This is the fourth part of a new series of reports written by industry specialists. The first 12 articles are about Japanese general trading companies, or sōgō shōsha.
To understand better the businesses the sōgō shōsha are involved in today, a look should be taken at how the sōgō shōsha developed over time.
Although I will focus on how the modern sōgō shōsha developed after World War II, a brief look at their origins might also be helpful.
19th Century Meiji Era roots
Actually, the emergence of the sōgō shōsha is quite easy to understand.
In the late 1860s Japan emerged from a semi-civil war, after more than 250 years of isolation from the rest of the world, with a new samurai-controlled government under the auspices of the young Emperor Meiji.
Having been forced to open its doors to the West by superior military technology, the new government set out on a course to build a strong military. In particular they aimed to avoid what was occurring in China, with the country being carved up by European powers (imperialism). To do this they began a period of rapid industrialization and commercialization. This became known as the Meiji Restoration.
To kick start this industrialization, the government took on the responsibility of developing various industries with the help of foreign experts. However, as the government began to run out of money, they turned to private Japanese enterprises — many of whom had supported the government during and following the civil war — selling off parts of various industries to them at extremely low prices. This was the beginning of close cooperation between business and government in Japan.
Mitsui and Mitsubishi
To speed up industrialization, the government granted these entities various rights and benefits and encouraged size, or economies of scale.
They came to be known as the zaibatsu, or family-owned conglomerates (the term actually means financial clique). These conglomerates, which included Mitsui and Mitsubishi, became involved in a number of different industries. Typically, they would only have one main bank and one main trading company to handle the needs of the entire group, which created efficiencies through the pooling of resources and allowed each company to concentrate on their core business.
To make a long story short, the trading firms for these organizations had to handle the import and export needs for all the different companies in different industries in the group.
Over time, they also started procuring modern equipment, new technology and raw materials, arranging for financing and shipping, extending credit and seeking out new markets for the other companies in the conglomerate. If the working model sounds familiar, that is because this remains the basis of the sōgō shōsha’s diversified business model today.
By the 1900s, these conglomerates had come to dominate the Japanese economy, with the companies of Mitsui, Mitsubishi, Sumitomo and Yasuda making up 70 percent of the shares on Japan’s commercial stock exchange. The Mitsui and Mitsubishi trading firms, established in 1870 and 1876, respectively, would become huge entities in their own right, and the most valuable companies within their zaibatsu, also supplying the holding company with top executives. At one point, Mitsui Trading funded nearly 50 percent of all dividends paid by the Mitsui zaibatsu’s companies.
This trading model was different from that of Western trading companies that developed over the long term during the industrial revolution, and typically specialized vertically in only a few commodities.
While there were many Japanese trading companies before WWII, I would venture to say that Mitsui and Mitsubishi were the only true sōgō shōsha at that time. Most of the others were specialized traders, meaning that they were involved in only one or two industries. Another zaibatsu, Suzuki, also had a huge, diversified trading entity but went bankrupt in the late 1920s as result of over-speculation (employees from their trading firm would go on to form Nisho, later merging with Iwai to become Nisho Iwai). The Sumitomo zaibatsu did not form a trading company as it concentrated on heavy industry and had the samurai’s aversion to pure commercialism. Interestingly, the term sōgō shōsha itself didn’t actually appear until the 1950s.
Marubeni and Itochu
Marubeni and Itochu, established in 1858, were essentially the same company, and operated as an international textile trader before WWII.
Their founder, Itoh Chubei, came from a farming family. He started peddling cloth and textiles like a traveling salesman in the 1850s, when he was only 12 or 13 years old, with his uncle and older brother as a side business. He was among a group of merchants from an area near Osaka that became known as Omi merchants. These merchants became synonymous with wise businessmen, with their 3S philosophy of satisfying both the seller and buyer and society at-large. By peddling their wares far and wide, they would go on to create many large companies all over Japan.
During the Meiji Era, the textile industry became Japan’s largest and accounted for around 70 percent of the nation’s exports by 1920. Riding this wave, Marubeni and Itochu became a large international textile trader during this time, with some diversification into other industries in the 1930s as the textile industry faltered. But they didn’t become true sōgō shōsha until after WWII, when they were separated by the occupation authorities following the war.
