Business | INSIDER REPORT

Reflecting the nation’s history, ‘sōgō shōsha’ are unique to Japan

by Patrick Ryan

Contributing Writer

The sōgō shōsha‘s organization and business model is unique to Japan. This is, for the most part, because they are a reflection of Japan’s own unique economic development, first during the Meiji Restoration’s period of rapid industrialization and commercialization aimed at building a strong military in the latter half of the 19th century and then in the intensive rebuilding of Japan’s infrastructure and industry in the aftermath of World War II eventually leading to Japan’s transformation as an economic superpower.

Impossible to imitate

The sōgō shōsha emerged in the post-WWII period as very large entities both in size and scope. They are extremely diversified, not only in terms of their range of products and services but industry-wise and geographically. Needless to say, they are very difficult to imitate. The first sōgō shōsha initially appeared more than 140 years ago and developed sophisticated multi-faceted functions and expertise over the ensuing years. These functions are rooted in Japan’s raw-material import — value-added export trading model as well as in the sōgō shōsha’s multi-industry upstream-downstream supply chains. In truth, it is virtually impossible to build these type of large-scale trading intermediary organizations from scratch.

To this day, the closest thing the rest of the world has to the sōgō shōsha are the trading firms of such Korean chaebol, or conglomerates, as Samsung, Hyundai and others. However, they are much smaller and specialized in scope than the Japanese sōgō shōsha.

Little known outside Japan

In 1996, all nine sōgō shōsha could be found in the top 40 of the Global Fortune 500 with five of the first six spots on the list being held by sōgō shōsha. (Having shifted to International Financial Reporting Standards (IFRS) based on sales revenue rather than total sales volume in recent years, sales have been revised significantly downward, however, six of the current seven sōgō shōsha are still in the top half of the rankings.) Now, if you asked international business executives at the time, which I often did during presentations on the subject, if they had ever heard of the sōgō shōsha, basically the five largest companies in the world, you got answers like the steel-maker Sumitomo Metal Industries Ltd. (now merged with Nippon Steel Corp.) or the auto-manufacturer Mitsubishi Motors Corp., neither of which are sōgō shōsha.

The reason that most people have not heard of the sōgō shōsha is simple, the sōgō shōsha are not manufacturers. They do not have their names attached to consumer or other products. You do not see their names on any retail stores and outlets, even though the sōgō shōsha own or have controlling interests in such retail outlets as the Family Mart and Lawson convenience stores, the Summit supermarkets and KFC Japan, to name a few. (Marubeni has large ownership stakes in such supermarket chains as Maruetsu, MaxValu and Kasumi.)

Again, this is because the sōgō shōsha are basically suppliers, wholesalers and distributors that operate, in many cases, as strong but barely noticeable links upstream, midstream and downstream in the supply chain. About the only places the sōgō shōsha are fairly well-known outside Japan are among those in government circles of emerging and developing countries due to the sōgō shōsha’s role as organizers of large-scale infrastructure projects.

The big five

So, who are these mysterious paragons of trade? Currently, there are seven sōgō shōsha. They are Mitsubishi Corp., Mitsui & Co. Ltd., Sumitomo Corp., Itochu Corp. and Marubeni Corp., which are often referred to as the big five, followed by Sojitz Corp. and Toyota Tsusho Corp., which previously was the trading arm of Toyota Motor Corp. handling mostly motor vehicles and motor vehicle parts. All the sōgō shōsha trace their origins, in one form or another, to just before or during the Meiji Era.

While there are seven sōgō shōsha now, there were in fact 12 sōgō shōsha until 1967, 10 until 1977 and then nine until the early 2000s. However, Japan’s economic travails in the 1990s and into the 2000s took its toll on the likes of the sōgō shōsha Kanematsu Corp., which shed business divisions and became a specialized trader; Nisho Iwai Corp. and Nichimen Corp., which merged and became Sojitz in 2004; and Tomen Corp. (roots in the Meiji Era Mitsui Trading Co.), which in 2006 was absorbed by Toyota Tsusho, itself looking to diversify to join the ranks of the sōgō shōsha.

