ScanDutch and EAC’s Initial Containerization
In spring 1966, when EAC
was still the second-largest shipping
company in Denmark
, the container ship
American Racer left New York
on its way to Europe
. The ship was owned by United States Lines
(USL), which thus initiated the first intercontinental container service. Companies such as USL
and the American competitor Sea-Land
, owned by the inventor and businessman Malcom P. McLean
, had introduced a new mode of transport in international shipping
that allowed to offer safe, quick and cheap door-to-door transport. It was based on standardized freight boxes which could easily be moved from ship to truck through efficient cranes. The economic benefits were obvious. Loading and unloading of traditional cargo ships was a labour-intensive process which kept ships at quayside for weeks. Goods were often lost or damaged in this time-consuming and expensive process. In the early 1960s, Trans World Airlines
was able to transport 300 kilograms of freight from Chicago
to Zurich
in 15 hours for USD 208. Sending the same freight by sea took 20 days for a price of USD 267. Liner shipping
faced major challenges.
4
At a meeting on 15 December 1965, four months before
American Racer’s
departure from New York
, Mogens Pagh
, the CEO and chairman of the largest Danish company at the time, the conglomerate EAC
, raised the issue of containerization
. Pagh
stated that EAC’s
shipping department faced an ‘almost explosive’ technological development.
5 The size of tankers
had been doubling within a few years, and now the liner segment would probably undergo a similar transformation. The relatively small cargo ships which EAC
built after 1945 cost DKK 5–6 million per ship and the ships of the early 1960s about DKK 25 million. The cost of the newest, significantly larger and more advanced semi-container ships for the Pacific line amounted to up to DKK 45 million. In addition, if EAC
adopted the container technology
, investments
also had to be made in containers, port facilities and land-based transportation.
6
Mogens Pagh
was appointed CEO of EAC
in 1960, and his vision was to change the old trading house founded in 1897 into a more industrial direction including further investments
in manufacturing activities. Initially, he had no vision for the Company’s shipping
activities. It was noted at the headquarters in Holbergsgade in Copenhagen
that the revenue from shipping rose only slightly from DKK 259.8 million in 1961 to DKK 267.3 million in 1963, while shipping
costs rose sharply—by DKK 15 million from 218.7 to 233.8 million in just two years.
7 The background to this depressing development was structural. EAC’s
traditional services were hit by competition from so-called outsiders, shipowners who had a surplus of tonnage and put these—primarily older—ships into the tramp trade, picking up cargo on the spot rather than sailing on a fixed route. In particular, customers who were more concerned with the price than with the frequency and speed of shipping used the new competitors. The problem was most severe on EAC’s
main service to East Asia
. This service connected the important ports
in Northern Europe
with Southeast Asia
through, among other destinations, Bangkok
, Singapore
and Shanghai
. As a response to these challenges, Pagh
and EAC’s
deputy director of the shipping
department Storm-Jørgensen
decided in June 1963 to strengthen EAC’s
organization by setting up a new specialized shipping
office in Singapore
.
So far, all ships had been commercially operated in a decentralized manner through EAC’s
local branches, but Pagh
and Storm-Jørgensen
concluded that the lines in the East faced such fierce competition that special coordination across the branches was required. For the management
of the new office in Singapore
, Pagh
selected 34-year-old Henning H. Sparsø
, one of the Company’s younger, skilled shipping
people who until then had led EAC’s
shipping
department in Bangkok
. Sparsø
and his two employees Holger Castenskiold
and Finn Ollendorff
took on their task with great energy. Their first initiative was a new express route from Japan
via Hong Kong
and Singapore
to Northern Europe
. The route opened in October 1963 with EAC’s
fastest ships. By omitting a number of ports
, the duration of the round trip was reduced from 169 days to 146. As a result, EAC
became the only shipping
company to offer a transit time from the last port of Japan
to the first port of Northern Europe
(Hamburg
) of 37 days, against the usual duration of 59 days. ‘Hurtigruten
’ (the fast route) produced encouraging results in 1964, helped by Japan’s
ever-increasing industrial exports to Europe
. EAC’s
most modern ships—the A-Fleet
with a speed of over 20 knots, delivered from 1964 to 1968—were put on the route. Thanks to the new route, EAC’s
shipping
department managed to raise its revenue by DKK 84.2 million from DKK 267.3 million in 1963 to DKK 351.5 million in 1966, while costs rose by DKK 50.1 million. The profit margin increased—and so did satisfaction with Sparsø’s
work in Singapore
.