The current formation of the sōgō shōsha began to appear in the years following WWII.
This was shaped by a number of important developments. One was the dissolution of the former zaibatsu and their companies following WWII. Another was the prevailing economic circumstances at the time and the government’s industrial policy aimed at rebuilding Japan. The last was the re-emergence of many former zaibatsu companies from around the mid-1950s.
The U.S.-led occupation broke up the zaibatsu and many of their companies in the wake of WWII, as they were associated with the former military government, i.e. the military-industrial complex. For example, the Mitsu zaibatsu’s sōgō shōsha alone was divided into 170 companies while Mitsubishi’s was separated into 139 companies. Marubeni and Itochu were broken up as well. This provided an opportunity for the large specialty traders like Marubeni, Itochu, Nichimen, Iwai and others to begin filling this void, gaining size and diversity in the process.
Also, as much of the nation’s infrastructure had been destroyed, the Japanese government embarked on a policy of division of labor among industries. To simplify, the government basically ordered the large manufacturers to concentrate on manufacturing, the large banks to loan the major manufacturers whatever funds they had available and the trading companies to concentrate on import and export — with the foreign exchange control law used as a tool of control by the government to maintain this division of labor. Given Japan’s lack of raw materials, energy resources and foreign currency at the time, the sōgō shōsha’s role in the rebuilding of the nation’s economy would become significant. Interestingly, this approach was very similar to the strategy Japan had used to industrialize during the Meiji period.
Finally, as the occupation came to an end in the early 1950s, the former prewar zaibatsu sōgō shōsha began to re-emerge. That spurred other traders to accelerate the process of diversification and attaining scale by absorbing other trading companies. The result was the emergence of 12 so-called sōgō shōsha during this time, further reduced to nine by the latter half of the 1970s through reorganizations.
At the same time, companies from a cross-section of industries formerly attached to three of the prewar zaibatsu — Mitsui, Mitsubishi and Sumitomo — began to re-group informally, due to the anti-holding company law enacted by the U.S. occupation. These cooperative groups of companies were known as kigyō shūdan (企業集団) in Japanese. They were anchored and led by a major bank and sōgō shōsha, and would share business information, directors and small cross-shareholdings of stocks.
Fear of losing out to these former zaibatsu groupings prompted other major companies and sōgō shōsha to form their own groups, leading to a total of six groups eventually taking shape, each made up of leading companies in various industries (Mitsubishi, Mitsui, Sumitomo, Fuyo, Dai-Ichi Kangyo and Sanwa).
During this rebuilding period the sōgō shōsha essentially supplied all the raw and intermediate materials, industrial machinery and equipment and technology Japanese industry needed to rebuild and reindustrialize.
In fact, the sōgō shōsha supplied more than 50 percent of all new technology introduced during this period. At the same time, they imported energy resources and foodstuff to support the Japanese economy. The sōgō shōsha also began to export whatever they could — first textiles then, as heavy industry re-emerged, industrial machinery, steel and ships, securing foreign currency. Note that the sōgō shōsha didn’t focus on any one industry but supplied and handled the goods of various different industries. This was both a matter of survival and an emulation of the prewar sōgō shōsha model.
With the economy beginning to boom in the late 1950s and early 1960s, the sōgō shōsha also began to supply small and medium size enterprises (SMEs) with goods, materials, export assistance and especially financing, as the nation’s financial institutions were reluctant to finance the exports of SMEs. Given that 50 percent of Japan’s exports during this time were carried out by firms with fewer than 300 employees, the sōgō shōsha, by the early 1960s, had emerged as linchpins of the Japanese economy.
The sōgō shōsha basically evolved into super suppliers, wholesalers and distributors, particularly to upstream and mid-stream Japanese manufacturers during this time.
Patrick Ryan is a senior analyst engaged in global industry research at the Marubeni Research Institute, the research arm of Marubeni Corp. He has previously worked in International HR and International Corporate Strategies for Marubeni.
IN FIVE EASY PIECES WITH TAKE 5