As mentioned before, the sōgō shōsha have two fundamental business models: Their traditional, core business model as trader, supplier, wholesaler and distributor of a vast array of goods and materials upstream and downstream in the supply or value chain, and as an organizer of large-scale infrastructure projects.
Integrating the supply chain
To better understand the sōgō shōsha’s traditional, main business as a super supplier and distributor, one only has to think of the supply chain or value chain, or what some call the flow of trade. They all mean the same thing. Simply, every product has a supply chain, from the raw materials that are processed into intermediate materials and semi-finished goods upstream, which in turn are used to make a finished product midstream, then to the wholesaler and finally the retailer and consumer in the downstream distribution process.
The sōgō shōsha’s fundamental goal, or dream if you will, has been to integrate the supply chain by being involved, if possible, at every stage of the chain, upstream, midstream and downstream. Of course, every finished product has its own supply chain, so there are literally hundreds of thousands, if not millions of product supply chains. Certainly, the sōgō shōsha are not involved in every product supply chain, however, in the product supply chains they are involved in they have been able to integrate them to a considerable degree. By applying, in particular, their logistics and financial expertise the sōgō shōsha have been able, in some cases, to partially integrate the supply chain from either upstream to midstream or midstream to downstream, and in others integrate basically the entire value chain upstream to downstream.
This is what forms the basis of the sōgō shōsha’s thinking and their core business model. To simplify this and make it more understandable, let’s look at some value chain examples using Marubeni Corp. cases.
Iron ore, steel and autos
This first example, iron ore and coking coal, steel and autos (or home appliances, etc.), is a fairly traditional example of a sōgō shōsha metals supply chain, having been involved in the handling of iron ore, coking coal and steel since the 1950s and in the export of autos from the 1960s. This value chain basically encompasses at least three different business divisions: Metals & Minerals, Steel Products and Automotive & Leasing.
Just a middleman
Originally, as just a trader or intermediary between buyer and seller Marubeni would purchase iron ore and coking coal, raw materials used in steel production, directly from mining companies, and arrange shipping to the buyers, which in this case would be steel manufacturers in Japan. They would then buy the finished steel product, or receive it on consignment, from the steel producer and arrange transport to the buyer, which in this case would be auto manufacturers or also appliance-makers and other manufacturers that use steel in other industries. Following this they would arrange for the export of the autos, let’s say to the U.S., where they would market or wholesale them to dealers and other entities.
As just a middleman or intermediary in this supply chain Marubeni would receive either the profit from buying and selling, meaning the difference in price, or just a commission for handling the sale and fees for arranging transportation, so the profit margins are relatively small. This is an example of the sōgō shōsha’s traditional trading business.
Before going into how the current business model has changed, keep in mind that in terms of natural resources sōgō shōsha like Marubeni are always searching for new supply sources. In the event new deposits of iron ore or coal were discovered, let’s say in an isolated location, such infrastructure as roads, water and electricity would be required. Theoretically, as organizers of infrastructure projects, Marubeni could also arrange for the financing and construction of the necessary infrastructure needed to extract the iron ore and coal and receive a fee in return.
Ownership in the supply chain
In the current model, given that steel makers and mining companies could talk directly with each other, Marubeni has taken equity stakes upstream in iron ore and coal mines, in this case in Australia through our subsidiaries Marubeni Iron Ore Australia and Marubeni Coal Pty., to secure a supply of iron ore and coking coal to sell to steel companies in Japan. They would then arrange for shipping to Japan (logistics/distribution). Ownership allows Marubeni to receive the iron ore and coking coal at cost thus increasing their profit margin, as well as giving them their own source of supply.
Note again that the steel companies and the auto and home appliance-makers, or other users of steel, could talk directly to each other and possibly eliminate Marubeni (sōgō shōsha), or drastically reduce their role in the supply chain. To partially counter this Marubeni’s Steel Products Division has invested in coil centers, or steel processing centers, through their subsidiary company Marubeni-Itochu Steel, a 50-50 joint venture with Itochu. As the specifications for steel and types of steel products used in the production of autos, appliances and other industries are different, these coil centers will cut the steel and/or produce steel products to meet the customers’ standards and various steel product needs. This is a type of outsourcing of part of the steel processing function to Marubeni, which allows them to protect their position as a midstream supplier, while adding value (higher profit) over and above their traditional role as just a buyer and seller or go-between (lower profit).
Downstream, at one time, Marubeni was the wholesaler for a major Japanese motor vehicle manufacturer in the U.S., Europe and other regions. However, over time many of the major automakers began to take on this marketing function themselves, especially after they began to directly invest in their own production overseas. In response, already knowing the retail auto business as an exporter and wholesaler and through their experience in auto leasing, Marubeni began to invest in auto dealerships of both new and used autos and provide auto financing at the consumer end in the U.S., UK and other countries, though they still wholesale and distribute vehicles in some Latin American, African and Asian countries.
In this way, through investment, by gaining ownership, they have been able to maintain their position as a supplier upstream, midstream and downstream in this supply chain.
Interestingly, this is not the end of Marubeni’s participation in this particular supply chain. Through the business relationships developed and know-how gained at the different stages of this supply chain Marubeni has also become involved in the sales of mining equipment in a number of mining-rich countries upstream, in steel manufacturing and steel product processing joint ventures overseas with a major Japanese steel company midstream and downstream through investment in auto parts wholesalers in the U.S. for example. A few of the other sōgō shōsha even have substantial stakeholdings in Japanese auto manufacturers.
This is but one simple example of engagement in the supply chain at the various stages of a metals value chain by the sōgō shōsha. Similar types of upstream-downstream trading, processing and sales supply chains by the sōgō shōsha can also be found in copper, aluminum and other metal and mineral resources.
Note too, that the sōgō shōsha’s participation in the automotive industry’s value chain goes even deeper than I have let on here. The sōgō shōsha do not only supply steel materials to the automotive industry and handle the sales of automobiles and auto parts, they also supply industrial textiles, plastics, aluminum and other materials as well as production machinery and have invested in auto parts manufacturers as well.
As you can now well imagine, the sōgō shōsha, as suppliers to manufacturers in a broad range of industries, this being just one simple example, handle a plethora of raw, intermediate and advanced materials and semi-finished goods essential to the smooth running of Japanese industry.
This is the seventh 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.