Reflections on Malcolm McLean
Malcolm McLean is little known today, but he had a vision to revolutionize shipping when he was in his thirties and the tenacity to build a giant company from scratch, risking his personal fortune and reputation when the “experts” told him it could not be done.
Humble Beginnings
McLean was born in a small town, Maxton in eastern North Carolina. Growing up in a farming family in the Great Depression, he only finished high school. In 1931, pumping gas at a service station, he saved enough money to buy a secondhand truck for $120. He began hauling freight, and three years out of high school, in 1934, he and two siblings, Clara and Jim, opened the McLean Trucking Company.
In 1937, while waiting to unload cotton bales at a New Jersey ship terminal, McLean had an idea that changed the shipping world: “containerization”. He recalled, “I had to wait most of the day, sitting there in my truck, watching stevedores load other cargo. It struck me that I was looking at a lot of wasted time and money. I watched them take each crate off the truck and slip it into a sling, which would then lift the crate into the hold of the ship.” He suddenly realized that putting goods into containers for shipment would make the process faster, safer, and cheaper.
(Clara McLean, Malcolm McLean, and Jim Mclean of McLean Trucking by Margaret Bourke-White)
For the next fifteen years, McLean concentrated on his trucking business, and by the early 1950s, McLean Trucking was the second-largest in the country and the first trucker to be listed on the New York Stock Exchange.
But Malcolm never forgot his vision of containerizing freight. The Interstate Commerce Commission did not permit a company to engage in two modes of transportation. Yet Malcolm McLean believed so much in his idea that he sold his profitable trucking company for a reported personal fortune of $10 million in the early 1950s ($93 million, 2019). He cashed in his chips from trucking and placed them all on a “roll of the dice.”
He talked with the world’s most knowledgeable ship architects about his ship design. Their response: “If you build a ship like that and stack the boxes up, it will roll upside down.” He spoke at an international shipping conference in Brussels, and the audience literally laughed him off the stage. He was not deterred. In 1955, he bought the Pan Atlantic Steamship Company in Mobile, Alabama where he built his own containership, the SS Ideal X with fifty-six containers.
In a YouTube lecture, Malcolm Gladwell describes the scene when this ship carried its first load of freight. On April 26, 1956, it sailed from Newark for Houston. McLean flew to Houston, and as the ship sailed up into port, McLean cried with emotion because he realized that he had changed the world. He had cut shipping costs from $5.58 to $.15 per ton, and nothing in world trade would ever be the same again. The “world economy” was born that day.
Dockworkers had loaded and unloaded ships much the way for a couple of thousand years. Sixty-three years later, the universal use of giant containerships has reduced sea freight costs to less than one percent (in inflation-adjusted terms) of the old bulk handling rates.
As the SS Ideal-X left Newark, a top official of the International Longshoremen’s Association, was asked what he thought of the new containership. He replied, “I’d like to sink that sonofabitch.” He knew that the earth had just shifted beneath the feet of the longshoremen. They were now obsolete.
Malcolm McLean assembled a team of close associates that had unique skills of their own, reflecting his ever-present entrepreneurial outlook and approach to business:
Harry Gette – He set up Equipment, Inc., the company that handled military cargo for the Viet Nam War. He supposedly could walk into a restaurant and tell how many seats they had to fill to break even.
Joe Leah – Malcolm’s driver, always armed. McLean would spend time gathering business intelligence. Leah would park his car in a lot near the docks while McLean watched loading and unloading, including other methods – LASH (Lighter aboard ship), RORO (Roll on – Roll off). He would study the competition as well as his own operation. Leah performed all sorts of functions to make McLean’s life more convenient. Once Locke Newlin was at an airport when Malcolm’s personal jet was about to take off. One of the Sea-Land people told Newlin to watch the line of planes taxiing for departure – that McLean’s plane would go first. And sure enough, it pulled to the head of the line. Leah, as was his custom, had slipped someone in air traffic control money to make that happen.
McLean’s sister, Miss Clara -office manager at Sea-Land. A no-nonsense person, she even controlled potted plant size in each office. The plant indicated your stature in the company. If your plant got too big, Miss Clara would come around and cut back your plant.
In 1975, while working for Aminoil, I met Malcolm. I worked fourteen months on the Burmah project that captured his interest as an RJR board member. My assignment afforded me some time with him. And each conversation was an experience. I never met anyone else like him, and I doubt that I ever will.