8
EAC’s
advantage was that the shipping
routes to East Asia
, India
and Indonesia
were unlikely to be affected by container shipping
, at least in the short to medium term. On the other hand, renewed competition would soon emerge on the Pacific route which connected Europe
to Japan
via the American west coast. At the same time, the US shipping
company Sea-Land
was preparing to introduce container transport from the North American east coast to Europe
. In EAC’s
shipping
department, the development at the end of 1965 ‘gave rise to a major headache as it was difficult to foresee the course of the coming years’.
9 The question was how, when and how much to commit to the new technology
. Everyone knew that these were critical decisions. The markets were in rapid motion. New alliances were concluded. On the North Atlantic, USL
and Sea-Land
in 1967 were joined by a new consortium, Atlantic Container Line
(ACL), consisting of six leading European shipping
companies: Cunard
, Holland
-America
, Compagnie Générale Transatlantique
, Swedish American
, Wallenius
and Rederi AB Transatlantic
. While the Americans entered the market one shipping
company at a time, the common European approach became the creation of consortia or alliances which could jointly shoulder the large investments
. Such partnerships suited EAC
which had sailed in alliances with other northern European shipping companies since the turn of the century. The question was who EAC
should work with, under which terms and when.
In spring 1968, Henning H. Sparsø was ordered home to the headquarters in Copenhagen in order to address these challenges. As head of the Planning and Development Department, Sparsø would prepare EAC strategically for a future in the container industry. The first task was to start cooperation negotiations with two Nordic partners, the Norwegian shipping company Wilhelm Wilhelmsen and the Swedish East Asian Company. The three Nordic shipping companies had for years sailed together on three routes from Europe to Australia, Indonesia and Pakistan–India. None of these was a candidate for an immediate introduction of container shipping. The idea was to initiate cooperation on EAC’s main route, that to East Asia.
At the end of 1968 rumours in shipping
circles said that Japanese shipping companies were ‘just about’ to contract fast and large container ships for the Japan
-Europe trade.
10 In addition, the British OCL
alliance and US Sea-Land
also considered introducing containers on the Japanese routes. In response to these specific threats, in autumn 1968 Sparsø
negotiated an agreement with Wilhelm Wilhelmsen
and the Swedish Ostasiatiska Kompaniet. It was an ambitious and crucial alliance containing four points
11: (1) A fully coordinated Scandinavian service on the East Asia
route with a total of eight departures per month, starting approximately 1 April 1969; (2) an operating office in Copenhagen
with the top position occupied by an EAC
manager; (3) joint agents in all ports
in Europe
as well as in Asia
, based on EAC’s
existing shipping
offices with the exception of Manila
; (4) an ownership pool, in which EAC’s
share was 46.87%, with Wilhelm Wilhelmsen
and the Swedish East Asian Company
sharing the rest.
The Dutch shipping
company Royal Netherlands Lloyd
joined this alliance in autumn 1971. This agreement, which became known as ScanDutch
, was of major importance to EAC’s
shipping department in the 1970s. With the partnership, EAC
managed the critical introduction of container operations. Moreover, the ScanDutch
operating office in Copenhagen
had a major impact on the general development of Danish shipping
as it led to the formation of special skills in operating ships on behalf of other shipping
companies within pool agreements. As Sornn-Friese, Taudal Poulsen and Iversen have argued, ‘EAC’s
co-operative capabilities would, in the development phase of Danish shipping, spread into the whole Danish shipping
industry and form an important basis for the development of Copenhagen
as an international centre for the commercial management
of, in particular, pools of product tankers
’.