To give you an idea of the size of the sōgō shōsha, based on data from previous years using the prior accounting standards (U.S. GAAP), I estimate that the total value of the trade one big five sōgō shōsha handles on average is roughly $130 billion with sales revenue of about $60 billion (actual). This means that the total sales volume of the seven sōgō shōsha is somewhere between $750 and $800 billion or about 15 percent of Japan’s economic size. In fact, if these previous accounting standards were still applied all seven would be in the upper portion of the Global Fortune 500 with the big five in the top 15 percent of the world’s largest companies.

In addition to this, the total assets of one big five sōgō shōsha average about $100 billion, not to mention that a typical sōgō shōsha has nearly 500 consolidated or group companies under their wings. (If the subsidiaries of these group companies are also counted, the number of group companies would likely double.)

One point that should be made in all of this before going on is that the sōgō shōsha are very similar in the lines of businesses they are involved in, in their organizational structures, and, from my viewpoint, in their corporate cultures. The only real difference is in their areas of strengths. For example, Mitsubishi and Mitsui are known for their strength in energy and metal and mineral resources, while Marubeni is strong in such things as grain and electric power plants, Itochu in textiles, and so on and so forth.

Vital to Japan’s economy

As you may have gathered, the sōgō shōsha are prestigious companies in Japan at the top of Japan’s business pyramid. One of the reasons for this is the important role they have played in the modern economic development of Japan. For example, during the 1980s, the total trade (sales) volume handled by the nine sōgō shōsha at the time was about 30 percent of Japan’s total GDP, or economic size. Please note that Japan’s economy in the 1980s was the world’s second largest by far, nearly the size of the West German, French and U.K. economies combined.

An even more impressive figure is the total amount of Japanese imports and exports they handled. During the 1980s, the nine sōgō shōsha accounted for about 70 percent of all Japan’s imports and nearly 50 percent of its exports, importing mostly raw materials, commodities, intermediate materials and goods and exporting manufactured products. It is hard to imagine just nine companies having such a large share of one country’s trade and gives you an idea how essential the sōgō shōsha have been to Japan’s economy.

In fact, due to their significance in world trade, there were attempts by socialist governments in some Eastern Europe countries and in China, as well as by private firms in the U.S. (1982 Export Trading Company Act) and other advanced countries to create sōgō shōsha-type organizations. However, as I have said, the complex inner-workings of the sōgō shōsha developed over decades proved too difficult to replicate.

In more recent years though, the current seven sōgō shōsha’s total sales volume has been, as mentioned, about 15 percent of Japan’s GDP and on average they have accounted for nearly 30 percent of Japan’s imports and around 18 percent of exports, well off 1980s totals, but still large figures for just seven companies. There is a structural reason for this. Around 90 percent of all Japan’s foreign direct investment came after the mid-1980s. Starting with pressure by the U.S. government over trade with Japan, particularly related to automobiles (déjà vu), and combined with the depreciation of the yen from 1985, Japanese manufacturers began to migrate overseas. Prior to that, sōgō shōsha were relatively focused on Japan-centric import and export.

As a result, the amount of third country, or offshore trade, meaning trade handled by the sōgō shōsha that involves two countries other than Japan, for example textiles between China and Germany, went from around 10 percent of their total sales volume in the 1980s to more than 40 percent today, as they continued to supply Japanese manufacturers overseas with raw materials and intermediate goods. And, of course this naturally led to a reduction in imports to and exports from Japan handled by the sōgō shōsha as Japanese makers increased production in overseas markets.

This points to the rapidly growing presence and significant expansion of the sōgō shōsha outside of Japan in supply chains around the globe.

This is the second part of a new series of reports written by industry specialists. The first 12 articles are about Japanese general trading companies, or sōgō shōsha. Patrick Ryan is a senior analyst engaged in global industry research in the Marubeni Research Institute, the research arm of Marubeni Corp. He has previously worked in International HR and International Corporate Strategies for Marubeni.