#61 Malcom McLean: The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger

What I learned from reading The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. ---- Such was the beginning of a revolution [0:01] The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use. [15:30] the basic idea was around for decades [17:30] Malcom's early life and first business [23:00] McLean had an obsessive focus on cutting costs [33:00] the beginning of Malcom McLean's idea [37:00] McLean's definition of total commitment [41:00] McLean's fundamental insight [48:00] fixing the business by focusing on the customer's real problem [53:40] the surprising reason containers are standardized [1:00:00] Daniel K. Ludwig and Malcom McLean [1:07:00] Malcom McLean sells his business [1:13:00] Starting another business [1:21:00] ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Senra?

  On April 26, 1956, a crane lifted 58 aluminum truck bodies aboard an aging tanker ship moored in Newark, New Jersey. Five days later, the Ideal X sailed into Houston, where 58 trucks waited to take on the metal boxes and haul them to their destinations. Such was the beginning of a revolution. Decades later, when enormous trailer trucks rule the highways and trains hauling nothing but stacks of boxes rumble through the night, it is hard to fathom just how much the container has changed the world. In 1956, China was not the world's workshop.

• 0:41David Senra?

  It was not routine for shoppers to find Brazilian shoes and Mexican vacuum cleaners in stores in the middle of Kansas. Japanese families did not eat beef from cattle raised in Wyoming, and French clothing designers did not have their exclusive apparel cut and sewn in Turkey or Vietnam. Before the container, transporting goods was expensive, so expensive that it did not pay to ship many things halfway across the country, much less halfway across the world. What is it about the container that is so important? Surely not the thing itself, a soulless aluminum or steel box held together with welds and

• 1:23David Senra?

  rivets, with a wooden floor and two enormous doors at one end. The standard container has all the romance of a tin can. The value of this utilitarian object lies not in what it is, but in how it is used. The container is, at the core, of a highly automated system for moving goods from anywhere to anywhere, with a minimum of cost and complication on the way. Okay, that is from the introduction of the book that I want to talk to you about today, which is "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger." If this is your first time listening to Founders, let me welcome you. My name is David.

• 2:07David Senra?

  The premise of this podcast is really straightforward. Every week, I read a biography, an autobiography, a book about the life story of an entrepreneur, and I try to pull out ideas all of us can use in our lives. So let me tell you how I found this book. A few weeks ago, I was listening to a fascinating podcast with the founder of Shopify. His name is Toby Lukey, I think is how you pronounce his last name. And I've heard him on a few podcasts, and I've just been fascinated with the way he thinks, like the way his mind works. And he said something that was really interesting. He was asking if he'd read any good books lately, and he recommended this book, the book that I have in my hand.

• 2:51David Senra?

  And he said, "The book is about the inventor of the shipping container, an amazing entrepreneur named Malcolm McLean, who is the subject of today's podcast." And he went on to talk a little bit about McLean, but he said, "McLean was the only person who cared about moving things. Everyone else was focused on a particular transportation method, be it trains or ships. But by focusing on the actual problem, which is what is the best way to move things around the world, he came up with a better solution. We need more of that in the world." And Toby talked about how that even influences how he thinks about Shopify, where, you know, most people think of Shopify, what do they do? They make it really easy to have an online store to sell something.

• 3:34David Senra?

  But that's not really what his customers care about. He says frankly, "My customers don't care about an online store. They care about the independence of entrepreneurship." So when him and his company build products, they don't think, "How can we make the best online store?" They try to solve the underlying problem, which is how do we make more people reach their ultimate goal, which is that of independence, self-employment.

• 4:04David Senra?

  And that's a really interesting distinction and something that he was referencing that, you know, a lot of people miss. You might've heard this, this, this concept before talking about, um, there's multiple examples how people don't want drills, they want holes. And so I've talked in the past that I keep a lot of quotes and things that are important to me that I need to reread on my phone in a special folder. And one of them is, uh, you know, this idea that people don't want drills, they want holes. And this, this one entrepreneur, um, realizing that. So let me just read this real quick. He says, I remember him saying, I teach my people on day one, people don't want drills, they want holes. Meaning the people that go to the store and ask for a drill. She's like, oh, I need to make the best drill possible. I was like, no, you need to look at underneath what your

• 4:46David Senra?

  actual customer is trying to solve. And he said, after a week of reflection, I collapsed the firm from inside and rebuilt it from the ground up to never make this mistake again. Meaning he was optimizing for the wrong thing. I rebuilt all my processes and everything was geared toward the fact that people don't want the technology, they want the solution it provides. We have to stand behind the core problem we are solving for our customers and we have to operate the whole way through to the point that they are raving fans. I hope this helps my fellow entrepreneurs. So that's exactly what Malcolm McLean does. And as we're going to learn today on the podcast. And I really appreciate, um, Toby picking up on that. First of all, reading the book and then also sharing, hey,

• 5:29David Senra?

  like this, this guy, you can actually learn a lot from him because, uh, as I'll share with you in a little bit, like this, this problem was, was rather obvious and people had, you know, guesses on how to solve it. But McLean was the first one to realize that there was the fundamental problem was just how, what's the best way to move things around the world? That's what our customers care about. That's why they're paying us. They're not paying us for our ships. They're not paying us for our trains, for our trucks. They don't care about any of that. They'll send their, their goods all over the world in the, in the, the most efficient manner. So why don't we focus on that? So before I jump into the book, I just want to read some of the, um, well, first how the book part describes itself. So on the back cover, it says, "The box tells the dramatic story

• 6:10David Senra?

  of how the drive and imagination of an iconoclastic entrepreneur turned container, turned containerization from an impractical idea into a phenomenon that transformed economic geography, slashed transportation costs, and made the boom in global trade possible."

• 6:28David Senra?

  And then just one of the blurbs, which I thought was good. I didn't read this till after I finished reading the book. But it says, "A perfect illustration of how an idiosyncratic entrepreneur brings something new into the world, and a wonderful example of how business history can be made to sing." Which I particularly appreciate because, you know, my, this entire podcast is around business history. So, alright, so let's jump into the book. I'm just gonna move through like I normally do, just some highlights and ideas that particularly stuck out to me. So this book, as you can probably tell from the title, it's not a biography of Malcolm McLean. It's a biography of shipping container. He just happened to be the one credited with making, he didn't invent the container,

• 7:11David Senra?

  but he invented the processes behind making it as broad and accessible as it is today. But embedded in this book is the life story of Malcolm McLean, including how he started, how he thinks about business, things that are important to us. So that's what I'm gonna be focusing on today. And so let me just jump into, getting right back into this whole ship. The very first ship that used containers in this way, which is the Ideal X, the one I was just referencing. So it says, "Getting from the Ideal X to a system that moves tens of millions of boxes each year was not an easy voyage." Let me just stop there after that, that, um, that sentence. So again, big things start small.

• 7:55David Senra?

  The very first inkling of the containerization industry, which is now massive, I've heard multi-trillion is the size of it, started with 58 boxes. So 58, and now they're saying millions, tens of millions of boxes each year. Okay. "Both the container's promoters and its opponents sensed from the very beginning that this was an invention that could change the way the world works." Eh, it's kind of. So I'm reading from the introduction. Later on in the book, though, it becomes apparent, a lot of people dug their heads in the sand. And the reason, I think I'll talk about on the podcast, but just in case I don't. It took an outsider. Malcolm Klean was not in the shipping industry.

• 8:40David Senra?

  He was in the trucking industry. That's how he got to start. So everybody in the shipping industry was very hesitant. Once the technology was appeared, and I'll go into detail like how, that once you see something, I think it was like an order of 10 times cheaper to ship things just by using Malcolm's system, that it, you know, kind of forced, kind of slaps you in the face like, oh, okay. The world has changed. We need to embrace that. But as we know, we've now talked about 60 something, what, 60 different founders. All different industries, all through different times of period. You know, human nature is resistant to change, especially when your paycheck depends on it. Okay, so it says, "That first container voyage of 1956, an idea turned into reality by

• 9:24David Senra?

  the ceaseless drive of an entrepreneur who knew nothing about ships unleashed more than a decade of battle around the world. Many titans of the transportation industry sought to stifle the container. Powerful labor leaders pulled out all the stops to block its ascent, triggering strikes in dozens of harbors." There's an entire chapter dedicated to that. It's some really silly behavior. "Some ports spent heavily to promote it, while others spent huge sums for traditional peers and warehouses in the vain hope that the container would prove a passing fad." We've seen that before. "Governments reacted with confusion, trying to figure out how to capture its benefits without disturbing its profits, jobs, and social arrangements that were tied to the status quo."

• 10:09David Senra?

  You know, I'm probably going to mention this multiple times on the podcast, but there's so many times I'm reading this book, and we could change out containerization with the internet, and the exact same behavior by governments, by powerful leaders, by entrenched incumbents, it's the same behavior over and over again. And I just kept getting slapped in the face.

• 10:32David Senra?