Malcolm had the unique ability to carry in his head a set of valuation rules to price virtually anything from a huge company to painting a house. He enjoyed doing it as though it were a parlor game. This convinced me that a corporate giant will always have little chance of winning negotiations with a crafty entrepreneur.
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Floyd Rogers in 1989 in the Winston-Salem Journal described my experience with Malcolm.
Gene Hoots was at his desk in Aminoil’s Rockefeller Center headquarters in New York City one spring morning in 1976 when Malcolm McLean called from his home in The Pierre Hotel and said that he wanted to come by to see Hoots. Hoots was a manager in the mergers and acquisitions department at R. J. Reynolds Industries. McLean, having merged his Sea-Land Corp. into Reynolds seven years earlier, owned about ten percent of Reynolds and sat on the board. McLean was a powerful man, and brilliant. “I stood a little bit in awe of him,” Hoots said.
Reynolds was interested in expanding its oil holdings by buying the major U.S. subsidiaries of Burmah Oil Co., and Hoots had spent the last year doing a detailed study of their value. When McLean got to the office that morning, he wanted to talk about Burmah. And he wanted to know what Hoots’ analysis showed its subsidiaries’ value to be.
“Before he asked me to come to the final number,” Hoots said, “he took a sheet of paper and wrote a number on it, and then he turned it upside down. And he asked me to give the value that I had come up with, and I had come up with something like $580 million, a bit more than we actually paid for it. I gave him my number, and he turned his paper over and said, ‘That’s my value.’ I looked at his number and we were about three percent apart.
“And I said, ‘Well, where did you get that number?’”
“He said, ‘At the house [He always referred to his suite in the Pierre Hotel as “the house.”] this morning before I walked down here, I read that little brochure that the bankers gave us. . .And I had time to think about it walking down here, and that’s the value I came up with.’”
Hoots said he felt that he had wasted months coming to a conclusion that McLean had reached while walking the ten blocks or so from The Pierre to the Aminoil offices.
“That’s exactly what I said, and do you know what he said? He said, ‘You have to use your methods, and I use mine,’” Hoots said. “And what he knew was that, even as powerful as he was, you couldn’t go into the board of directors of Reynolds, to the eighteen or so people in the room, and simply say this is what it’s worth and I know it, without any supporting facts.”
The only full RJR board meeting I ever attended concerned the Burmah purchase. Malcolm very much favored buying it and sometimes made his point with a quip or comment that didn’t always sit well with the more formal directors. He said that he knew a lot about the oil business because he had worked at a service station (in Red Springs, near where he grew up). That comment from anyone else would have been absurd. Pumping gas at a service station forty-five years earlier does not ordinarily qualify a person as an expert on a half-billion-dollar oil deal. But it’s a fairly safe bet that Malcolm absorbed more valuable knowledge about the oil business from a year or so in a rural service station than the average person does in a twenty-year career with Exxon-Mobil.
At the same meeting, the board discussed one of the energy fields RJR would be buying in northern California, near a major geological fault line. Another director said that an earthquake could split the site and drop half of it in the Pacific. Malcolm’s comeback was, “Good, then we’ll own beachfront property!”
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I saw two other examples of Malcolm’s legendary valuations.
Late one afternoon, he visited Jack Sunderland, Aminoil’s CEO. Jack apologized because he needed to go home; a painter was coming to give a quote to paint the exterior of his house. But Malcolm insisted that Jack stay a few extra minutes so that he, Malcolm, could calculate what the painter’s quote would be. Malcolm asked the size of the house and how many doors and windows. Malcolm’s quote was something like $1,075. He was off about $50. I joked that I wanted the scratch pad and pencil that he used because they must be the key to business success. Frank Power, at Aminoil, said he didn’t think the magic was in the pencil, but rather the hand that held it.
