It was probably a mistake for me to begin my last post talking about a bad case of the flu and then to go radio silent for three weeks. A lot of people sent messages asking if I was OK. Not to worry, I’m fine, having finally beat the flu that would not leave.
In fact, I have just returned from another edge – Dubai. Dubai represents a geographic edge, sitting near the intersection of Asia, Africa and Europe (OK, the latter is a stretch, but in this jet age it is close enough). I want to blog more extensively about Dubai in a separate posting – my focus here is on the recent announcement that DP World concluded an agreement to acquire the venerable British company, Peninsular & Oriental Steam Navigation Co., created by a royal charter back in 1840, at a price exceeding $5 billion.
This news received a lot of play in the international business press, but barely received any comment in U.S. publications even though it marks a significant milestone in the restructuring of the global trading infrastructure.
It is significant on a number of levels. First, it drives home the growing prominence of Dubai in world trade. With this acquisition, DP World, which is owned by Dubai’s Ports, Customs and Freezones Authority, catapults from the sixth largest port operator in the world to third in terms of capacity. It also significantly expands DP World’s presence in China and India. Earlier this year, DP World made another significant acquisition when it bought CSX World Terminals, the international terminals business owned by CSX, the U.S. railroad and shipping company.
The scale of Dubai Ports (the parent of DP World) is in part due to the size and growth of its Dubai operations. In 2004, its Dubai operations ranked among the top 10 container ports in the world, surpassing Antwerp in throughput. Dubai Ports has been growing its throughput at a rate exceeding 20% over the past several years at a time when most other ports were growing at less than half that rate. Its growth rate last year was exceeded only by the Shanghai Port and the Shenzhen Port in China.
But that is only part of the story. DP World was formed as an international arm of Dubai Ports in 1999. It has been growing by leveraging the expertise acquired in operating Dubai’s own port operations to provide port management services to large container ports around the world. It has in effect become a major outsourcing services provider in the container port business, offering a broad range of services including management of container terminals, free zones and related infrastructure. In the words of the company, DP World “can completely turn around the performance of ports, rather than just achieve small incremental improvements solely through better management practices.”
In effect, DP World has been capitalizing on an even more fundamental shift in world shipping that has played out over the past 50 years. Back in 1955, an American entrepreneur, Malcolm McLean, came up with the ingenious idea that the efficiency of loading and unloading ships could be dramatically improved by modular design. Rather than having shippers use any size container they wanted, McLean defined and tirelessly promoted adoption of a new shipping standard – the twenty foot container. McLean formed Sea-Land, one of the most successful contemporary shipping companies, to pioneer container shipping techniques. The fascinating story of the impact of this innovation is told by Stewart Taggart in a great article entitled “The 20-Ton Packet” that originally ran in Wired magazine back in October 1999.
Why did Taggart call the article “The 20-Ton Packet”? Simple – he was making a compelling case that containerization did for the global shipping industry what packet switched networks did for global information flows decades later:
Just as the Net and deregulated telephony spelled the death of distance for telecommunications, containers spelled the death of distance for manufacturing. By breaking down cargo into standard units, greater amounts could be more efficiently pushed through a network.
While other factors were certainly at work, containerization played no small role in the dramatic growth in world merchandise trade over the past 50 years and has been instrumental in facilitating the offshore movement of manufacturing. As Taggart reports,
From a small base of 6.3 million in 1972, the number of containers handled by the world’s ports had risen 26-fold, to 163.7 million, by 1997. As scale efficiencies grew, prices dropped. Over the past 20 years, nominal unit-transport costs on the key Asia-US route have fallen by about one-third, or roughly two-thirds in inflation adjusted terms.
For those interested in a great techie build on the original Taggart article, please see the PowerPoint presentation by Nick Gall of the Meta Group on “TCP/IP and Shipping Containers: How to Architect Freedom” delivered to OSCON 2005. This presentation was covered by both Daniel Steinberg and Phil Windley. Gall draws attention to an even more techie piece by David Clark at MIT on “Interoperation, Open Interfaces and Protocol Architectures” which highlights the importance of “spanning layers” in achieving interoperability. The standards around container format represent just the kind of spanning layer that Clark is talking about.
Containerization has not only transformed the maritime shipping industry; it has led to a transformation of truck and rail transport as the need to unpack and repack goods disappeared with the spread of containers across all forms of transport. Containerization has posed a challenge for older ports as they sought to re-tool for this new technology. DP World has been riding this transition, offering world-class management techniques to take full advantage of the efficiencies created by containers.
But here’s a key lesson. Modularization does not necessarily lead to fragmentation. In fact both the container shipping business and the port operation business have been rapidly consolidating. As containerized shipping becomes more pervasive, both sets of players are realizing significant economies of skill.
Both of these businesses are what I call infrastructure management businesses – businesses that focus on high-volume routine processing activities. As the unbundling of the corporation proceeds, these businesses are getting carved out of traditional companies and, in the process, rapidly consolidating. Modularized technology and management techniques are accelerating this consolidation on a global scale.
Modularization will intensify fragmentation for another kind of business – product innovation and commercialization businesses – but that’s another story for another time.
So why should business executives care about what is happening in the container port business in Dubai? It provides insight into much more fundamental trends that are re-shaping our global economy at an awesome pace. It shows that countries and companies on the edge have an opportunity to become significant global players by understanding and harnessing the forces at work. It also drives home that our most well-known and well-established companies, even those granted royal charters in 1840, are vulnerable to these same changes and can succumb quickly to the initiatives of more aggressive competitors, even those just formed in 1999.