12
The head office of the new Scandinavian Joint Shipping
Service—usually abbreviated to ScanService
—was established in the famous shipbroker C. K. Hansen’s old offices in Amaliegade in Copenhagen
. The three Scandinavian shipping
companies now offered barges on container ships from a number of selected ports
. The service began on 1 April 1969 with a total of 51 ships, and on 2 September that year, the management
concluded that provisional results were ‘extremely satisfactory’, despite fierce competition.
13 On the other hand, profits on EAC’s
four other routes were now hit hard by increasingly intense competition, especially on the Pacific route from Northern Europe
via the American west coast to Japan
. The conclusion was that these services should either be closed down or restructured and modernized. With this in mind, the planning and development department was now working intensely on a major strategy
and investment
plan.
On 2 September 1969, 40-year-old Sparsø
was given the opportunity to present the shipbuilding
programme to EAC’s
Board of Directors. It was quite unusual for a young middle manager to be in the boardroom, but Pagh
had a great deal of confidence in the young shipping
man. This was the most daring and biggest investment
plan in the company’s history.
14 For ScanService
in East Asia
, two new 2272 TEU container ships were to be contracted from the Danish shipyard B&W for delivery
in the third and fourth quarters of 1972. The price for these two vessels was DKK 156.8 million. The ships, which received the classic EAC
names
Selandia and
Jutlandia, were designed as the world’s fastest ocean-going cargo ships with an operating speed of 28 knots (about 50 km/h) and a top speed of 31.5 knots. For the Pacific route, two container ships of 1200 TEU were to be contracted from the Danish EAC
owned Nakskov Shipyard
. The price for the two container ships was DKK 68.5 million, and they were to be delivered in the third quarter of 1971 and the second quarter of 1972 and were named
Falstria and
Meonia.
Falstria was the first Danish-built container ship. In addition, EAC
was negotiating an alliance with the British Blue Star Line
and the Swedish Johnson Line
, the latter being particularly strong on the Pacific Ocean. The alliance, named Johnson ScanStar
, had a total of nine container ships in the Pacific from May 1972. Finally, one roll-on-roll-off would be contracted to the Australian line. The ship would cost NOK 75.7 million and was to be built at the Swedish shipyard
Eriksberg
. In autumn 1969, EAC
signed the third cooperation
agreement with Norwegian Wilhelm Wilhelmsen
and Swedish Rederi AB Transatlantic
, using 16 vessels. This alliance was named ScanAustral Carriers
Ltd.
All in all, the plan Sparsø presented at the meeting of 2 September 1969 was extremely bold. Investing around DKK 520 million, EAC would become a main actor in the global container business as partner of three major alliances. The East Asia line was of particular importance. The two ships for this service were among the world’s most expensive and most advanced cargo vessels. Their names, Selandia and Jutlandia, referred to EAC’s history of bold innovation which included the world’s first ocean-going diesel-powered vessel, Selandia, launched in 1912.
The cooperation within ScanDutch was coordinated from Amaliegade in Copenhagen with the participation of four leading shipping companies: Swedish Broströms, Norwegian Wilhelm Wilhelmsen, Dutch Nedlloyd Lijnen and French Compagnie Générale Maritime (CGM). ScanDutch was ground-breaking. The seven newly built container ships were supplemented with 22 conventional cargo liners, which allowed departures every ten days from all major ports between Europe and East Asia—EAC’s original service started by the Danish company in 1899. On the eve of the 1973 oil crisis, ScanDutch’s market share on the route from Northern Europe to East Asia was above 25%.
In the 1970s and 1980s, EAC
enjoyed high and stable earnings of about DKK 100 million a year from ScanDutch
. 1988 seemed to be an exceedingly profitable year. It was therefore extremely surprising—and unpleasant—when the Norwegian shipowner
Niels Werring Jr
. appeared at Sparsø’s
office on 19 August 1988 to tell him that the two Nordic partners, Swedish Transocean
and Norwegian Wilhelmsen
, had sold their 15% stakes in ScanDutch
to Dutch Nedlloyd. The Dutch were already in possession of almost 30% of the company and they would thus own a majority of the alliance and consequently take control.
