This is the third part of a new series of reports written by industry specialists. The first 12 articles are about Japanese general trading companies, or sōgō shōsha.

We know that the Japanese sōgō shōsha are unique business organizations not found outside Japan. So, what makes them unique, what are their distinguishing features?

30,000 different products

The first distinguishing feature is what I call economies of scope and scale. The sōgō shōsha are basically middlemen, brokers, intermediaries, suppliers, agents, distributors or traders if you will, between buyers and sellers. All of these terms, to a certain extent, mean the same thing. This is their core competence. Following World War II, they imported the raw materials, intermediate goods, energy resources and industrial machinery and equipment needed for Japanese industry to rebuild. They also brought in the foodstuff to help feed the Japanese populace. Eventually, as Japan re-industrialized, the sōgō shōsha would begin to export whatever goods and manufactures they could, for example first textiles, then steel, industrial machinery and ships.

Now, as the sōgō shōsha were basically just middlemen with little or no ownership of any raw materials or the means of production, there were only two ways they could really increase their earnings. One was to handle the commodities and goods they traded in ever larger volumes, meaning scale: millions of tons of coal, grain, or paper and pulp, or hundreds of thousands of computers. The other way to increase profits was to take their trading expertise, mostly in raw materials, energy resources and foodstuffs, and apply it to other items, including such higher value products as motor vehicles, aircraft, medical equipment and so on. This is what is called scope, increasing the number and types of goods they trade. It is said that a single sōgō shōsha now handles more than 30,000 different products on average, everything from “noodles to satellites,” or from “tissue paper to airplanes.”

The handling of such a wide variety of items in such huge volumes is a unique characteristic of the sōgō shōsha not readily found in other business organizations.

And, when you think about it, the “shōsha-man” or shōsha-(wo)man, the popular euphemism used in Japan for those working for the sōgō shōsha conjuring up the image of international and elite, really had to hustle, really had to work to find new customers, new business and new markets. This is an integral part of the shōsha-man and shōsha-woman’s DNA: knowing the channels, markets, customers, technology and industry trends in each industry supply chain on a global basis better than the companies actually operating in them.

Center of a global network

The second distinguishing feature of the sōgō shōsha is their industry diversity, the broad number of subsidiary companies they have and global scope. The sōgō shōsha operate in an array of industries as the center of a conglomerate through an extensive global network.

To simplify, the sōgō shōsha’s business is just divided by industry. Using Marubeni Corp.’s organizational chart as an example, there are chemical, food, energy, metals and minerals, forest products, textiles (Lifestyle Division), plant and various machinery and other business divisions partitioned by industry. Now each of these divisions, 16 business divisions in the case of Marubeni, act almost like individual companies in their own right, with responsibility for their own business strategies worldwide: upstream, midstream and downstream in their industry.

As part of their business strategy each division may buy a company, form a joint venture company, create a new company, or take a small equity stake in a company for strategic purposes. These companies are the business division subsidiaries and affiliates and make up the bulk of the sōgō shōsha’s investment. Marubeni has about 430 of these business division subsidiary and affiliate group companies worldwide including Japan, with some of the other sōgō shōsha having about the same number or even more.

In addition to Marubeni in Japan (global headquarters), which consists of these 16 business divisions (and six group units), there are also corporate subsidiaries overseas, or smaller versions of the headquarters: For example, Marubeni America Corp., Marubeni Europe PLC, Marubeni (China) Co., Marubeni ASEAN Pte., and so forth, have most of the same business divisions as Marubeni in Japan, as well as their own corporate offices. Marubeni has about 130 of these corporate offices, with about 120 being overseas.

These 130 corporate offices combined with the 430 business division subsidiaries and affiliates form the Marubeni Group and employ about 40,000 employees. Now with nearly 70 percent of these group companies also being overseas, Marubeni and the other sōgō shōsha have anywhere from 400 to 600 business units operating in roughly 70 to 90 countries outside Japan.

There are not many organizations involved in so many industries managing such a large number of companies on such a wide global basis.

Array of nontrading expertise

The third distinguishing feature is what I call economies of functions. In the course of executing their traditional core business role as a trader and wholesaler between buyers and sellers, the sōgō shōsha developed other skills and expertise in the areas of information, logistics, finance/investment and risk management, not to mention marketing. These functions have become very important to their business. Moreover, by combining these functions they have also become organizers of large-scale projects.

The foundation of the sōgō shōsha’s information function is their extensive global network. In Marubeni’s case it is their more than 400 units in nearly 70 countries linked by digital hardware. Previous to the emergence of IT on a broad basis, it was said that the sōgō shōsha’s global networks were second only to that of the U.S. Defense Department’s due to their extensive use of telex machines worldwide. However, they lost much of their hardware advantage with the onslaught of IT. They still have a software advantage though, which is the people they have in each of these units in each of these countries liaising with governments, businesses, partners, clients and customers gathering and analyzing market information firsthand to create new business, supplement current trade and provide valuable information to their customers.

Another important function is logistics or the transport and distribution of goods and materials. As traders, this is a natural process for the sōgō shōsha. Through expertise in warehousing, customs clearance, various types of insurance, shipping arrangements and intelligent supply chain management systems they can very cost-effectively, due to their ability to operate in volume, move materials and goods for their customers from the producer’s door to the buyer’s door.

Finance is also an essential function. In finance, they are involved in advancing credit, providing loans, debt guarantees, currency hedging and dealing, futures contracts, project finance and investment, among other things. Providing credit, loans and debt guarantees to their customers, both buyers and sellers, to advance trade transactions is an important part of their business, as is project finance for large-scale projects, and investment, or ownership, in core businesses to protect themselves and improve their profit structure as intermediaries in the supply chain.

Another function is risk-management, including credit risk, investment risk, logistics risk and country risk, among others. With long experience, meaning in many cases mistakes, in carrying out business transactions between countries and in various industries and product areas they have been able to build sophisticated risk management systems to reinforce and complement their businesses and in many cases their customers’ businesses, as part of the sōgō shōsha’s value is in taking on the risks that their customers are not willing to.

Finally, by employing the sōgō shōsha’s global information network in combination with their trading, logistics, finance/investment, marketing and risk management functions they can provide multiple services to their customers as a kind of one-stop shop super supplier, while at the same time enabling them to organize large scale infrastructure projects.

Undoubtedly, it is unusual to find such an array of functions integrated under one roof in one commercial enterprise.

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.

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