  With that thought, I was reading this book. So it says, you know, governments reacted with confusion, trying to figure out how to capture its benefits without disturbing the profits, jobs, and social arrangements that were tied to its status quo. Problem is, when you have fundamental changes in technology, as we've seen in the past, you can't, you can't stop, like, you can't stop it once it starts. So it's saying, you know, they don't want to disturb the profits. Well, the profits got disturbed. They don't want to disturb the jobs. The jobs got disturbed. And the social arrangements tied to those jobs and profits certainly got disturbed after this. Okay. Even seemingly simple matters, such as the design of the steel fitting, steel fitting that allows almost any crane in any port to lift almost any container, were settled only after years of contention.

• 11:16David Senra?

  In the end, it took a major war, the United States' painful campaign in Vietnam, to prove the merit of this revolutionary approach to moving freights.

• 11:28David Senra?

  Okay, so now, at the, at the core of why this was necessary is, think about how much of our economy relies on building something in one place and then having to move that elsewhere, whether it's a short term across town or across the entire globe. So the, if, applying efficiencies to such a massive industry, which is basically what at the heart of what McLean did, you know, not only did it make him a very wealthy man, but it, it's similar to when we were studying John Bogle a few weeks ago. What did we learn in John, in one of John Bogle's books is that the estimates of him passing on the savings from index funds to the investors, his career contributed to about 250 billion, about a quarter trillion dollars of savings.

• 12:13David Senra?

  So who knows what that number is with, now we're going, what, 70 years of containerization? It's probably much larger in, in McLean's case. But at the core, it's transportation efficiencies. So that's what we're gonna talk about here. Transport efficiencies, though hardly, though hardly begin to capture the economic impact of containerization. The container not only lowered freight bills, it saved time. And that's really hard to put a value on that because it's priceless. It's literally the only currency that humans have that is non-renewable. Quicker handling and less time in storage translated to faster transit from manufacturer to customer, reducing the cost of financing inventories sitting unproductively on railway

• 12:56David Senra?

  sightings or in pier-side warehouses awaiting a ship. The container, combined with the computer, made it practical for companies like Toyota and Honda to develop just-in-time manufacturing in which a supplier makes the goods its customer wants only as the customer needs them and then ships them in containers to arrive at a specified time. I just found a book written by the founder of Honda. It's like 30 years old, 30, maybe 35 years old. So I'm waiting for it to arrive, but eventually that's gonna be a future founder's episode. Such precision unimaginable before the container had led to massive reductions in manufacturers' inventories and correspondingly huge cost savings, which I just touched on a little bit there.

• 13:45David Senra?

  So this is very fascinating. So this, this is one of the books where I'm almost like, dang, man. Like, I know I'm, I'm on this cadence of a book a week for you guys. But I feel like there's, I would, there's almost a benefit if like I read a book and then the following week I reread it. Because you know, there's all these things that you, you don't understand until like you know the whole story and you can go back and see like the different meanings of things. Something that happens in my own life is I don't watch much TV, but my favorite show is Game of Thrones. And every year, like, there's just a huge gap between seasons. I usually, me and my wife usually re-watch the series from the beginning to, to catch up. And then you pick up on so many things you didn't know.

• 14:29David Senra?

  And then we go deep dive into like subreddits and YouTube videos. But I just think it really enhances like your appreciation for, for what it is that you're studying. And the reason I bring that up is because the paperback version of the book I have in my hand is like 400 pages, right? No, it's, it's more than that. It's a... Five, five, five-ten. Four-hundred is the story, right? Then this guy's got like a hundred pages of notes and bibliography. So the amount of research he did, um, it's just fascinating. So I'm gonna just, see, he goes back in history, tries to compare what's happening with the containers, with the stuff in the past. So I'm just gonna, I'm not gonna harp too much on that because I wanna focus on Malcolm.

• 15:10David Senra?

  But I like this part about, like, think about how important Thomas Edison's invention is, right? The incandescent light bulb. It was ama- like, an amazing, like, they lived in a time where you had no, like, you were lighting candles, but there was no electricity in your house. And as Jeff Bezos says, it's not like the killer app for electricity, they weren't putting electricity in the house, they were putting lighting. You know, another way to think about, if you're actually solving your, the root of what your customer's, uh, problem is, right? Which I think the closer you can get to that, the custom, the solution, the actual solution they want, the better company will be. But anyways, he just has this point about, like, as, as great as this invention was, it took forever to spread. So he says, although Thomas Edison invented the incandescent light bulb by 1879,

• 15:54David Senra?

  only three percent of US homes had electric lighting 20 years later. That's insane. That's insane, three percent in 20 years. "The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use."

• 16:14David Senra?

  That's, I don't have any tattoos, but if I did, we should tattoo that on ourselves. "The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use." Amen, okay. Um, oh, so here's another interesting part, remember? This, a basic idea was around for a very long time. That's why, like, this whole idea that, like, oh, it's too late to start a company, or it's, it's only too late if you're gonna copy, but there's tons of, um, opportunities hidden in plain sight. Um, you just have to go looking for them and have the time to do that. I know it's really hard if you have a full-time job, a family, hobbies and everything else, but you have to dedicate yourself to, to getting in the mind frame. mindset to like constantly look like, hey, that's, why are things done this way?

• 16:59David Senra?

  Um, I think it was, what is his name? Josh Wolfe, I think is his name. Uh, I took, uh, I took notes on him for Founder's Notes. But he says, a good way for entrepreneurs to find opportunities is ask themselves what, like, what sucks? Like, what in your life sucks? And you realize like, why is it done this way? And then most, uh, most likely you'll find opportunity. But, um, let's, let's focus, I guess, I'm getting a little off, off, uh, topic. Let me just read this part about, like, this was a, this was a giant opportunity hidden, hidden plain sight. The solution to the high cost of freight handling was obvious. Instead of loading, unloading, shifting, and reloading thousands of loose items, which is exactly what they were doing at the time,

• 17:40David Senra?

  which is why you had so many like manpower to do this, which now in the world we live in, you know, we, most of the people probably listening to my voice were born after the containerization. Um, like, it just seems so bizarre that they would do stuff like this. Like, this seems very wasteful. Like, you're, you just put a bunch of random stuff in a box, and then you ship it, and then on the other end, you have, you know, 20, 30, 50, 100 people going and using muscle power to take this out, and you wonder why it's so inefficient. So it says, um, so instead of unloading, shifting, and reloading boxes of loose items, why not put the freight into big boxes and just move the boxes? The concept of shipping freight in large boxes had been around for decades. The British and French railways tried wooden containers to move household furniture in the late 19th century,

• 18:25David Senra?

  using cranes to transfer the boxes from rail flat cars to horse carts. Oh, my goodness. At the end of World War I, almost as soon as motorized trucks came into wide civilian use, the Cincinnati Motor Terminal Company hit upon the idea of interchangeable truck bodies that were lifted onto and off of wheels with a crane. Farsighted thinkers were already proposing a standardized unit container in the form of a, of a demountable closed auto truck body, so kind of closed, which can be readily transferred by cranes between railroads, flat cars, auto chassis, warehouse floors, and vessels. Okay, so these ideas were out there. Malcolm's the first one to integrate them all into one solution.

• 19:09David Senra?

  Um, so just describing what this is author, just with one sentence describing what what everybody's trying to solve. All of these undertakings were modest in scope, but all of them had the same aim. To cut the cost of moving cargo through slow and inefficient ports. By the early 1950s, there was little dispute that freight terminals were a transportation chokehold. So there's just gonna be a lot of stuff, there's it'd be impossible for me to to share on the podcast because this book is so long. Um, but what they're talking about chokeholds, it's not only where their processes are inefficient, but there was a bunch of competing interests. And a bunch of, uh,

• 19:49David Senra?

  just like theft, violence, cronyism, nepotism, strikes. Um, the whole time I'm just sitting here reading, uh, what's going on in this industry and, you know, thinking of it through the terms of like, if I was running this business. And I'd be like, oh, there's just no way I would deal with all this, like you're this behavior is incentivizing the people that own the company to find other solutions. Like you're not helping yourself. I don't know who's advising you, but this is a very bad idea. Um, okay, uh, let's see. So everyone in the industry knew about the problem. No one could solve it. Um, so they actually, they're they can, who, there's like a bunch of not only governments, but also companies.

• 20:32David Senra?

  Um, they do really strange things like they they, and we're gonna compare and contrast there, the way they solve problems with a way Malcolm does, we're not there yet. But they they hire like, they commissioned studies to be done. And Malcolm was not big on that. He went by intuition and just like, I'll just have a problem and I'm gonna move about this problem. Very quickly, and then I'm gonna learn through trial and error. So somebody, I can't tell who though.

• 21:00David Senra?

  There's, I'm gonna read the results of this study. Unfortunately, I lost track of who actually did this. It says the authors went, this is the result.

• 21:12David Senra?

  Okay, hold on.

• 21:16David Senra?

  Okay, here we go. "The authors went beyond the normal admonishments to improve longshoremen's productivity and eliminate inefficient work rules, and urged a fundamental rethinking of the entire process. Perhaps the remedy lies in discovering ways of packaging, moving, and stowing cargo in a manner that break bulk is avoided," they wrote. So they're gonna use that word "break bulk" a lot. That's just moving things as individual units instead of in containers. "Interest in such a remedy was widespread. Shippers wanted cheaper transport, less pilferage, less damage, and lower insurance rates. Ship owners wanted to build bigger vessels,

• 21:58David Senra?

  but only if they could spend more time at sea earning revenue and less time in port. Truckers wanted to be able to deliver to and pick up from the docks without hour upon hour of waiting. Business interests in port cities were praying for almost anything that would boost traffic through their harbors. Yet despite all the demands for change," I think about all the different people, like stakeholders, in this entire process. "Yet despite all the demands for change, despite much experimentation, most of the industry's efforts to improve productivity centered on such time-worn ideas as making drafts heavier so that longshoremen would have to work harder. No one had found a better way to ease the gridlock on the docks.