15 The immediate explanation of the sale was that Wilhelmsen
was in desperate need of liquidity. Sparsø
was furious about the message. In the original agreement, the Scandinavian partners had promised each other a right of first refusal in the event of sale. Niels Werring Jr
. left Holbergsgade with a sharp message stating that EAC’s
lawyers would be involved, ‘unless the transactions mentioned [were] immediately reversed’.
16 As a consequence, EAC
entered into an agreement with the two Scandinavian partners regarding the acquisition of their pool and conference
rights as well as two container vessels,
Toyama and
Nihon. EAC
would be 100% owner of the Scandinavian branch of ScanDutch
—ScanService
—as of 1 January 1993. The price paid was USD 10 million for each partner’s rights and USD 17.3 million for each of the two ships—in total, an investment
of USD 54.6 million.
17
ScanDutch
thus changed from a joint venture between a number of different shipping
companies to a partnership between EAC
(
c. 55%), Nedlloyd (
c. 30%) and CGM (
c. 15%). The Dutch partner was obviously not satisfied with the reversal of the agreement, and tensions appeared, but the two partners had to enter into a close dialogue. Despite tensions the commercial start was good. 1988 was a record year for the subsidiary due to more cargo and higher rates as well as lower crew costs, the result of the transfer of the two largest EAC
vessels,
Selandia and
Jutlandia, to the newly created Danish International Ship Register
(DIS). But competition was increasing in the international container market of the late 1980s. EAC
therefore wanted to expand the cooperation
and proposed that the two partners should invest in new, larger container ships and a modernized organization. Nedlloyd, however, did not share these views. On the contrary, the Dutch were upset by the acquisition of the Norwegian and Swedish interests by EAC
. Their response was the promotion of an alternative line in their own name at the expense of ScanDutch
. The situation was untenable—and it was made worse by the decline in the freight rates between South East Asia and Northern Europe
in early 1989. At the beginning of August 1989, the three remaining partners held a crisis meeting in EAC’s
headquarters at Holbergsgade in Copenhagen
. Sparsø
, who was known to be a domineering manager, had personal difficulties with the Dutch and French colleagues. On a symbolic level, the climate between the two companies was poisoned when the Danish manager decided to return an official birthday gift from Nedlloyd. In early May 1990, the situation had become so difficult that the partners did not want to continue with ScanDutch
. At about the same time, the two British shipping companies
P&O and Ben Line Containers
Ltd. informed
the public that they would leave the TRIO consortium
, ScanDutch’s
main competitor. EAC
therefore initiated negotiations with Ben Line about a new cooperation
on the important Europe
–Asia
route. The EAC-BenLine
became a reality during the early 1990s and ScanDutch
was discontinued. EAC
was to contribute with six major container ships—including two new builds,
Arosia and
Alsia. The cooperation
with Ben Line, a relatively small family-owned company with an old fleet, proved to be a disaster as it was launched in a difficult and competitive market. The service was unprofitable from the beginning, and in 1992 the partnership lost DKK 260 million. EAC
sold its liner vessels to Maersk Line
in March 1993 due to the combination of the depressed results from EAC-Ben Line and the additional problems in its shipping
department resulting from the expensive investment
in a new, but troublesome category of ships—the LRVs
.
18
The Liner Replacement Vessels: A Fatal Investment
On 2 October 1974, EAC’s Board of Directors decided to promote Henning Sparsø
to deputy CEO. Sparsø
led the EAC’s
ship department and reported directly to Pagh
, occupying what was traditionally the second most prestigious position in the Company. It was always the ships’ results which were presented first at board meetings, and the department’s development was placed at the beginning of the annual reports ever since the founding of the company in 1897. It was from a strong position that Sparsø
on 24 September 1975 presented the Board of Directors with perhaps the most fatal initiative in the history of the EAC—an initiative which, according to insightful observers, would eventually destroy the entire company.
19
The EAC
board meeting on 24 September 1975 began at 9.30 AM with a review of the positive results of three shipping
alliances: ScanDutch
on the Southeast Asia
route, Johnson ScanStar
on the American West Coast and ScanAustral on the Australia
route. After about two hours of a general review of the company’s development, Sparsø
was asked to round off the meeting with a review of EAC’s
shipbuilding
programme.
