The U.S.
Navy can project military power using the largest piece of military equipment
ever built. The USS Gerald R. Ford,
commissioned in 2017, is the first of the new Ford-class aircraft carriers, and
it deploys a great deal of firepower. The Ford-class also offers efficiencies
compared to the similar-sized but older Nimitz-class carriers. These efficiencies
include 700 fewer crew members and lower maintenance costs from its two nuclear
reactors which, at 600 megawatts, generate triple the electric power of the
Nimitz-class and enough to light up a city of 500,000 people. Newport News
Shipbuilding charges about $13 billion for a Ford-class carrier, which is twice
as much as the last Nimitz-class, the USS
George H. W. Bush, commissioned in 2009. These prices, of course, do not
cover the cost of aircraft. Currently, the United States maintains a fleet of
11 aircraft carriers and no other navy even comes close.
From a
military perspective, aircraft carriers have allowed the U.S. Navy to establish
air superiority off the coast of any nation, thus alleviating the need to
secure access to neighboring countries’ airspaces –let alone the need to be
granted permission from them to establish airbases. However, aircraft carriers
are also multi-billion dollar targets that are vulnerable to attack from enemy
submarines, aircraft, ballistic missiles and, perhaps one day, drones. As such,
aircraft carriers need to be positioned farther off enemy shores (perhaps as
much as 1,000 nautical miles) to be able to avoid today’s modern and
maneuverable missiles. Each nautical mile off-shore presents the trade-off of
keeping the military asset safe while limiting the range of its fighter and
recognizance aircraft. More escort vessels and submarines may allow for closer
positioning, but that ties up even more assets. Despite the increased
efficiencies of Ford-class carriers, U.S. Navy strategists are no doubt
wrestling with the thought that these supercarriers may be suffering from a
non-military concept known as diseconomies of scale. In the business world a
company needs to guard against becoming too big to fail. The military needs to
guard against weapons becoming too expensive to lose.
Economies of
scale is a concept well-known to ocean vessel carriers. The term can be
simplified to mean that bigger is better. The cost of container carriage per
twenty-foot equivalent unit (TEU) falls as the vessel size increases. At the
same time each extra container brings in more revenue, meaning that operating
profits are likely to rise when economies of scale are present. But this cannot
go on forever. Sooner or later, however, the ocean vessel becomes so big that
cost per TEU actually begins to rise. These diseconomies of scale can squeeze
operating profits to zero and below if something is not done to rationalize
vessel size.
Economies of
scale are fairly straightforward to exploit and can be tempting to overdo. As a
simple example consider building a cube-shaped container measuring three feet
on each side. It would have a carrying capacity of 27 cubic feet. Now, if a
larger container were desired measuring six feet on each side, the material
cost of each side would be four times larger. The cost is not simply double
because you can fit four 3’x3’ sides onto a 6’x6’ side. The carrying capacity
would increase to 216 cubic feet. So the material cost increases by four times
but the revenue-generating potential from the carrying capacity increases by
eight times. It is great news when revenue potential rises faster than material
cost.
Another way
to understand economies of scale is to compare a fully-laden 10,000 TEU
container vessel with one that is double in size. Does doubling the size mean
that the crew size doubles? Does it require double the amount of gantry cranes
to load and unload? Does it require double the amount of bunker fuel to steam
from point A to B? Does it require double the amount of office workers to
handle the doubled flow of container shipping documents? The answer to these
questions is no. The fact that not all sources of cost rise at the same rate as
others means that a double-sized TEU operation will indeed cost more but it
need not cost double when economies of scale are present. Again, this is great
news.
Ocean vessel
carriers offering a lot of capacity in one large vessel gives consignors with
high demand for transport (e.g., Walmart, Home Depot, etc.) a chance for even
larger bulk discounts on their freight rates. There are external benefits to be
had as well. A vessel double in size does not double its burn rate of bunker
fuel. This means that the fuel savings per TEU lessen the environmental impact
of air pollution per TEU.
Now for the
bad news. Any source of economies of scale can, if taken too far, generate
diseconomies of scale. Following the examples noted above, suppose the
container becomes so large that its sidings collapse due to the weight of the
shipments loaded into it. Suppose the new 20,000 TEU vessel is too big to be
handled by the gauges of the gantry cranes available at the required ports of
call. Suppose the vessel takes too long to load and unload given the time
constraints of the consignors and/or the workday requirements of unionized dock
personnel. Suppose the increase in office workers and management oversight lead
to bureaucratic red-tape. In other words, the sources of revenue and of cost
savings afforded from higher carrying capacity begin to evaporate under the
limitations of container engineering, the indivisibilities of labor, the cost
of bureaucracy and the patience of consignors. Longer load and unload times per
TEU and the extra time moored offshore waiting for other large vessels to be
serviced lead to extra fuel burn in idle time. This, of course, increases the
environmental impact of air pollution.
There is
quite a diverse set of variables to stay on top of to prevent economies of
scale from turning into diseconomies of scale. Ocean vessel companies need to
be mindful of not taking things too far. American
Shipper notes that there are 105 commercial vessels with at least 18,000 TEU
capacity. Of these, 47 exceed 20,000 TEU and 37 more of them are on order
between now and 2021. Currently, the MSC
Gulsun launched this year has a capacity of 23,756 TEUs and is the world’s
largest container vessel. It beat out the OOCL
Hong Kong at 21,413 TEUs.
“Build it
and they will come” is no guarantee in any mode of transportation – especially
in ones that are competitive and prone to economic downturns. More flexibility
is afforded through fleets of smaller and more nimble vessels. This overcomes
the indivisibility problem and the dangers of excess capacity if and when
consignors become scarce. A single large vessel is either at sea with any
excess capacity resulting from lack of demand or it is out of business in dry
dock. On the other hand, a fleet of several smaller vessels with aggregated
TEUs equal to the large one have more options. These include making adjustments
in routing to avoid congested ports, seeking out scarce freight from more ports
of call, and moving to dry dock on a piecemeal basis if business declines.
As
mega-vessels dock at fewer ports there will also be more drayage, more trucks
on the road, and more trains moving containers to and from places all over the
country. All of these activities will concentrate in a few large ports able to
handle the world’s largest vessels. Economies of scale require careful planning
and timing in order to adjust to changes in consumer demand and technology. A
good rule of thumb for all business and military strategists is – too big to fail
simply means too big.
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