• 22:43David Senra?

  The solution came from an outsider who had no experience with ships." And this is where we're gonna be introduced to Malcolm McLean,

• 22:53David Senra?

  and they call him the "trucker" because that's what he was. So this is a little bit about Malcolm McLean's early life and his first business. "Reshaping the business of shipping was left to an outsider with no maritime experience: a self-made trucking magnate named Malcolm McLean. McLean was born in 1913, deep in a swamp country of southeastern North Carolina. At the time of McLean's birth, about 3,500 residents," they're talking about the city he lives in, it was called Maxton. "So they had about 3,500 residents, and it was very rural and very poor."

• 23:29David Senra?

  Upon Malcolm's graduation from high school in 1931, in the depths of the Great Depression, family ties got him work stocking shelves at a local grocery store. So this is for one of his first jobs. And then he starts working, uh, this is how he's gonna stumble into business. Uh, those local connections, what they're talking about here are family connections. It's not like high socioeconomic status connections. It's that like, it's such a small town that everybody was related. Um, so it says, "Those local connections helped, uh, once more when an oil company needed a gas station manager." A family frie- um, so he starts working at a gas, as a gas station manager. And then he realizes that he could make money just trucking gasoline for the company instead of working in the store.

• 24:11David Senra?

  So it says, "A family friend lent McLean the money to buy his first load of gasoline. His rise began when he learned that a trucker earned $5 for bringing the station's oil from Fayetteville, which was 28 miles away. McLean proposed to do it himself. The station owner let him use an old trailer that had been rusting in the yard. McLean Trucking Company opened for business in March 1934, with McLean still running the service station as the sole driver." And so, look, check this out. So he is, graduates in 1931, three years later, he already has his own company. So he's a very, very driven person, as we're gonna see. And unfortunately, some of that drive, um, winds up leading to a downfall later in life.

• 24:56David Senra?

  Okay, so it says, "A, a local man agreed to sell McLean a used dump truck on installments of $3 a week. With that truck, McLean won a contract to haul dirt for a federal public works program." Even after hiring a driver, McLean earned enough money, earned enough to buy a new truck to haul vegetables from local farms. So he's gonna basically do everything. Started out doing gas, "I'll take your dirt, I'll take your vegetables, I'm just in the transport business," right? "According to a much repeated tale, one trip found McLean so poor that he couldn't afford to pay the toll at a bridge along the way. He left a wrench with the toll collector as a deposit, redeeming it after selling his load in New York City." So what do they mean? One sentence, they're telling you, he's making enough money to buy trucks. The next sentence, they're telling you, he's too poor to pay a toll.

• 25:41David Senra?

  This, welcome to Malcolm McLean's modus operandi of pushing it to the limit. Again, that gets him in trouble later on in life, so. Says, "The rags to riches tale fails to do justice to McLean's immense ambition. By 1935, at 22 years of age and with just one year of trucking, of experience as a trucker, McLean owned two trucks and one tractor trailer. He employed..." So let me, so he's 22. And he's, he's only been open for one year, right? So he's got, he's got two trucks, one tractor trailer, and nine drivers who owned their own rigs and had already hauled steel drums from North Carolina to New Jersey and cotton yarns to mills in New England.

• 26:21David Senra?

  By 1940, so now he'd be 27 at the time, as preparation for war revived the economy, the six-year-old McLean truck, trucking owned 30 trucks and grossed $230,000. That's in, in 1940 dollars. McLean built his operation during the war, gaining additional routes. A massive merger among seven of his competitors, which he opposed unsuccessfully all the way to the US Supreme Court, barely affected the truck line. At the war end, at the war's end in 1945, World War II, Malcolm McLean controlled a thriving business with 162 trucks, mainly hauling textiles and cigarettes from North Carolina to Philadelphia, New York, and southern New England.

• 27:04David Senra?

  Okay, so let's see, he started the company in 19, was it 1934? And now we're talking about 11, excuse me, now we're gonna go into 1946, so it's 12 years later. It says, "Revenues in 1946 were 2.2 million, nearly 10 times the level of 1940. McLean, already wealthy at age 34, viewed this as just the beginning. As he wrote a few years later, "I saw that my only opportunity was to build and build and build, to make a big trucking company out of a relatively small one."

• 27:38David Senra?

  Okay, so now, um, his business is up and running. This is how he got around what he would consider corrupt regulation. So there's this, it might still be around today, but, um, his industry, trucking industry at the time, was regulated by the ICC, which is the Interstate Commerce Commission. And there's some very strange objectives for the ICC. So let me start there. "The ICC's concern was not efficiency, but order. Regulation protected the interest of established truck lines," also known as regulatory capture, still happens today, "by limiting competition and it protected, and it protected the railroads by forcing, by forcing truck lines to charge much more than railroad companies."

• 28:22David Senra?

  So that, again, very bizarre, right? Not really serving the interests of the consumers. Like, why would you keep artificially high, you're keeping artificially high, uh, prices for people, for businesses that want to ship things, just because you want to protect the railroad industry? "More than anything else, the ICC wanted to keep the transportation industry stable." So there's this, you know, this, um, present, uh, behavior by humans throughout history of this idea of, you know, artificial control over the economy, over businesses. This idea that you can, you know, somehow keep things stable, um, which I, I think is, you know, probably false. "Regulation damped competitive spirit in the trucking industry.

• 29:07David Senra?

  Showing the sort of ingenuity that would characterize his career, McLean found ways around the regulatory, the regulators' obstacles. If winning new route authority was too arduous, why not buy a carrier that already had attractive routes? And if buying another truck line was too expensive, why not lease one? The labor unrest that followed the war left many truck lines struggling," remember, we're in the, just still in the 1940s here, "and McLean repeatedly seized opportunities. Between 1946 and 1954, McLean Trucking bought or leased routes in at least 10 different transactions, expanding its network from Atlanta to Boston. The company added 600 trucks between 1947 and 1949," that's crazy, "using the government

• 29:52David Senra?

  as the unwitting financier." Oh, so this is a really interesting idea. Check this out. So this is how he was able to get all those trucks in so fast and have the US government foot the bill. Veterans of the war were eligible for cheap government loans to set themselves up as independent truckers. So McLean encouraged veterans to become owner-operators. Brought them together, what that means is they drive the truck and they own the truck that they drive. I know a little bit about this because my dad's a truck driver. Brought them together to purchase equipment in a single, large order and sign them to haul freight from McLean Trucking. So he's kind of like the Uber of trucking. But with military veterans financed by the US government and no app.

• 30:36David Senra?

  But um, so he's getting the business, but they own, they, they own the rigs that they're driving and they're doing all the driving. Alright, so he brings them together, they purchase equipment in a single, large order, so they have some benefits, efficiencies there. And then sign them to haul freight from McLean Trucking, so, very similar. Okay, so, this is really important. Something that I harp on all the time. I actually just saw, you know what, I wasn't expecting to talk about this, let me grab this real quick. Because this whole idea of frugality, that we, that, you know, for whatever reason seems to be really present with

• 31:13David Senra?

  with, uh, with a lot of the founders that we cover. So Berkshire Hathaway, Warren Buffett, just wrote this letter, just think it came out a few days ago. But he, he has a, this idea on, um, like his philosophy on, on debt. And, um, and I saw a lot of people commenting on Twitter, they're like, "I hundred percent concur with this Berkshire philosophy." Um, it's more, even more appropriate for certain companies, but it's counter to the vast majority of VCs on boards recommending taking debt. So he's saying, we, this is now Buffett talking. "We use debt sparingly," and remember this whole debt thing, because this, this is going to come to play in later in our story.

• 31:54David Senra?

  "We use debt sparingly. Many managers, it should be noted, will disagree with this policy. Arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time. At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal." Yes, it does. "A Russian roulette equation. Usually win, occasionally die."

• 32:22David Senra?

  This may make financial sense for someone who gets a piece of the company's upside, but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don't, this is such good old school advice. Rational people don't risk what they have and need for what they don't have and don't need. Damn, that's a great quote. Rational people don't risk what they have and need for what they don't have and don't need. So, the reason I bring that up is because he's preaching, in my opinion, responsible management of finances. So, frugality is tied into that. Now, here's the weird thing. So, before I finished, I don't know if I'm going to talk about this in the future, so

• 33:07David Senra?