20 Sparsø
initially stated that the ship department had conducted in-depth analysis for a whole year in order to determine EAC’s
need for new ships. The conclusion was that the Company should contract a whole new type of ship to be called ‘neo-bulk’. A relatively small and flexible ship—neither a traditional bulk carrier
nor a container ship—of about 20,000 tonnes dwt, as against
Selandia and
Jutlandia’s
34,730 dwt. In fact, these ships went in the opposite direction to that taken with the recent container ship orders. Their service speed would be a modest 15.5 knots, and the energy-saving engine would only provide 11,600 hp against the two fast containerships’ record-breaking performance of 82,000 hp. It was an ambitious plan of a series of eight modern ships. Such a series had not been contracted since the much smaller—and significantly cheaper—conventional liner ships of the 1950s and 1960s. Pagh
presented an interesting argument for the contracting of the new vessels. Where ship orders so far had reflected EAC’s
specific strategic needs, what was sought now was ‘the most commercially useful and economical ship that would be a good asset for future sale’. The ship was to be regarded as a financial asset.
The success of the new ship type was crucial for EAC
, as it should, in Sparsø’s
cryptic words, ‘fill the need beyond what conventional bulk carriers
can accommodate and, on the other hand, make the modern container ships’ facilities redundant’.
21 What kind of cargo Sparsø
specifically had in mind was not clear at the meeting, but the philosophy behind the new ship was
flexibility. The ship should be able to transport containers, specialized cargo and traditional dry cargo such as timber or grain. However, the price for flexibility was the loss of economies of scale
, and at the same time the small engines and low top speed prevented another type of flexibility namely the capability to catch up in case of delays. In October 1975, the initial two ships, called the LRV
, were contracted with the Mitsui Shipyard
in Japan
. There was an option for delivery of two more ships, and delivery would take place between 1 May and 31 December 1977. With this order, there was maximum pressure on EAC’s
own shipyard in Nakskov
in Denmark
. The prerequisite for placing an order for another six, maybe eight, ships was a competitive price. In this connection, it was crucial whether the shipyard management
could achieve a pay-limiting agreement with the workers.
22 On 4 February 1976, negotiations with Nakskov Shipyard
ended with a positive outcome. Six LRVs
were contracted with an option for two more vessels. For Nakskov Shipyard
, it was the first serial order of such a large scale. The prize was held low due to the purchase of steel, engines (four out of six) and cranes in Japan
. In addition, shipyard workers had agreed to limit wage increases until the last ship was delivered. On the other hand, the shipyard would pay a bonus to the workers for each ship that was delivered on time and according to the agreed specifications. Mogens Pagh
, like many others, was deeply concerned with labour market conditions in the 1970s. As the first Danish company, EAC
had introduced employee shares in 1971. The chairman was particularly proud of the agreement with the shipyard workers. To the Board of Directors, he expressed the hope that the agreement ‘might seem like a model for other industries’.
23 With this pious hope, the happy circumstances surrounding the LRVs
ended—even before the first ship was built.
At the same Board meeting on 5 March 1976, it was stated that the Company’s newbuilding programme now comprised 14 vessels with a total contract value of DKK 1.6 billion. The ships were contracted for delivery over four years from 1972 to 1976. During that period, conditions in international shipping
changed profoundly. With the oil crisis, demand for transport decreased, and the re-opening of the Suez Canal
in 1975 led to the bottom falling out of the tanker
market. International shipping faced a ten-year crisis around 1975–1985. In particular, the years 1978–1980 were bloody as the total amount of transported goods fell for the first time since 1945.