In another demonstration of his estimating skills, long after he had left RJR and started his new shipping company, I was in New York with Bob Kluttz, a consultant from Booke & Co., a Winston-Salem actuarial firm. We were in the Ritz Carlton lobby on Central Park, a few blocks from Malcolm’s home. The McLeans and another couple were leaving the dining room, and when Malcolm saw me, he asked Mrs. McLean and his guests to go back to the “house.” He sat down to visit with Bob and me. I introduced them, and Bob said that he worked for Booke. Of course, Malcolm knew Sam Booke, the company founder. After a few pleasantries, Malcolm said, “I’ll tell you what your profit was last year. Booke was a private company, and Bob didn’t think Malcolm could do it. Malcolm asked, “How many professionals and how many non-professionals work at Booke? Bob told him. Malcolm scratched on his ever-present pad for a few moments and said, “Your profit was Z. (A number, I can’t remember now). Bob had a startled look and said, “Who told you that?!”
Malcolm grinned and answered, “Nobody told me. I just know.” And you could tell that Malcolm was so pleased to have converted another skeptic who doubted his ability to pull answers out of thin air. Then he explained that in a typical financial service business, the profit margin is X dollars per professional and Y dollars per non-professional. If you know those two numbers and how many employees there are, you can easily figure the profit. It was amazing that Malcolm could remember numbers like that – he had an encyclopedic knowledge of such rules of thumb.
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Malcolm’s visit with Bob and me had probably not been just a friendly chat. He gathered business intelligence this way. Years later, Eileen Sharp, in Winston-Salem, spoke about Malcolm’s chats. Her husband, R. Y. Sharp, owned Pilot Freight, a competitor of McLean. Many mornings Malcolm would walk up the street while she and Mr. Sharp were having breakfast. He would come in for coffee and a visit. They finally realized that he was subtly gathering competitive information all the time.
Back at RJR, my boss was not at all pleased when I mentioned the brief conversation with Malcolm, who was now a Sea-Land competitor. Unbeknownst to me, the boss was planning a spinoff of Sea-Land and hoping to head this new company. Although I had said nothing about shipping, the boss clearly didn’t like that I had talked with Malcolm.
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Certainly, Malcolm’s business record was not flawless. He was an adventurer, dreaming up new business schemes. He would toss off a hundred ideas a day, and most of them made no sense as you listened to them. But he thought in terms so large that his reasoning was hard to follow. Like most entrepreneurs I’ve met, he had trouble verbalizing his thoughts in a logical, organized way – a trait that often made even good proposals sound downright crazy. Most were not feasible, but, I suppose, if you come up with an idea like containerization once-in-a-lifetime, you’re entitled to a lot of “not so good” ideas. He never flinched at embracing a business or a technology that was new.
His financial undoing was that he could never work in a structured environment. He always said, “I am a ‘builder,’ not a ‘runner,’” meaning that he was not a corporate manager who ran businesses; rather he was a builder of businesses. He depended on others to carry out the details, like his sister Clara McLean. I was told that she was vital to his success because she was an administrator who really knew how to keep the early Sea-Land organization functioning.
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Malcolm was never afraid of huge risks, nor was he afraid to use debt. In fact, he took pride in borrowing as much money as he could. He once told RJR Vice-President of Tax, Arnie Sidman, and me “Borrow all the money you can from the banks. If you borrow enough, you will own them; they won’t own you. They can’t afford to let you fail.“ I don’t think either of us was inclined to follow his advice. Maybe that’s why Arnie and I never became billionaires.
A trucking story illustrates his appetite for debt. Joe Gwynn was a White Truck dealer in Winston-Salem. I knew Joe, the “Captain” he was called, when he was about ninety years old. He once sold Malcolm a fleet of trucks. It was a typical Malcolm deal. Joe arranged ninety percent financing. Then, Malcolm talked Joe into going to Charlotte and telling the White District Manager that Malcolm had paid ten percent down when he had paid nothing. Joe said, “I just lied for him.” Malcolm could be very persuasive.
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No one could find Malcolm McLean guilty of “thinking small.” When I moved to Aminoil in Rockefeller Center in early 1976, on my bookshelf was a four-volume study. McLean had personally paid a million dollars for this consulting work and had given it to Aminoil. But like many of his ideas, RJR did not have the appetite.
This proposal encompassed a multi-industry venture to be located on a Caribbean island. The first step was to build an oil refinery that would be the world’s largest. This raised the question, how to transport the oil to the refinery – have a shipyard on the island build a fleet of the world’s largest oil tankers. This raised the question, what source of steel for the ships – build the world’s biggest steel mill on the island.
And last, all these projects would require a city with infrastructure for 100,000 people, the workers and their families. This obstacle, Malcolm dismissed as a mere “detail.” He truly was a “builder,” not a “runner.”