  I'll just talk about it now, because I don't remember if I left another note. But, I'm reading this, and, well, let me read this first, and then I'll tell you what I thought. So, this is, "An obsessive focus on cutting costs was the key to McLean's trucking success." We've seen this multiple times. "The only way a truck line could attract much new business was by offering lower rates than competitors offered." It's kind of like a commodity product, if you think about it. "A trucking company salesman would call on a prospective client, learn how much cargo it generated for various destinations, and then study the rates that its current carrier had filed with the ICC. The truck line could then propose a lower rate to win the business, but only if it could prove to the ICC that the proposed rate would be profitable. In practice, this meant that a truck line could not underprice its competitors unless

• 33:52David Senra?

  it had lower costs. Malcolm McLean's sharp pencil was critical." So, there's going to be multiple examples of his just, like, just fanatical focus on frugality in this book. And so, then I was like, wow, this is amazing. But, as I'm continuing to read the book, then I noticed, wait a minute, this is weird. I gotta ask the listeners if they can remind me of a time, because this guy had obsessive frugality combined with unbelievable leverage. And those are usually, you know, not, they don't come from the same person. I can't think of another founder that we've covered that was excessively frugal, yet highly, highly leveraged.

• 34:36David Senra?

  And what did Warren Buffett just tell us about leverage? Because that's what debt is.

• 34:41David Senra?

  He says, "It's a usually win, occasionally die strategy." "A Russian roulette equation." "Just like none of us would be, think it's smart to play Russian roulette." "Yet many companies do that with their, their, their business." "By taking on massive debt." "And I don't want to spoil the story, but that's what happens to McLean." "So there's a lot we're going to learn on, on, from him that he's really smart on." "And then you see that like, he does things that a lot of people do." "Um, and it destroys him in the end." "So, um, yeah, so I, I don't know, there's just, there's just stuck out to me." "I can't think of anybody else that is, it was as highly levered, uh, but frugal at the same time."

• 35:25David Senra?

  "Okay, so let's go more into his frugality before we get to that." "Cost-saving innovations continually materialized as McLean Trucking grew." "The company opened one of the earliest automated terminals in the industry." "Using conveyors to transfer freight from one truck to another while saving labor." "At a time when most," this is again, just a stream of good ideas, uh, from Malcolm, "which all comes from, you know, questioning how things are being done." "At a time when most trucks had gasoline engines, "McLean Trucking was the first major company to install diesel engines in its tractors." "And in an era when drivers typically bought fuel on their own, "Malcolm McLean arranged a corporate discount at service stations along the company's routes "and told drivers to fuel only at those stations."

• 36:07David Senra?

  "By the early 1950s, McLean Trucking was hiring young university graduates "and putting them through one of the first formal management training programs in American business." "Men just out of college would come to Winston-Salem, "where their first task was learning to drive a truck." "After six months of hauling freight, "trainees were sent to a terminal and spent several months unloading trucks." "This is just smart." "Then came a stint in the office, "learning the McLean Trucking method for making a proposal to a potential customer." "Basically what, what's that, um, old saying by Samuel Zemurray? "If you know your business from A to Z, there's no problem you can't solve." "He's teaching them the business from A to Z." So he's making proposal to a potential customer which required careful analysis on the cost of service of serving the business.

• 36:50David Senra?

  Only then were trainees dispatched to their first assignments, usually selling freight in Raleigh or Boston or Philadelphia. McLean Trucking quickly became known as a dynamic company in a very stodgy industry. That's an understatement. He understood, and then this is somebody, actually the person that was running some of the bank that was financing his operations, that bank actually becomes, turns into Citibank later on. But he's talking about McLean here. He says, "He understood cash flow. You'd go to a railroad in those days and talk about cash flow, and they'd ask you what you meant. Of necessity, a highly leveraged company had to focus on efficiency, for which Malcolm McLean had a passion.

• 37:32David Senra?

  They knew every aspect of their business, and they knew how to squeeze out costs." Okay, so this is now we're getting into his idea, the beginning idea of the idea that's going to change the entire world. Malcolm, Malcolm McLean was not a man to sit and enjoy his success. He was a restless soul, competitive, calculating, always thinking about business. He wouldn't be able to sit still for five minutes. His inventive brain churned out idea after idea for making money. One such brainstorm came in 1953, as McLean was fretting over increasing highway congestion and worrying that domestic ship lines, able to buy war surplus cargo ships from the government

• 38:17David Senra?

  for almost nothing, might undercut his trucking business. Rather than driving down crowded coastal highways, why not just put truck trailers on ships that could ferry them up and down the coast? So that's the little tiny beginning of this massive idea. By the end of that year, McLean was proposing to build waterfront terminals that would allow trucks to drive up ramps to deposit their trailers on board specially designed ships. These ships would move the trailers between New York, North Carolina, New York, and Rhode Island, circumventing the worsening traffic jams at a time when expressways were few and far between.

• 38:59David Senra?

  At the port of arrival, other trucks would collect the trailers and haul them to their destination.

• 39:06David Senra?

  In the context of the 1950s, McLean's plan was revolutionary. Law and regulation ensured that trucks and ships had nothing in common. Trucking companies can, or excuse me, trucking companies ran trucks. And shipping companies ran ships. Remember how Toby was talking about everybody was just focused on either trucks, or ships, or trains? No one was looking for that complete solution to what the customer actually needed? That's an example of that. A few ship lines and barge companies carried trucks on their vessels, as McLean planned to do. But they were simply offering water transportation to any trucker who would pay. The idea that a truck line would use its own trucks to drive its own trailers onboard its own ships, float the trailers down the coast, and then drive them to their destination at the other end,

• 39:51David Senra?

  violated the ICC's precepts, even though it was the best idea at the time. Because remember, he doesn't care about trucks, he doesn't care about boats. He cared about moving things efficiently around the world. So if I can have a completely integrated system for that, why wouldn't I do that? So it said, "No one had invested significant money in coastal shipping in 30 years. McLean's interest was entirely a matter of cost." The ICC had regulatory authority over domestic shipping, and it allowed ship rates to be well below rail and... Wait, wait a minute, let me back up. "The ICC had regulatory authority over domestic shipping, and it allowed ship rates to be well below rail and truck rates to compensate for slower service."

• 40:35David Senra?

  Sending his trucks by water would let McLean underprice other truckers. Another kind of clever workaround, right? I like his idea of total commitment. Although, I liked it when I left this note. I didn't know how the story ends, so maybe I need to rethink this. "What followed was an unprecedented piece of financial and legal engineering. First, to circumvent rules required ICC approval for a truck line to own a ship line. McLean created an entirely new company, McLean Industries, in January 1955." Okay, so before I get into this, this is also going to show you how crazy this guy is. What he's about to do...

• 41:20David Senra?

  Remember, he has a wildly successful trucking company. He's already made him wealthy. He's doing fine. He's gonna basically nuke his own company because he believes in this idea so much. Okay. So it says, uh, first to circumvent rules requiring ICC approval for a truck line to own a ship line. McLean created an entirely new company. And some of these, like, these financial machinations that this guy does, I don't even, I can't even read some to you because I was so confused by them. I had no idea what was taking on. They gave him credit for making the first, uh, leveraged buyout ever. And it's just insane, some of the, the ideas this guy had. McLean Industries in January 1955. Okay, so he starts a new business, right? It's called McLean Industries, not McLean Trucking.

• 42:02David Senra?

  Although McLean Industries had publicly traded stock, it was clearly a family-controlled business. Malcolm McLean was president, his brother James was vice president, and his sister was secretary and assistant treasurer. They, Malcolm, James, and Clara then put control of the trucking company in a trust, of which they were the beneficiaries. Malcolm McLean kept $5 million of stock, but the trustees were authorized to sell the rest. As soon as the trust documents were signed, the McLeans resigned as directors of McLean Trucking, and within an hour, McLean Industries took control over Pan Atlantic. That's a shipping company he needs, right? The country's best-known, and this is the result, in case that was all confusing to you, because it was very confusing to me, too.

• 42:44David Senra?

  The, the author does us a favor and breaks it down, like, we're five years old here. The country's best-known trucking magnet walked away from the business he had built in order to build a new one, based on some untested idea about shipping.

• 43:03David Senra?

  In September 1955, the trustees sold off McLean Trucking stock, making the legal issue moot, moot, moot, excuse me. Uh, what they're talking about is the other people in, like, railroads and other trucking companies were like, hey, this guy's clearly, like, he's getting around, he's complying with the letter of the regulation, but not the spirit. So then they sell off, now they, they don't own a trucking company, now they just own a shipping company, right? Uh, so... That makes illegal issues mute. Malcolm McLean did not fare badly in the process. He cleared fourteen million dollars in the sale of McLean Trucking. His net worth in nineteen ninety-five, or nineteen, excuse me, nineteen fifty-five, was twenty-five million dollars, or the equivalent of two-hundred-and-twenty million dollars today. Asked later whether he had considered ways to shelter some of his wealth

• 43:48David Senra?

  from the risk of entering the maritime business, his answer was as unequivocal no, was an unequivocal no. McLean explained, "You've got to be totally committed."

• 44:03David Senra?

  So he goes on in this, in this idea, and he realizes, "Oh, I made a mistake." I actually, there's an, like, we can continue to improve the efficiency of this idea. So this is the more efficient idea. McLean reconsidered his plan. He had realized that carrying trailers on ships was inefficient. Why? Because the wheels beneath each trailer would waste a lot of precious shipboard space. Pondering that problem, McLean came up with a still more radical idea. A government maritime promotion program made leftover World War II tankers available to ship lines very cheaply. Pan Atlantic, which is the company he bought, and he's running right now, and it's actually gonna change its name again. Pan Atlantic would buy two and convert them to haul truck trailer bodies, which is the containers, right?