24
Between 70 and 80% of EAC’s DKK 1.6 billion investment was financed by long-term loans over seven to eight years. There was thus no danger of an acute liquidity crisis. The problem for EAC was rather that the asset value of the ships dropped in line with the worsening market conditions. Thus, the value of the ships had to be written off faster—but could EAC afford that? Also on 5 March 1976, it was stated at the board meeting that even before delivery, the market value of the ships was ‘significantly’ below the value of the debt taken on to finance them. An attentive board of directors would of course have asked about the obvious risks of the large series contract for a completely new and untested ship type under these market conditions. But instead of this debate, management was congratulated on the wage restraint agreement at Nakskov Shipyard. The lack of debate and concern about EAC’s indebtedness was particularly striking because the board was neither presented with an in-depth review of any specific market demand for the new ship type, nor with any analysis of the financial consequences of the investment. Such superficial scrutiny by the board of directors was in stark contrast to former large serial orders of ships under the previous chairman Hakon Christiansen in the 1950s and under the founder H. N. Andersen before and during World War I. At that time, decisions on major vessel contracts were discussed in detail—especially the financing, which often required the expansion of the share capital or new loan agreements. To make matters worse, the ship investments of the 1970s were relatively larger due to the increased size of the ships and more advanced technology. In March 1976, Pagh closed any possible debate with the claim that the ships were to be regarded as a ‘financial commodity’ created for the second-hand market rather than the company’s own specific needs. The problem with this logic was twofold. First, the general shipping market turned out to be in free fall just in the years from 1977 to 1979 when the ships were delivered. Second and more important, it was uncertain whether there was any interest in a completely new type of vessel in the second-hand vessel market, whether depressed or not.
On 10 December 1976, one year and three months after the first board discussion concerning the LRVs
, Sparsø
reported that it had been decided to deploy the ships in a new Pacific liner shipping
trade between the west coast of the United States
and East Asia
.
25 EAC
had served this route from 1932 to 1954, when the service was discontinued due to increasing competition and poor results. The Pacific route was particularly difficult to service for three reasons: First, the liner shipping
conference
agreements in the Pacific were open to free participation in contrast to the closed conferences
to Asia
. Thus there were more, and less disciplined, players in the Pacific. Second, long distances across the world’s largest ocean caused challenges in relation to regularity. In case of a storm or accident, there was a high risk
of expensive delays. In this respect, the low engine power of the LRVs
was completely unsuitable for sailing on the Pacific as the ships would not be able to make up any delays. Last but not least, the service was characterized by an imbalance in cargo volumes: In the 1970s, there was a significant need for transportation from East Asia
to the United States
, while there was only a slight demand for goods from the United States
which was in the midst of a deep industrial crisis.
26
The first report on the Pacific experience came in June 1977, when the first LRV
ship in service had a ‘reasonable’ start.
27 This message was moderated in September that year to ‘slightly slower start than expected’.
28 In December of the same year it was announced that two major shipping
companies, German Hapag-Lloyd
and Singaporean Neptune Orient Lines
, were about to enter the Pacific route, which was already characterized by fierce competition and unbalanced trade patterns.
29 In March 1978, the message concerning the first two LRV
ships,
Sumbawa and
Songkhla was clear: tough competition combined with the lack of appropriate cargo for the rather small and slow vessels. By the autumn of 1978, the situation had become so serious that the leader of the shipping
department, Wøldike Schmith
, decided to travel to Vancouver to investigate the situation. Since the spring of 1977, five new competitors had entered the Pacific trade. It was therefore not surprising that 1978 showed ‘a significant loss’ for the new EAC
line. No specific amount was recorded to the Board on this loss. When the newly elected Member of the Board, L. Beckvard
, at a board meeting in December 1978, asked for these figures, Sparsø
replied ‘that the final number would appear in the March 1979 financial statement’.
30
EAC’s
annual accounts for 1978 were depressing, for three reasons in particular: (1) the difficult conditions of shipping
, particularly on the Pacific; (2) the high debt resulting from the new tonnage contracted in the mid-1970s; and (3) the industrial crisis in Western Europe
and North America
. EAC’s
total revenues dropped markedly from DKK 23.12 billion in 1977 to DKK 18.46 billion in 1978. EAC’s
earnings halved from DKK 100.4 to DKK 50.63 million. Most seriously, long-term debt increased by approximately DKK 470 million in just one year from DKK 2.47 billion in 1977 to DKK 2.9 billion in 1978. EAC
was on an unsustainable financial course and the LRVs
contributed to the problems until the mid-1980s, both through the increased debt EAC
took on to build them and through annual operating deficits from 1978 to the mid-1980s when they were withdrawn from the Pacific trade and subsequently sold.