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McLean left RJR and sold his stock. He invested in other ventures — a hog farm in North Carolina; a residential development, Diamondhead; the town of Pinehurst, NC. He seemed unable to resist the lure of shipping, and he bought United States Lines in 1978 and named it McLean Industries. (He was the only person who ever listed three separate companies on the New York Stock Exchange. And another on the Over the Counter Market (OTC).
By the 1980s, the line operated forty-three vessels and was a leader in international shipping. It spent over $1 billion to rapidly expand its fleet and acquired two competitors, Moore-McCormack and Delta Steamship. Expecting a worldwide surge in oil prices, United States Lines borrowed heavily to construct a new class of twelve slow but very fuel-efficient containerships. The Jumbo Econships, at over 57,000 gross tons, was the largest cargo ships yet built. Each had a capacity of 2,000 forty-foot containers.
Some industry analysts were critical of the jumbo ships from the beginning, arguing that, in addition to adding capacity in an already slack world market, the vessels were underpowered and difficult to maneuver. As McLean took delivery, oil prices collapsed, and international freight rates fell. The giant, slow Econships left U.S. Lines with overcapacity, deeply in debt, and unable to compete with faster ships that were again economical.
In 1970, Malcolm had guessed wrong on the fast fuel-hogging SL-7 as oil prices rose. He guessed wrong again with the slow fuel-efficient ships as oil prices fell.
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Autumn 1986, I was leaving RJR and moving to New York but was still on the RJR payroll. The Barbarians were in control, and the Old Guard was being forced out quickly. My boss, John Dowdle, the RJR Vice President of Treasury, had resigned and RJR’s investment bankers, Dillon Read, honored him with a retirement lunch at the University Club.
Malcolm and I spoke briefly after lunch. He said, “Well, Hoots (He sometimes forgot my first name, but a distant cousin named Kelly Hoots had worked for McLean Trucking, so he could remember the Hoots part, but would sometimes call me “Kelly.”), I’ve got to go and try to take care of my broken-down old shipping company.” It was a somber moment, and I felt sad for a man who had accomplished so much and yet had come to such a disappointing end. He knew U.S. Lines was headed for bankruptcy.
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November 1986, McLean Industries filed a bankruptcy petition. The company announced that Malcolm McLean, owner of nearly 90% of its shares, would remain chairman but would be replaced as president and chief executive by Charles I. Hiltzheimer, formerly a head of Sea-Land.
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July 1988, McLean Industries filed a court plan to settle claims against it. The complicated bankruptcy plan covered McLean, First Colony Farms, and U.S. Lines.
The reorganization would leave Malcolm with First Colony’s real estate assets, which were largely undeveloped tracts of land in North Carolina and Alabama, affiliated real estate interests, and about $20 million in cash.
History is filled with “ifs” – but, if Malcolm had kept his RJR stock, he would have gotten $3.5 billion. But with Malcolm McLean, it was never about money; it was about building something that was exciting, taking a risk, doing what no one else was bold enough to do.
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It is unfortunate that more people do not know the contribution this man from North Carolina made to the world. Without his “box”, there would be no global economy and manufacturers would still be stuck with local markets because the shipping costs would make cross border markets too expensive in most cases.
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McLean had come a long way from his Tar Heel roots in Maxton. He and I were not close, but twice, Malcolm invited me to visit him at his “house.” It was a beautiful nine room suite. The last time I saw the McLeans was 1988. My wife and I were living in New York, and we were at a sidewalk café on a Sunday afternoon. They strolled by with their poodle, “Bouffant.” I wondered if anyone on Madison Avenue knew that the man passing by had “changed the world.” Probably not.
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May 29, 2001, The New York Times: Malcom Purcell McLean, an entrepreneur who started as a truck driver and reinvented worldwide shipping forty-five years ago when he hefted big loaded trailers into freighter holds, died Friday at his home on the East Side of Manhattan. He was eighty-seven.
Wikipedia. “Malcolm McLean.” Last updated March 23, 2020. Accessed July 5, 2020. https://en.wikipedia.org/wiki/Malcom_McLean
Raskynov, Susan F. “Bankruptcy Step Taken By McLean.” The New York Times, November 25, 1986.
Feder, Barnaby J. “McLean Industries Files Its Reorganization Plan.” The New York Times, July 6, 1988.