• 44:46David Senra?

  Which are trailers detached from their steel beds, axles, and wheels. Subtracting the frames and wheels would reduce the space occupied by each trailer by one-third. Even better, the trailer bodies could be stacked, whereas trailers with wheels could not be. As McLean envisioned it, a truck would pull the trailer alongside the trip, or the ship, rather, where the trailer body, filled with twenty tons of freight, would be detached from its steel chassis and lifted aboard ship. At the other end of the voyage, the trailer body would be lowered onto an empty chassis and hauled to its destination.

• 45:19David Senra?

  So, and then the result of this more efficient idea. Container shipping, which is what it would be known to be called, would be ninety-four percent cheaper than break-bulk shipping of the same product, even allowing for the cost of the container. So this is in order of, like, this is an insane improvement that this guy's coming up with. So this is the first shipment where we talked about at the beginning of the podcast, the ideal X. And so they, they fly, they, it leaves in New Jersey. McLean and some of his people he works with fly to Houston to wait for it. And this is the result. They were all waiting for the ship to arrive and as she came up the channel, everyone else came to look. Now, remember, this is never, like now, it's common.

• 46:04David Senra?

  Like, I kind of live close to a port and I see, you know, they come, these ships come in all day, every day. I was like, it's amazing to actually see up close. There's actually a park by my house that runs by a shipping channel to the port. And you can get, you know, you might be maybe 20 feet, 30 feet away from these ships as they come in. And it really is so eerie because of how big they are, stacked hundreds of these containers on them. And yet, they're so silent. It's fascinating. Alright, so it says, "Everybody came over to look. They were amazed to see a tanker with all these boxes on deck. We had seen thousands of tankers, but never one like this. So, everybody looked at this monstrosity and they couldn't believe their eyes." Remember, this is only 50, they have like, what, 58, something like that on there?

• 46:48David Senra?

  "From McLean, though, the real triumph came only when the costs were tallied. Loading loose cargo on a medium-sized cargo ship costs $5.83 per ton. McLean's experts pegged the cost of loading the Ideal X at $0.15 per ton. With numbers like that, the containers seem to have a future." So, from almost $6 a ton to $0.15 a ton.

• 47:16David Senra?

  And now, this is, I just want to, I think it's probably somewhat, like, you can kind of pick it up in the context so far of what I've put out of this book. But this is the explicit, like, this is McLean's fundamental insight. So, and the real problem he's solving, right? Going back to why we're studying him to begin with, like, this is, it's, it seems obvious, but it's not. When you actually look and examine, like, how different products or services that you consume are created. Like, they have an idea of the problem, but they're not completely focused on it, like he was. "The high cost of freight handling was widely recognized as a critical problem in the 1950s. And containers were much discussed as a potential solution." Malcolm McLean was not writing on a blank slate.

• 47:59David Senra?

  Yet the historians debate about precedents misses the transformational nature of McLean's accomplishment. While many companies had tried putting freight in containers, those early containers did not fundamentally alter the economics of shipping and had no wider consequences. Malcolm McLean's fundamental insight, commonplace today, but quite radical in the 1950s, was that the shipping industry's business was moving cargo, not sailing ships. That insight led him to a concept of containerization quite different from anything that had come before. McLean understood that reducing the cost of shipping goods required not just a metal box, but an entire new way of handling freight.

• 48:43David Senra?

  Every part of the system, ports, ships, cranes, storage facilities, trucks, trains, and the operations of the shippers themselves would have to change. In that understanding, he was years ahead of almost anyone else in the transportation industry.

• 49:06David Senra?

  So the note I left myself on this next section is sometimes it's better not to overanalyze because you'll be able to talk yourself out of it. So it says, "Of course, there was no model of a pure container ship." He has to make this. "The metal cells did not exist, and no one had ever stacked containers five or six high. How tightly should the containers fit into the cells? How would a stack of six containers behave when a ship rolled in heavy seas? And how could the vessels be unloaded at ports where there were no land-based cranes?" So these are just some of the obstacles that other people would consider, right? But, as his way, McLean did not preoccupy himself with such details. He simply told his staff to get the job done. He just figured, "Hey, I have an idea. I know there's gonna be problems finding the solution,

• 49:51David Senra?

  but we're wasting time sitting around thinking about it. Let's just, let's move through trial and error, and we'll find ways to solve all these problems," which is exactly what they did.

• 50:01David Senra?

  Now, this section just talks a little bit about how different, you know, he's entering a new industry. Now, he's in the shipping industry, right? He's using that as a vehicle to get to really to transport goods. And he just realizes that this industry is ridiculous because they've been protected by regulation. The ICC is setting the, um, it's actually, it's ICC on that land, but then you have like the maritime, something called Mayrad, which is the maritime, it's the maritime regulatory body. I'm sure I'll come up, I'll figure out, I'll read the full name, but just know there's just another governing body that's that's setting prices and basically just kind of protecting the incumbents.

• 50:47David Senra?

  So Sid, McLean was not deterred. Pan Atlantic's problems, which is the company he's running at the time, that eventually turns into this other company called Sealand. Uh, he determined, their problems he determined were rooted in the maritime industry's passive, slow-moving culture. Domestic ship lines operated in a highly regulated environment that left little room for entrepreneurial spirit. American-owned lines operating internationally, such as Waterman, another company that he's gonna overtake, were allowed to join international rate-making cartels. So you have the domestic rates set by the regulatory body, and then you have these cartels doing the international rates.

• 51:28David Senra?

  So it says they're rate-making cartels. There's a huge flow of US government shipments, including military cargo, and many lines received government operating subsidies as well. So these are the players in the industry he's in. This sheltered culture led to excesses like Waterman's headquarters building in Mobile, Alabama, with its revolving globe in the lobby and the lavish executive suite on the 16th floor. It did not breed the sorts of creative, aggressive, hungry employees that suited Malcolm McLean. He talks about when they build, um, he built a new headquarters, but it's very, it's like in a, he like repurposes like a big cargo, like a hangar.

• 52:11David Senra?

  I guess, I don't know what they're called when they're next to water, but it looks like kind of an airport hangar. Um, but the ones next to the water. So it's the kind of opposite. And again, he has to be frugal. He is frugal, and then, of course, we learned that he has to be frugal because he's highly leveraged too.

• 52:28David Senra?

  So the container business is up and running, right? That's what he's now all in. He's got, for the first few years in the industry, it's just McLean and then another company called Matson. I think the breakdown would be like, let's say, McLean has like 60% of the market and Matson may have 30, like that kind of thing. But they're very, very different. And this is just, uh, McLean had a couple of years head start because of this is how Matson moved. Matson moved deliberately. Pan Atlantic, under McLean's control, was a scrappy upstart building a brand-new business, and it risked little by acting quickly. Matson had no such haste. It had a large existing business to protect, and its directors were tight with the purse strings.

• 53:13David Senra?

  After commissioning outside studies for two years, the same two years it took Malcolm McLean to move from concept to a functioning business, Matson created an in-house research department in 1956. So they're very slow. Once they get going, they'll, uh, they, you know, do become competitors, but they're very, they're run by completely different people.

• 53:36David Senra?

  And this is another example of fixing things by focusing on the customer's real problem. The problem McLean decided was the maritime mindset. The Pan Atlantic staff experienced in the slow-moving ways of the maritime industry did not know how to sell to an industrial traffic manager. Okay, so that's who, to earn their business, you have to convince this one guy, right? The industrial traffic manager. But now they're going to get to, what does an industrial traffic manager actually care about? The industrial traffic manager who cared not about ships, but about getting freight to the customer on schedule and at a low cost. McLean brought in a team of aggressive young trucking executives to turn the business around. So he starts recruiting former employees of McLean Trucking into his new business.

• 54:19David Senra?

  So one of the people that he hires is Gary Richardson. He comes with a very good idea on how to sell the industrial traffic managers. Richardson's secret weapon was a simple form with the pompous title, "Total Transportation Cost Analysis." The form provided a side-by-side comparison of the cost of shipping a product by truck, rail, and container ship, including not just transportation rates, but also local pickup and delivery, warehousing, and insurance costs. Salesmen were instructed to add up each column to show the saving containers would bring, and then multiply by the number of loads the company shipped over the course of the year, which is also public information. So instead of, it says, "The bottom line was total, was the total annual saving,

• 55:03David Senra?

  a number much more likely to be large and memorable than the traditional measure of a few dollars per ton." So that's just a good idea. It says, "Hey, I'm gonna save you $2 a ton, or 50 cents a ton, or whatever the case is. Hey, I'm gonna save you a million dollars a year. Do you wanna do this?

• 55:20David Senra?

  Which one sounds better? Um, okay, so this is Malcolm's, a little bit about his management style, and his relentless, more on his relentless focus on costs. "When refrigerated containers were needed, managers would spend two days debating on how many to buy, only to hear McLean say, 'I appreciate the exercise, but I've already signed a contract for 500.'"

• 55:41David Senra?

  Above all, he kept costs on the money, or excuse me, he kept his eye on the money.

• 55:47David Senra?

