Business | INSIDER REPORT

Tracing Japan's business giants from the late '80s to the 2000s

by Patrick Ryan

Contributing Writer

In the mid-1980s Japan was considered the most dynamic economy in the world and its manufacturers the most dominant. Japan’s GDP growth had averaged around 7 percent per annum for the previous 30 years even with a slight downturn following the first oil shock in the 1970s, and was growing at around 4 percent by the mid-1980s. It was the “Japan as Number One” era that would culminate in Japan’s infamous (asset) bubble economy which proved to be unsustainable.

Bubble economy comes, goes

What did the sōgō shōsha do during this period? They continued to increase investment in supply sources and in joint ventures with manufacturers to secure goods and materials to trade and protect themselves in the supply chain through ownership during the latter half of the 1980s and into the 1990s. Reflecting the changing Japanese economy, which was becoming more service and leisure oriented, they also entered the service industry; fast food (actually started in the 1970s, KFC/Dairy Queen, but became more prevalent in the 1980s), health clubs (leisure boom), financial services (financial leasing of office equipment/automobiles/aircraft), among others, and began importing such higher value-added products as high-end medical equipment, personal computers and software, expanded their handling of aviation equipment, including aircraft and invested in the telecommunications field.

In addition, as Japanese manufacturers moved overseas in the 1980s and early 1990s, spurred by U.S. and European pressure over imports as well as by the huge appreciation of the yen following the Plaza Accord in 1985 (more than 90 percent of Japan’s accumulative foreign direct investment came after the mid-1980s), the sōgō shōsha provided logistics and distribution support, sometimes entering into JVs with manufacturers, expanding their third country trade in the process. In fact, the sōgō shōsha had more than 1,300 manufacturing JVs by the late 1990s compared to just 15 at the end of the 1950s.

With the strong yen as a backdrop, the sōgō shōsha also began to rapidly increase their own overseas investments and alliances with foreign companies (Marubeni Corp. had 97 overseas investments between 1987 and 1991). On the other hand, foreign companies continued to seek out the sōgō shōsha for joint ventures as a way to enter the notoriously protected Japanese market, as the sōgō shōsha operated in most industries and understood well the complex domestic business relationships and networks. This was most pronounced in the luxury brand and fashion industry with many famous brands teaming up with the sōgō shōsha.

At the same time the Japanese bubble economy both came, temporarily providing business relief to the sōgō shōsha, although also leading to speculative investments in the domestic market, and then went.

Sōgō shōsha’s second winter

From the mid-1990s into the 2000s, the sōgō shōsha moved into a number of new fields. One that was rapidly entered into was the IT or information technology industry. The sōgō shōsha invested in a number of IT-related businesses after the internet took off from the mid-1990s: undersea optic fiber, broadband infrastructure, server storage, IT application software, internet service providers and media contents (cable TV, etc.) to name a few. During this period, they also began moving into the environmental field, for example reforestation projects, recycling and carbon emissions trading, and also into the medical health care business which was being deregulated in Japan. They expanded their large-scale infrastructure project business as well as their handling of highly advanced materials. The sōgō shōsha also increased their investment in the retail sector.

By the mid-1990s, following the bursting of the economic bubble, it was clear that Japan’s economy had matured and was facing much lower potential growth. As economic growth came to a halt a deflationary cycle set in leading to worsening financial problems. In particular, a credit crunch emerged as the bad debt portfolio of banks accumulated with more and more small, medium and even some large size businesses unable to pay back their loans. At the same time the government, worried about the continued hollowing out of Japanese industry due to the high cost of domestic industries, began to deregulate the economy.

If that wasn’t enough, the IT revolution (meaning internet access), free trade agreements and globalization, the manufacturing rise of China and before, that of Korea and Taiwan, led to mega-competition, and the impact of the Asian currency crises in the late 1990s, all had a strong negative effect on the sōgō shōsha, which resulted in cash flow problems, deterioration in earnings and financial losses. It was, in my opinion, the second winter of the sōgō shōsha.

The biggest impact for the sōgō shōsha was credit, which led to financial balance sheet restructuring, a shift in business strategy to selection and concentration (selecting and concentrating management resources in areas of strength), and to new ways of managing their risks, especially investment risk. I want to emphasize that the sōgō shōsha’s basic business model did not change, but the way they managed their businesses did.

As a result, from the late 1990s to the mid-2000s the sōgō shōsha were mostly focused on balance sheet restructuring, revamping their management systems, and in how they managed their investments (applying economic value added, portfolio management and risk-at-value concepts). Their basic upstream-downstream business model and core role as a trader/supplier/intermediary, as well as being an organizer of large-scale projects, remained unchanged.

The sōgō shōsha emerged from this period of restructuring stronger and have reinforced their upstream-downstream business model through aggressive investment.

Management sea change

It wasn’t just the sōgō shōsha that went through this balance sheet restructuring phase, but rather many of Japan’s major companies as well. The early 2000s seemed to mark a shift away from Japan’s old post-war industry structure. The relationships in and between various industry and corporate groupings fortified by friendly cross-shareholdings (about 68 percent of the stocks on the Tokyo Stock Exchange during the 1990s were owned by Japanese companies and financial institutions and rarely traded) and focused on sales volume and market share began to breakdown as balance sheet restructuring took root. Friendly stockholdings were sold off with many companies becoming more the 50 percent owned by individuals and foreign entities (Marubeni included). Cash flow, debt to equity ratio and other management indicators became important as banks changed their loan criteria. A more independent industry structure with companies focused on net profits and a broader stakeholder base emerged.

For the sōgō shōsha, as well as many other major firms, this meant a change in management thinking through an overhaul of management systems including less seniority, more performance-based human resources management, smaller boards with outside directors concentrating on broader company management issues rather than daily business, stronger corporate governance and compliance processes and corporate social responsibility awareness, more sophisticated risk management methods, and realistic strategically focused midterm management plans, to name a few.

This did not mean that major Japanese companies completely abandoned their corporate cultures and Japanese management traits, some of which still play to their strengths. But, from my perspective, the difference between the sōgō shōsha and other major Japanese corporations of the 1990s and those of today, for the most part, is nothing short of a sea change.

This is the sixth 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.