Business | INSIDER REPORT

‘Sōgō shōsha’: Navigating the changing currents of Japan’s industries

by Patrick Ryan

Contributing Writer

The Tokyo Olympics in 1964 marked the emergence of Japan as a consumer economy with the population growing, incomes rising and the economy expanding. In fact, the Japanese economy averaged nearly 10 percent annual growth between 1957 and 1972. Sales of TVs, refrigerators, automobiles, and housing boomed. To fuel this growth Japan needed ever more raw materials.

Given this situation and lacking natural and energy resources the government encouraged and supported the sōgō shōsha in investing in natural resource development overseas. As such, the sōgō shōsha increased their imports of raw and intermediate materials to support Japan’s economic growth during this stage and handled the distribution of the more sophisticated and advanced materials needed for consumer product manufacturing, which increased the scope of their supply chains.

Moving downstream

The sōgō shōsha also moved into domestic real estate development downstream. The sōgō shōsha were already supplying the construction industry with construction materials and equipment upstream, however, to meet the exploding housing demand construction companies sought the sōgō shōsha’s financing, planning and distribution functions needed for this large-scale type of real estate development. The sōgō shōsha further entered food wholesaling and downstream food distribution during this period. As incomes rose, the Japanese diet shifted to more processed and ready-to-eat foods which required more modernized equipment, packaging materials and more complex distribution networks. As many of the food processors were small to medium size they turned to the sōgō shōsha to handle these needs.

As a result, the sōgō shōsha developed more integrated and expansive logistics and distribution networks (distribution processing centers, etc.) in the domestic market.

In addition to the domestic market, the sōgō shōsha began to export higher value-added manufactures and market such consumer products as automobiles and electronic appliances in overseas markets, considerably expanding their overseas networks in the process. Marubeni Corp., for its part, brought Nissan to the U.S. in the 1960s and would eventually market and wholesale Nissan motor vehicles in many parts of the world.

As such, the most notable development during this consumer economy phase was that the sōgō shōsha began to move downstream and their integrated upstream-downstream supply chain business model began to emerge.

Large-scale project organizer

In the wake of the first oil shock in 1973, oil money began pouring into many oil producing countries, which wanted to invest in their own refineries, petrochemical plants (value-added) and other types of infrastructure. The cause of the first oil shock was the outcome of the 1973 Arab-Israeli war in which Israel, supported by the U.S. and a few other Western countries, emerged as victors. The oil-producing Arab countries soon embargoed oil to the U.S. and a few other countries, including in Europe, sending oil prices skyrocketing. With oil money now pouring into these countries they became intent on acquiring their own value-added oil-related facilities such as refineries and petrochemical plants, as well as other infrastructure needed in their countries.

Given the U.S., and to some extent Europe, were now out of this infrastructure supply picture, and Japan having highly advanced engineering and technology capability, the sōgō shōsha, with a strong presence in oil- and resource-rich countries, were well-positioned to take advantage of the ensuing plant and infrastructure development boom. Furthermore, the sōgō shōsha were well-acquainted with the plant business having procured industrial equipment for Japanese manufacturers after World War II and having exported Japanese industrial machinery, including for plant exports, in the 1960s. As a result, the shōsha’s large scale project business took off.

With their network of partners and customers in various industries (global network/sourcing) and their trade (import-export procedures), logistics (machinery and materials transport), project finance and risk management expertise, the sōgō shōsha found that their functions were ideally suited to the planning and organization (consortiums) of infrastructure and other large-scale projects. With Japan, up until recent years, becoming the largest contributor of official development assistance (ODA) to developing countries, this became big business for the sōgō shōsha.

Winter of the sōgō shōsha

The sōgō shōsha also faced a crisis, or what I refer to as the trader’s dilemma, in the late 1970s and early 1980s as large Japanese manufacturers questioned the need of the sōgō shōsha as middlemen and began to rely less and less on them in the supply chain. This was exacerbated by a worldwide recession brought on by the first and second oil crises and the period was dubbed the “winter of the sōgō shōsha.”

Given that the sōgō shōsha’s core business is trade and that the sōgō shōsha are essentially suppliers, without materials, intermediate goods or products to trade and supply their customers with the shōsha would essentially be out of business.

The solution to this dilemma was to substantially increase their investment in the sources of supply, in manufacturers, or in manufacturing joint ventures, and in distributors with strong access to supply sources in order to secure the goods and materials necessary to supply their customers and protect themselves in the supply chain. In other words, gaining ownership to avoid being eliminated in the supply chain.

This marked a shift in the sōgō shōsha’s role of being mostly an intermediary or middleman in the value chain between buyer and seller to being an intermediary with increasing ownership of the sources of supply as well.

So, the sōgō shōsha’s push into the large-scale project business as an organizer and new emphasis on investment upstream and downstream in the supply chain to protect their position as a trader and intermediary through ownership were the two most significant moves made during this period.

This is the fifth 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.