  "There was an endless stream of demands for better cost control. Shaving 1.6 cents off the cost of handling 100 pounds could save $14,000 a year. One more container lift per gang hour," which is the, what they call the unloading of the ship, from the ship to the, to land, "would save $180,000." So one more container lift per gang hour would save $180,000 on a yearly basis. "Limiting long-distance telephone calls to three minutes would save $65,000 a year. Probably more attention was paid to financial results there," meaning McLean's company, "than you find in any company around today." And that's a quote from the chief financial officer of the company,

• 56:30David Senra?

  and the company at this point is now, it has been renamed Sealand.

• 56:35David Senra?

  Okay, so the book goes into quite a bit of detail about how the ports and all the different, you know, governing bodies and unions and all this other stuff reacted to this. I'm gonna skip over most of that. I do want to pull out this, because what's happening is New Jersey embraces the container, New York doesn't, and as a result, the ports in New York City are kind of destroyed. And this reminds me of, there's this quote in that book I read on Paul Allen, when he was talking about that he felt Microsoft and Bill Gates had ignored Google, and kept saying, "Oh, we'll catch up in search, we'll catch up, we'll catch up." And they basically ignored them too late.

• 57:18David Senra?

  And the takeaway Paul Allen had was that history shows that you ignore emerging platforms at your peril, because one of them might make you irrelevant. This is an example of that here. "As containers supplanted conventional ships, New Jersey's share of the port's general cargo reached 63%. In New York City, though, only destruction was visible. The container is digging our graves." That was the president, one of the presidents of the labor unions in Manhattan. "In 1963 to 1964, Manhattan employers used 1.4 million days of longshore labor." Okay, so 1.4 million days of longshore labor each year, and now we're gonna say 10 years later.

• 58:02David Senra?

  That number drops down to 127,000 in 1975. A 91% decline in longshore employment in 12 years. It's a little longer than that, get done. So, I think Paul Allen is describing exactly what happened here. New York kind of stuck their head in the sand, like, "Oh, no, it might be a fad, you know, we don't have to worry about it, and New York's all-powerful, and New Jersey embraced it, and that was the result." Okay.

• 58:34David Senra?

  And this is the inevitable result of any new technology that takes hold. The container was not the sole cause of the surprising and painful economic changes of the 1960s and 1970s, but it was an important cause. Container technology developed far more quickly and affected transportation industries far more significantly than even its most ardent proponents had imagined. New York was only the first established shipping center whose economy would be transformed in ways that were unimaginable before the container arrived on the scene. So we talked about that before. When these new technologies pop off, the only thing we can be certain of is that things are going to change.

• 59:14David Senra?

  And then one, and then two, we're not going to be able to predict how those changes will play out in the future. President John F. Kennedy weighs in on this, and I know that I left myself, is this 1962 or present day? So it says, "President Kennedy addressed the issue himself in 1962. I regard it as the major domestic challenge, really, of the 1960s, to maintain full employment at a time when automation is replacing them." Isn't that crazy? When I read it, I was like, wow, like that, I hear that constantly now. And he's saying that back in 1962.

• 59:56David Senra?

  Oh, this was, this was very bizarre to me. This is the surprising reason, reason container sizes were standardized. So this is the governing body I was telling you about, it's called Mayrad. So said, "Mayrad's desire," now we're into the 60s, "Mayrad's desire to set common standards was supported by the Navy, which had the right to commandeer subsidized ships," meaning subsidized by the US government, "in the event of war, and worried that a merchant fleet using incompatible container systems would complicate logistics."

• 1:00:33David Senra?

  That's, that's, isn't that strange? So, they were on, uh, slightly unsuccessful in, um, in standardizing from like the top down, but they did set that, tho- those events into motion. And the reason was because in case the Navy had to confiscate the, the ship, they wanted it standardized. Um, so, th- uh, there's like a, there's an entire chapter uh, in the book, um, dedicated to this whole debate between the US government, foreign governments, all the different, um, shipping and, uh, trucking companies. So Malcolm goes and a bunch of other people have to testify. And I just want to pull out a sentence in his testi- test- testimony, kind of get you to understand the kind of person he was.

• 1:01:18David Senra?

  He says, "I don't care what size containers adopted as a standard. If the marketplace can find one that moves cheaper, that is the way the marketplace will dictate it. And we want to be a flex- flexible enough to follow the marketplace." So he's very skeptical of this idea that, then they had like a committee and all these people, they were trying to figure out the optimum way. And as normal bottom up beats top down, he said, "No one would declare that all of the subcommittees and task forces came up with the optimum result. They just started the process." Yet after 1966, as truckers, ship lines, railroads, container manufacturers, and the governments reached compromises on issue after issue, a fundamental challenge, or, excuse me, fundamental change could be seen in the shipping world.

• 1:02:00David Senra?

  So, you had this governing body kind of say, "Hey, we need to, we need to figure this out ASAP." They were unsuccessful in doing it on their own, but once they invited all the other parties in, uh, they wind up working it out to the point where now you can, uh, like there were some companies that didn't want, let's say like, uh, their competitor, you were using their competitor, uh, because there's some other vertically integrated company. So, let's say, uh, you, you wanted, uh, to ship your, your stuff with one shipping company, but you wanted another company to, to put on their railroad. Like they would use different sizes so their, uh, their competitors' containers wouldn't fit on uh, their trucks or their railroad.

• 1:02:42David Senra?

  Um, so they forced you to basically use them as the whole, does that make sense? Like, they, they would sabotage their competitors by not having standards. Eventually that was all worked out.

• 1:02:57David Senra?

  Oh, so this is interesting. This is just me reflecting on, uh, I was wondering like, this is a good section on why so much innovation comes from outsiders. Um, the leaders of the US maritime industry were by no means unanimous that the container was the future. The steamship business was, was as tradition bound as any in the country. Many of its most prominent executives were men who reveled in the romance of sea and salt air. They worked within a few blocks of one another in Lower Manhattan and spent, and spent well-oiled luncheons comparing notes with their peers. I've heard this, uh, this kind of like, uh, when you, when you have small clusters of people, you know,

• 1:03:38David Senra?

  some people call it a bubble. I've heard somebody say it was incestuous knowledge, and that you should avoid incestuous knowledge when you're building products. I like that idea. So that's what's taking place here. Says, "For all their earthly bluster, their business had survived thanks almost entirely to government coddling. On domestic routes, government policy discouraged competition among shiplines. On international routes, for, uh, on international routes, rates for every commodity were fixed by conferences", which is a polite term for cartels, "and the most important cargo, military fleet, freight, was handed, handed out among US flag carriers without the nuisance of competitive bidding." So it's just, it's not really a market. It's all, the books are cooked.

• 1:04:19David Senra?

  "Decisions about buying, building, or selling ships, about, uh, ships are about leasing terminals, about sailing new routes, all dependent on government directives. For men who had prospered in this environment, uh, an artificial environment, Malcolm McLean's wholly unromantic interest in moving freight in boxes had little appeal. It was all well and good for visionaries to proclaim that containers were a must." That's Malcolm, right? "But the collective wisdom," and that wisdom should be put in quotation marks by the way, "of the shipping industry held that they would never carry more than a tenth of the nation's foreign trade." So what they're telling you is like, "No, no, we know what's going on. This is like a little, you know, you can have your tiny, small niche business, whatever, but it's never gonna go, get to more than 10% of the market." That's obviously not.

• 1:05:07David Senra?

  That, that just didn't happen. The opposite was true. So, that's again, why so much innovation comes from outsiders. We have this incestuous knowledge, this, this undying need to conform people around us, to engage in group think that, you know, not many good products come out, come out of. You have to think differently.

• 1:05:31David Senra?

  Let's see.

• 1:05:34David Senra?

  Oh, so, okay, I, I already talked about this part, so I'm gonna skip over it. But this is what needed to be solved for massive growth. So it said, uh, they had the container technology settled, but it says, "Not until container technology affected land-based transportation costs would the container revolution take hold." And that, that had to come from standardization, because like I just said, they were, they were trying to sabotage each other by using proprietary, even though they were operating on railroads and, and with trucks that could have been standardized. They were, they were, uh, trying to say, "Oh no, this size of proprietary you can't use." And, and trying to make them, um, incompatible. As like a strategic advantage, which seems to be a really bad idea. Um, another reminder that big things start small. "Container shipping looked to be a viable enough business, producing ninety-four million of revenue for Sealand in 1964.

• 1:06:19David Senra?

  But it was a niche business. The way most manufacturers, wholesalers, and retailers move their goods had hardly changed." So, uh, let's see, the first ship takes off in 1956. Now we're eight years later. He's making ninety-four million in revenue a year, but it's still, uh, just echoing back to what they said about the Thomas Edison, like twenty years later, they've only penetrated about three percent of the market. We're seeing similar, uh, similar occurrence here. Um, it says, "No one was more aware that the world was about to change than Malcolm McLean. He was all, already fully committed to the container."

• 1:07:00David Senra?