31
From EAC to COSCO—A Difficult Case of Knowledge Transfer
After Mao Zedong’s
death in September 1976, Hua Guofeng
was appointed President of the Communist Party and China’s
Prime Minister. In February 1978, Hua announced an ambitious ten-year plan, aiming to increase China’s
industrial output by 10% a year and agricultural production by 4–5%. The plan was based on the Four Modernizations, that is, in agriculture, industry, defence and science/technology
. The following month, at a major science conference
in Beijing
, Deputy Prime Minister Deng Xiaoping
announced a training programme for 800,000 researchers in China
. The goal was to promote development in a number of high-priority areas, including energy resources, computers, laser and space technology
.
32
Mogens Pagh
visited China
a few weeks after Deng Xiaoping’s
ground-breaking speech and, on his arrival, received a spectacular invitation for a meeting with China’s
Minister of Transport.
33 The Minister initiated the meeting by introducing the ambitious goals for China’s
development over the following eight to ten years. The Chinese government was aware that this development could only take place through foreign technology
and know-how. EAC
was therefore requested officially to assist the Chinese government in the development of its external transport system. At the meeting, it was agreed that EAC
would send a delegation to China
in order to be able to draw up a more detailed programme. Pagh
immediately saw almost unlimited potential in the official request. Later on the journey, his assumptions were confirmed, as he was asked to meet with the Deputy Prime Minister who proved to be well informed about the transport minister’s proposal. Not since Andersen’s days around 1900, when the company’s founder established the first EAC
office in Shanghai
, had EAC
worked at such a high political level in China
.
Immediately after his return to Copenhagen
, Pagh
decided to send a delegation of senior EAC
employees and experts to China
, headed by CEO Henning Sparsø
and EAC’s
China
expert Holger Hansen. Their initial meetings with the ministry’s officials showed that the Chinese wanted something very specific from EAC
, namely support
for initiating containerization
. This was to include
34:
-
plans for the physical lay-out, equipment, workflow and administration for the first two container terminals in China, Tianjin and Shanghai;
-
suggestions for streamlining workflow and administration of the conventional shipping sector in Tianjin and Shanghai;
-
proposals for the harmonization and streamlining of inland transport, which was under the responsibility of three different ministries. In this connection, verification and documentation procedures for land-based transport of containers (road transport had not yet been completed) would also have to be developed.
-
EAC assistance with the implementation of these plans in the longer term.
EAC’s
board of directors became acquainted with the Chinese plans at a meeting on 14 June 1978. Mogens Pagh
was obviously excited about the perspectives: ‘we have had our relations with China
for a very long time and this gives us a big chance’. So far, it was not something that had made a financial surplus of significance, explained Pagh
, but now there was hope of ‘an opportunity for really great chances for us’.
35 The last remark made the 68-year-old board member Prince Georg
raise the question of fees for such large-scale work. Pagh
replied quite thoughtfully that the Chinese were the most skilled business people in the world. Regarding the fee, the chairman stated that it was nothing at all that he had wanted to speak about yet. ‘We have expressed our satisfaction with the tasks that the Chinese are giving us, and we have to look at a suitable fee later on’. ‘Surely’, continued Pagh
, ‘the Chinese will never forget us if we do something like this for them now’.
36
By the end of 1978, Pagh
considered the development in China
as the true bright spot in an otherwise dark picture concerning the future of EAC
. As stated above, the debt issues related to the liner business in the Pacific grew significantly during this period, and industrial plants in Western Europe
and North America
suffered significant losses. But at the same time, EAC’s
trading activities accelerated in Beijing
. During 1978, agency import contracts to China
amounted to DKK 230 million in total.
37 Representation in Beijing
was increased from two to four men, and the office, as the first foreign company, was authorized to install a telex machine in 1978.
