R.J. REYNOLDS TOBACCO – GLOBAL ECONOMY PIONEER

Container shipping has been in the news since a giant ship ran aground in the Suez Canal, causing a major bottleneck in global supply chains. In a recent article, Ryan Petersen said this about the global economy and the critical part that containerized shipping plays in it:

Before the shipping container, longshoremen loaded and unloaded bulky cargo on ships in whatever order seemed best to them at that moment. In 1956, hand-loading a ship cost $5.86 per ton. Then, containers dropped that loading cost to 16 cents per ton and cut the loading time by as much as 95%.  It also eliminated pilferage that sometimes ran as high as 10%.

The idea for containerization came from a truck driver. Malcolm McLean started out hauling empty tobacco barrels in North Carolina in 1935. McLean planned to use the “trailerships” for freight from North Carolina to New York, but U.S. regulations didn’t allow one person to own both a trucking and a shipping company. So, he sold his McLean Trucking company, borrowed $22 million and, launched a shipping company in 1956.

And on April 26, 1956 the SS Ideal-X sailed from Newark, New Jersey, for Houston, carrying 58 containers. (The International Longshoremen’s Association was not pleased. When asked for an opinion, a top official replied, “I’d like to sink the son-of-a-bitch.”)

McLean later opened a new 101-acre port facility in Newark, and a decade after the first container shipping, service commenced between New York and Rotterdam, Netherlands; Bremen, Germany; and Grangemouth, Scotland. Through the late 1960s and early 1970s, container networks entered Hong Kong, the Philippines, Singapore, South Vietnam, Taiwan, and Thailand. By the end of the 1960s, McLean’s Sea-Land had 36 ships with more than 27,000 containers, and access to over 30 port cities.

Containers were perfect to drive global connectivity - they traveled across land, sea, and air, all in one form. They connected transportation, infrastructure, supply chains, and logistics. They made the world smaller and the world economy bigger. 

According to a recent report, between 1970 and 2018, world exports increased more than 65 times, from $384 billion to $25 trillion. Inflation adjusted, total exports still grew 10 times. The “key factor spurring this globalization was the containers and infrastructure.” The shipping container is truly the unsung hero of logistics.[i]

Perhaps it seems a stretch to claim that a cigarette company 50 years ago could take any credit for the success of the global economy today, but we can make a case for it, with a backhand compliment to R.J. Reynolds Tobacco. In my book, Going Down Tobacco Road, I tell how Malcolm McLean persuaded RJR to buy Sea-Land in 1969. He saw that huge capital resources were needed to advance container shipping, and he needed a partner with “deep pockets.”  The tobacco company knew nothing about shipping, and the purchase turned into a complete misadventure for R.J. Reynolds. You can learn the details HERE, HERE, HERE, HERE, and HERE.  They are not pretty, but they make a point.  The chart below gives the financial results of Sea-Land at RJR. RJR invested over $10 billion (2021 dollars) with a free cash flow loss of nearly $3.5 billion before it was divested.  The total cash return to shareholders for 15 years was -13.9% annually. The damage to RJR stockholders was even greater because the 1969 merger included surrendering 27% of the tobacco company to Sea-Land shareholders, thus trading away a major part of one of the all-time great cash-generating businesses.

Nevertheless, RJR did supply massive funding for a new advanced fleet of container ships and port facilities around the world.  Malcolm McLean and RJR combined his entrepreneurial genius with the company’s unmatched cash flow from tobacco and advanced the early development of a technology that changed our world to the benefit of everyone. Few other companies could have shouldered that financial burden with hardly a noticeable blip on its long-term cash flow or balance sheet. [ii]

This is one of those ironies of economic history that has been lost in the sands of time. Sometimes it takes decades to understand the impact of decisions and their unintended consequences.

[i] INFRASTRUCTURE IS EVERYTHING Beyond the Meme: Ever Given, Supply Chains, and the Physical World, Ryan Petersen  

[ii] In 1971-72, RJR built 8 SL-7 Class ships, the world’s largest at the time, with about 1,950 TEU capacity (Twenty Foot Equivalent is the standard unit of measure for a container ship’s capacity).  The SL-7s are still the fastest vessels in the world, but they became obsolete decades ago. For comparison, Daewoo has built 7, and Samsung 5, Algeciras Class ships with a capacity of 23,964 and 23,820 TEU respectively. But they will not be the biggest for very long.  Samsung and China State Shipbuilding are each building 5 Evergreen Class A ships with a capacity of 23,992 TEU, more than 12 times the size of the SL-7.