  Also, this is interesting. I discovered, so I've talked about this idea many, many times. Keep talking about it because I think it's important. Books are the original hyperlinks. They lead us from one idea to another. This is another example of that. I just ordered, uh, this guy's really expensive old biography. Never heard of him before this book, but, uh, we had a, some guy trying to compete with Malcolm, but this guy's much older. Uh, and he's just decides just to, um, he's gonna invest in Malcolm instead when he realizes he's not gonna compete. But let me just tell you a little bit about this guy. Daniel K. Ludwig, a man who had so, had much in common with Malcolm McLean. Ludwig was born in 1897, had entered the shipping business at age 19 by transporting molasses

• 1:07:43David Senra?

  around the Great Lakes. Uh, like McLean, he ran his business with a legendary focus on costs. According to one famous story, he bought a tanker called the, oh, oh my goodness, Anahoc, and decided to keep the name because it would have cost $50 to paint it out. By the 1950s, his National Bulk Carrier, is the name of his company, was the largest American-owned ship line, and Ludwig was one of the world's wealthiest men. So remember a few pages back, they were talking about, oh, like, you know, don't, this little container business is small, they're never gonna capture more than 10% of the market. Uh, this example of how fast things change. A few years later, and this is the result

• 1:08:28David Senra?

  in the industry, companies that had watched containerization from a distance for years, curious but non-committal, now felt that they had to be put, they had to put up real money or be swept away in the flood. And I just, I just find that, um, this thing was part, this, this, first a rejection of the, the new thing, and then the, the drastic move to realize, oh, wow, we need to jump on this, is like part of human nature. I think it's present with almost any new technology. There's examples of the internet, uh, Paul Allen was talking about search being one, uh, crypto, you start to see that as well. Um, so again, people are like, oh, they, they kept an eye on it, they were curious, but they weren't committing, and now, now we're in a rush to put up serious money. And

• 1:09:13David Senra?

  they saw, these companies started investing with the equivalent of like 60 billion, something like 60 billion dollars. In today's money, um, in this, and it's actually going to cause a huge, um, bubble. And that bubble bursts, of course, um.

• 1:09:30David Senra?

  Okay, so this is no, this is just another, um, straightforward understanding of what McLean's vision on how things should be based on the customer's actual problem. Malcolm McLean had a different vision. For him, railroads, trucks, and ships were in the same business. Moving freight. So he kind of just focuses on that. And this is, um, his integrated solution that he proposed, uh, like, but he wasn't able to, to, to actually achieve like the railroad part of this, but let me just read this to you. So that his idea was McLean Industries offered an audacious proposal to build railroad yards in Chicago and St. Louis at its own expense.

• 1:10:11David Senra?

  Freight forwarders owned by McLean Industries would collect freight from shippers, consolidate it into McLean-owned containers, and load the containers aboard McLean-owned railcars. See, he's kind of just, he wants to control the entire, like, give them one unified solution. And this is why, um, so it would also contain, uh, not only would he own the, the, the shippers, the shipping, the, I can't speak. He'd own the ships, he'd own the railroads, he'd own the rail, or the railway, the, what are they called? Railcars? Trains, David, come on. Um, he'd own the railroad yards, he'd own the containers, and he'd own the trucks.

• 1:10:53David Senra?

  Um, so then a Pennsylvania railroad would pull McLean's all container train straight to, to a rail yard that he would own, uh, which would then pull it to a dock, which he would build, um, arriving to meet a Europe-bound ship, which he would own, which would in turn connect with trucks and trains on a European dock. And this is the end result. That was really confusing. I'm sorry if I'm supposed to be, uh, simplifying things for you, and I'm confusing myself and probably you. Okay, so this is the end result, the most important part. For the first time, a shipper a thousand miles from sea would be able to buy not just international transportation, but tightly scheduled international transportation.

• 1:11:31David Senra?

  A seller could tell its customers when the goods were to arrive with a reasonable likelihood that the schedule would be met. So what we're talking about there is like the before this, the projection like, yeah, it's going to get there 40, 40 days, maybe 90 days later. They don't know because like you're, there was no one company holding, uh, taking care of that, that freight from beginning to end. They would have to enter, enter, uh, interact and interchange where, with all these different companies. And then sometimes you'd have like a strike or there'd be like a fire or there'd be all kinds of different things that are outside of their control and you'd have to wait for another company to fix. So this is Malcolm trying to, um, to solidify, uh, like the entire, basically the entire solution the customer needs.

• 1:12:16David Senra?

  The problem was you had like, uh, people went crazy and they started lobbying against it. Um, like they had the ICC, uh, turn them down, uh, all these other different people. Basically say you can't, you, one company can't own everything. I guess they were, I mean, they do have some, somewhat of an argument that, you know, kind of monopolizing it, but in any case. So what had, this is what happens if you wait too long, but just a reminder, it's only too late if you copy. But as container shipping made the transition, uh, from the emerging technology of the early 1960s to the booming business of the early 1970s, remember now we're, we're close to 15 years after, uh, Malcolm McLean started.

• 1:13:00David Senra?

  The, uh, the opportunity for ports to establish themselves as major maritime centers was diminishing rapidly, meaning the ones, the ports that had the advantage were the ones that jumped on all the technology and, uh, environment that needed for the container ships, including like how deep the water was, the cranes needed, et cetera, et cetera. The maintenance of a major port in every major coastal city, which is what was happening before, when it was all manual labor, labor is no longer justified. A government report declared in the early 1970s, such longstanding ports as Boston and San Francisco, Gulfport, Mississippi and Richmond, California would have to find other roles in the container age.

• 1:13:42David Senra?

  Okay, so now we're gonna get to the point...

• 1:13:48David Senra?

  This is when I have a sad face.

• 1:13:52David Senra?

  So, there's a boom and bust, and then... It's interesting, I don't know the quote, but it's like, what your strengths are could also be your... lead to your weaknesses. Somebody said it a lot more eloquently than that. We're gonna see that, you know, his hard-charging nature, the way he was aggressive, the way he kinda did things by intuition, benefited him, all the way up until the point it did not. And that's what I think makes entrepreneurship so difficult, and why I recommend, like, just exposing yourself to the thought processes of people that have built companies, because there's not like a way. No one can teach entrepreneurship. But you can take ideas from other people's experiences, keep them in your toolbox, and then use them when you feel the time is right. So, this is him selling his company,

• 1:14:37David Senra?

  and then what happens when inevitably, he comes to regret that decision?

• 1:14:42David Senra?

  "On January 10, 1969, the maritime world was shaken by an unexpected piece of news. Malcolm McLean, the father of container shipping, was selling out. Once again, his timing was impeccable. Three years earlier, at the start of 1966, container shipping had been an infant industry. Almost none of the international trade was containerized. Most of the world's manufactured goods and foodstuffs moved as they had for 100 years, painstakingly loaded piece by piece into the holds of break-bulk ships. A leading maritime executive could still hold the opinion voiced in 1966," and this is an actual quote from a leading maritime executive, "I do not think the time for all container ships is now nor in the next decade." Fast forward three years, and the world had changed.

• 1:15:26David Senra?

  The equivalent of 3,420-foot container of commercial imports or exports passed the US ports each week." Okay, so let me just... There's 3,400 of these containers going through the ports each week? Three years previously, that number was zero. "Revenues at McLean's Sealand Service," his company, whose 31 ships made it far and away the largest container operator in the world, "had mushroomed from 102 million in 1965 to 227 million in 1968."

• 1:15:59David Senra?

  But, remember, we talked about this guy's pensions for being highly leveraged, something that Warren Buffett had just warned us against. Sealand's debts at the end of 1968 reached $101 million. The financial demands would only grow for the maritime equivalent of an arms race was underway. This is the bubble I was referencing earlier. Now, everybody's jumping it in, so costs for everything, because they're being poured into the industry are skyrocketing. So now, he's like, "I gotta get out of here. Like, I have too much debt. The company's large, but it's not profitable enough. Let me go find somebody with deeper pockets."

• 1:16:37David Senra?

  No conglomerate chieftain was a more avid reader of financial reports than Malcolm McLean. He knew what the cost of competition was going to be, and he knew that Sealand, its balance sheet stretched almost to the limit, had no hope of borrowing money. McLean turned toward an entirely unexpected source of funds: R.J. Reynolds. This is the cigarette company. Its cigarette business threw off cash by the bucket full, and its managers were using that cash to turn the company into a conglomerate. So this time, there's a lot of regulation coming down for cigarette companies, including their inability to advertise, so they're trying to diversify into other businesses. Reynolds offered $530 million from McLean's company. Remember that Ludwig guy that I told you that was going to compete with McLean

• 1:17:21David Senra?

  and didn't, and said invested a few years earlier? He says, "The $8.5 million that Ludwig had invested in Sealand in 1965 was now worth $50 million." So he wound up doing really, really well.

• 1:17:37David Senra?

  Okay, so, he sells the company. He stays on with R.J. Reynolds. And he's still running the company, but they own it, and you know that's not going to work out for somebody like him. But, this is an important part, because it's... Somebody said, like, the hard part of entrepreneurship is not only, like... It's when you're hearing advice, it's like, you have to figure out who to listen to and when. So like, some advice is good, but it's not always good at the right time. Like, it's dynamic, right? It changes. Well, this is a crazy thing, because here, you're seeing Malcolm learn something, and then, in a few minutes, you're going to realize that that learning...

• 1:18:18David Senra?

