitted only their trains. Some containers came with built-in slots for forklifts, others with eyes on top for lifting with hooks, others with one of several varieties of steel fittings that allowed for lifting by special cranes.

Each company, of course, insisted that its way of using containers was best for its own business. Individual efficiency, though, led to collective inefficiency. The plethora of incompatible containers threatened to nip containerisation in the bud. Companies engaged in prolonged technical battles in the effort to use standards to protect their short-term commercial interests. By doing so, they retarded the growth of their industry - a mistake that firms in many other sectors of the economy continue to make to this day.

The disadvantages of having multiple container systems were evident to everyone by the late 1950s. The patented boxes carried by New York Central Railroad between New York and St. Louis could not go on any other train line, and a container shipped on McLean's Sea-Land Service could not be transferred to a Hawaii-bound ship of Matson Navigation.

These complications scared away potential customers and deterred investment in ships and containers: no one wanted to buy equipment that might soon be obsolete. But the process of standardising something as simple as an aluminium box required years of haggling.

Everyone agreed, in principle, that it made sense to have a container that could travel on any ship, truck, or railway car anywhere in the world. Yet each company that made or used containers had its own investment to protect. Within the American Standards Association, votes to adopt a common set of standards repeatedly showed no majority in favour of anything.

Only intense pressure from the US government convinced the domestic goods transporters to embrace a single version. International agreement took years more.

All in all, a decade was lost before the 40-foot box, with uniform corner fittings that could be lifted by almost any crane in almost any port or rail yard, became the world's standard in 1967. Once the standard was finally in place, shipping lines began ordering purpose-built containerships by the dozen and international container traffic took off like a rocket.

In one sense, this is surely a success story: thanks to standardisation, containers by the millions move seamlessly around the world. But the arduous process of agreeing on standards also serves as an object lesson. The process was much delayed by the legions of engineers engaging in battle on behalf of equipment manufacturers, ship lines, railways and hauliers.

These men were defending their respective companies' immediate concerns - but their focus on short-term advantage worked against their employers' more fundamental interests.

The container story is unusual only in the relative simplicity of the technology at issue. Most attempts at standardisation involve far greater complexity. In Europe, firms have faced pressure to standardise everything from arc welders to medical equipment to G3 wireless phones.

In the US, a law recently passed requires tighter financial reporting for all stockholder-owned companies regardless of size, effectively setting a standard for accounting. New banking regulations are intended to establish a uniform standard for bank safety, regardless of an institution's size or home country.

In each of these cases, individual companies face an irresistible temptation to use the standardisation process to gain competitive advantage. Playing with standards in a way designed to help one company has become more common as formal barriers to international trade have come down. Governments invariably join in the game to help local employers. The logic is straightforward: if you can't keep the competition at bay with tariffs or quotas, standardisation can do the job as well.

Used in this way, standardisation is invariably a short-term response to a long-run competitive problem. As they are in the trenches fighting to shape the standards, corporate lobbyists and lawyers are prone to focus on the immediate issue and neglect more fundamental concerns.

Will standardisation permit companies to adapt and innovate? Will there be room for new technologies that may create new demand? These are the issues that managers need to face, rather than using standardisation as an opportunity to resolve a competitive problem.

- Marc Levinson, an economist in New York, is author of The Box: how the shipping container made the world smaller and the world economy bigger (Princeton, 2006).

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