38 EAC
was a Western pioneer in Deng Xiaoping’s
reforming China
and the most promising project was containerization
. EAC
sent ten of the company’s best shipping people to China
in July 1978. In the following months, the Danish staff prepared a whole new design of quays and warehouses in Tianjin
, the largest port city in North China and the main port of Beijing
. Specifications for and positioning of crane systems were established and the EAC
experts provided a detailed manual for the management
and documentation procedures that had to be set up before the container traffic could be introduced. Once this work was completed in November 1978, the EAC
experts moved on to Shanghai
. Here, port facilities were planned to handle 10,000 and 50,000–60,000 containers per year in port districts nine and ten, respectively. In order to implement the plan, cranes, forklifts and other special equipment worth USD 15–20 million had to be imported. As part of the agreement, the Chinese would pay EAC
a commission on these imports, but otherwise the work was free of charge.
39
In addition to the work of reorganizing the Chinese port facilities in Tianjin
and Shanghai
, EAC
staff also undertook a significant advisory task for the state-owned Chinese shipping company COSCO
. The Danes conducted a complete review of the entire state-owned organization in China
, covering all its functions. Marketing
, management
and control, repair and maintenance routines were reviewed, all for the purpose of introducing containerization
. Concurrently with—and probably related to—the knowledge transfer from EAC
COSCO
established the first regular Chinese overseas container line.
40 On 26 September 1978, COSCO’s
first container ship,
Ping Xiang Cheng, sailed from Shanghai
bound for Sydney
.
41 The chief architects behind this development were EAC
staff and the task also included training of Chinese personnel. In January 1979, the first Chinese employees arrived at the EAC
headquarters in Copenhagen
, where they were trained in administration. At the same time, Chinese teams of navigators and engineers were posted on a number of EAC
container ships. And as a third step, in February 1979, Chinese port officials received a thorough introduction to EAC’s
roll-on-roll-off terminals around the world.
42
Against this background, it was a shock to EAC
that, in March 1979, the Chinese announced unexpectedly that the containerization
cooperation
had to be ‘paused’ with immediate effect. The Chinese officials underscored that the decision should not be known to the public. The unexpected suspension had nothing to do with the efforts of EAC
. At a board meeting on 30 March 1979, Sparsø
stated that China
had suddenly decided to break off partnerships with all Western countries. EAC
was affected relatively late and in a limited way—for example, the Dutch had been sent home and in other cases the Chinese had cancelled even relatively loose agreements. The background for the new Chinese policy was to be found in internal political conditions in China
. On 18 December 1978, a small group of young Chinese held a demonstration for freedom and democracy in Beijing
, and in January 1979 there were further demonstrations of up to 30,000 rural workers outside the capital
. The Chinese government reacted by dropping its economic reform plans. The modernization process was not only politically risky, it was also costly. The trade deficit grew to USD 3.9 billion in 1979–1980. It was decided to emphasize modernization of agriculture over the three other parts of the Four Modernizations.
43 Against this background, EAC’s
modernization of container traffic was no longer urgent. The Chinese had time—plenty of time. And if nothing else, COSCO’s
first container line had been started, and the Beijing
and Shanghai
authorities had gained free access to valuable knowledge of how modern container lines, port facilities and ship management
worked.
The suspension hit Pagh particularly hard. It had been his decision that the crisis-ridden company would allocate significant management and staff resources to the Chinese project for several months without charge. He had rejected Prince Georg’s request for fees based on his understanding of guanxi—the importance of reciprocity and personal networks in China. Pagh was undoubtedly right that the Chinese would never forget the EAC’s goodwill and generosity. On the other hand, Pagh at the same meeting described the Chinese as ‘the best business people in the world’. The entire arrangement in 1978–1979 was costly for EAC and lucrative for China. Unfortunately for Pagh, neither he nor EAC could afford to wait for a long, slow and difficult economic and political development in China. It was Sparsø, not Pagh himself, who informed the board of directors about the Chinese withdrawal, and only three months later, Pagh announced his departure as Chairman of EAC. His era was over—as was EAC’s.