  Uh, was accurate for the time that he learned it, but it was no longer accurate for the time he was applying that logic, if that makes sense. Says Malcolm McLean, acting per usual on intuition rather than caution analysis, had overridden objections from Sealand's board to move ahead with the SL7 in 1968. So remember SL7. It's their ships. The costliest merchant ships ever built were also the Thirceavits, each burning 500 tons of fuel per day. At full speed, they consumed three times as much fuel per container as a competitor's vessels. When the price of bunker fuel jumped from $22 per ton to $70 within a matter of months,

• 1:19:01David Senra?

  the SL7s became a crushing burden. So he was optimizing for speed. What happens when you go faster? Well, it consumes a lot more fuel and if that fuel cost goes up, you're screwed, right?

• 1:19:13David Senra?

  So a settling of scores was inevitable. McLean, unhappy with Reynolds' bureaucratic ways, began selling his stock in 1975 and left the board in 1977. A few years later, Reynolds got out of this business. They're like, I don't want any part to do with this business. And their reasoning was investors who might be interested in owning RJR stock were not the type who ordinarily would be interested in a capital-intensive cyclical transportation company.

• 1:19:42David Senra?

  That's a good way to describe the entire industry they're in, which again is commoditized. It's very hard to make money in those kind of markets, right? So it says, "McLean was frustrated by the tobacco giant's bureaucracy and bewildered by its repeated changes of strategy. Most of all, though, he was restless." And this is him talking. "I am a builder and they are runners. You cannot put a builder in with a bunch of runners. You just throw them off kilter." Meaning the board, they can run companies, but they don't know how to build companies. Okay, so what happens here though, right? So this guy is now, he's not a spring chicken anymore. He's rather old.

• 1:20:27David Senra?

  And you know, for somebody that started working at the beginning of the depression, now we're in 1977. So he sells his company, makes a ton of money, obviously,

• 1:20:39David Senra?

  and regrets it. Which we hear a lot. Uh, he's bored, he's looking for something to do. And he wants to try again. Um, so I think like this is a, uh, interesting, uh, what's a dichotomy of entrepreneurship? Where you have a lot of people that like, oh, like the, the exit for them is the, is what they think is what they want. And then when it happens, they regret it. They're like, damn it, now I'm sitting here with not like, if you're an entrepreneur, that means you're a builder. You just have, you have to do something. The idea that you're gonna just make a ton of money and be content sitting down, we know for a fact that's not true. Because we have a lit, like an entire roster of history to see this happens over and over again. And undoubtedly, what these people do is they try to start another company. But usually, they had, they already had their best idea.

• 1:21:24David Senra?

  They should have stuck with their best idea because the best things in life come from compounding, right? For sticking with that idea for a long period of time. And so what does he do? He sells his company, right? And then he starts another one. Uh, so he buys, to the surprise of almost everyone, he arranged to buy United States lines. And this is gonna end in tragedy. Um, so this is, we got to the part of the book where we stop learning what to do from Malcolm, we learn not to do. Um, and I just think this is a very common, uh, set of emotions for entrepreneurs, builders. Um, and I think the solution is just keep your company. I mean, if there's some cases you have to sell, or whatever the case is, maybe you, you accidentally started a company, but if you're like a builder at heart, you're not

• 1:22:09David Senra?

  gonna be happy just sitting on your ass with a bunch of money in the bank. You know, that's just not gonna happen. Okay, so, and here's his downfall. Remember, I said, frugality, yes. Leverage, no. So, um, he has this idea, he's gonna say, hey, I'm gonna do him and this other guy named, uh, he's competing with this other guy named... Let's see, Chang Yong Fain, who owned this company called Evergreen, and they decide, they both decide that they're gonna do, instead of like some, what was common, like you'd have like boats in the Atlantic or boats in the Pacific, he's like, my boats are gonna, both of them said they're just gonna do around the world trips. That's, that's the new thing.

• 1:22:51David Senra?

  And, so it says, McLean's strategy was different from Chang's. His ships would circle the globe only in an eastbound direction, and they would do so slowly. Now, here's what I mean about misapplying the lesson, right? Especially when you think some of these things are out of your control. The price of oil is always outside of your control. Don't lever yourself up and then be dependent on something that's outside your control. That's not smart. It says, McLean had learned from his mistakes with the speedy SL7s, whose fuel bills ate up their profits. So he's like, okay, I'm not gonna make that mistake again, right? The new ships were built for an era of expensive oil. So he's like, I'm gonna build ships that go slower, and they're, so, oil costs are expensive, I'll be okay. They would conserve

• 1:23:35David Senra?

  fuel by sailing at only 18 knots, taking longer than Evergreen's vessels to sail around the world. McLean dubbed his new vessels econ ships, because their fuel economy, along with the scale, the scale economies created by their enormous size, would produce the lowest cost per container ship, per container of any ship anywhere. So they're bigger, and they move slower, and therefore, they can, they, they can ship things for lower than their competitors. Here's the problem. The ships alone cost $570 million. McLean had no difficulty raising the money. The world was eager to invest with the founder of a container shipping, the founder of container shipping, as he turned United States Lines,

• 1:24:19David Senra?

  which is his new business, into a global bus service. And that's how he described it. It's a global bus service. Now, here's the problem.

• 1:24:28David Senra?

  This makes me sad. Disaster was not long in coming. Instead of rising from $28 to $50 a barrel, as McLean had expected, oil prices collapsed to $14. This is in 1985. He's in his 70s at the time. Uh, maybe 60s. "United States Lines' Slow, Fuel Conserving Ships Were Suddenly The Wrong Vessel For The Market, And The Oil Sheikdoms Of The Middle East Could No Longer Afford The Limitless Quantities Of Imports That Were Supposed To Keep The Econ Ships Filled With Cargo." After posting a $62 million profit in 1984,

• 1:25:10David Senra?

  McLean Industries reported a $67 million loss in 1985. So think about that. That's what, 129,000 swing? Or whatever that, 125? Whatever the number is. That's a hell of a, like, going from making 62 million one year and then losing 67 million the next year. It gets worse. That was in 84 and 85. Now, what happens in 1986? "In The First Nine Months Of 1986, McLean Industries Lost $237 Million." Staggering under $1.2 billion of debt, McLean Industries suspended all service and filed for bankruptcy.

• 1:25:53David Senra?

  Malcolm never got over the US Lines bankruptcy. He went into seclusion, shunning journalists and avoiding public appearances. His failure followed him. The knowledge that he had hurt thousands of people, a constant source of shame." So that's where I'm gonna leave the story of Malcolm. If you wanna, um, learn more, I'd recommend reading the book. Especially if you're into the history of how technology changes things. Cause there's so much more in the book that I, uh, that I just barely scraped to service. And like I said, this guy's done an insane amount of research. And then distilled all that research down to us, uh, in, you know, in a book that, over 400 pages. It's quite remarkable.

• 1:26:37David Senra?

  Now I need to ask for your support. If you get value from my work and you want to support this podcast, I have one thing to ask of you. Please subscribe to Founder's Notes. Founder's Notes is my subscription service where I let you know what other founders are thinking. I listen to podcasts with entrepreneurs, talks, things like that. I write down their best ideas and I email them to you. Actually, I started something new this week, which now there's an audio component. So not only will you see all of my notes that I take, but I started to record little mini podcasts. So just like I riff and I talk about like the notes I did, I take and I read in the book on this main feed, I do the same thing with

• 1:27:20David Senra?

  the notes and the key ideas for these entrepreneurs. And instead of sending them to you once a week, I'm gonna send them every day now. At least during the week, I think I'm gonna do like a five day a week thing. So each email that I send you will cover one founder on one podcast. You'll be able to see all my notes, get their key ideas, benefit from their experience, their idea, how they look, how they started their company, how they look at the market they're operating in, any books they like to read, tools they use, just any kind of information I think is valuable from, from one entrepreneur to many. And not only you'll be able to read it, but you can listen to it. So if you're, if you like the podcasts I do, you'll probably like hearing from me more frequently in these little mini

• 1:28:03David Senra?

  podcasts. So just click the link in the show notes, sign up for that. That's the one way to support the podcast. As you just saw, I presented this entire podcast without ads. And as such, if you're interested, if you do get value and you're interested in investing in the ongoing production of this content, I spend, you know, this book probably took me 12, 12, 13 hours to read alone before I was even able to start recording. If you're interested in supporting my work, if you get value from it, please invest in the ongoing production of this content. I do think it's important. I do think it needs to exist. And if you believe that as well, you can sign up in less than 60 seconds and you'll

• 1:28:47David Senra?

  hear more from me if that's something that you want to do. I'd really appreciate it. Second thing is, I need your help with reviews. Every podcaster is going to ask you, "Hey, please leave a review." I made a private podcast feed. And you don't have to pay for it. All you have to do is leave a review, screenshot the review, and email it to me at [email protected]. And I'll reply back personally with the private podcast feed. I've already done five of them, and I plan to do more in the future. So if you'll spend a minute or two helping me out by leaving a review, I will give you hours and hours of work. And if you're listening on Overcast, or Breaker, or things where they don't have a review section, they do have a place where you can press a star, or press a heart. Do that. Screenshot it, send it to me, and I'll reply back with that.

• 1:29:32David Senra?

  And other than that, I've been talking for a very long time. I will be back next week, and I'll talk to you then.