Business | INSIDER REPORT

Adapting to new industries, bolstering world’s infrastructure

by Patrick Ryan

Contributing Writer

The ability of the sōgō shōsha to survive through all the changes and transformations that have taken place over the years can, in many ways, be attributed to their adeptness in recognizing the rise of new industries early on and creating new businesses in the process, or in applying new technologies and techniques to existing businesses to increase competitiveness and avoid obsolescence.

One example of a new industry the sōgō shōsha quickly adapted to is the information and communication technology (ICT) or information technology (IT) industry.

Building an ICT value chain

Marubeni Corp. has an IT value chain upstream in broadband infrastructure and data storage, midstream in software development, systems integration, advanced IT-related equipment and peripherals for businesses, and downstream in mobile device retail sales.

As background to this, prior to the mid-1990s Marubeni had been involved in telecommunications projects overseas and invested in a large private telecommunications operator in the mid-1980s with the deregulation of the telecommunications industry in Japan.

Marubeni had also been involved in office automation, data processing, sales of office equipment including mini-computers, the export of advanced electronic equipment, including semiconductors, and even arranged the manufacturing of notebook computers in Japan for a major U.S. company. Being involved in these different areas enabled Marubeni’s related business divisions to anticipate the personal computer boom, and Marubeni would go on to become one of the largest wholesalers of PCs, packaged software and other computer products in Japan, eventually investing in a major PC and software retailer in the latter half of the 1990s.

From this broad vantage point Marubeni was also able to make an educated bet on the newly emerging IT industry anchored by the internet. In the mid-1990s Marubeni invested in undersea fiber-optic cable between the U.S. and Japan and in a land-based fiber-optic network between Tokyo and Osaka that connected to the undersea system (Marubeni eventually restructured their investment into ownership of the land-based network only, but with a strong partnership with the submarine cable provider.).

As such, upstream Marubeni, through their joint-venture subsidiary Arteria Networks, has their own countrywide fiber-optic broadband infrastructure and communications networks and provides businesses with internet, data storage, cloud and intranet access as well as mobile device support, while connecting individuals (via condominiums) to the internet.

Midstream, Marubeni’s wholly owned subsidiary Marubeni Information Systems designs smart manufacturing, measuring and other systems using such advanced technologies as computer-aided design and manufacturing platforms, 3D printing, digitizers, the internet of things, big data and AI for a variety of industries. They also build and maintain customized integrated digital IT networks and infrastructure for companies, including much of the Marubeni Group, providing the advanced hardware as well as the systems and business application software.

In terms of the downstream sector, as personal computers became commoditized during the latter half of the 2000s, Marubeni sold off their wholesale and retail computer sales operations and moved into mobile devices instead. Through their subsidiary MX Mobiling, they retail mobile devices, mainly mobile phones and related products, began via MX Mobiling’s chain of stores in Japan. MX Mobiling also provides fixed-line and broadband services to the home.

Of course, these are not the only companies in Marubeni’s upstream-downstream ICT value chain. There are a number of other subsidiaries involved in such areas as telecommunications systems integration and IT solution services, software development and IT security, and wireless communications services and cell phone networks all in all covering most of the IT value chain spectrum. (Note: There is overlap in the services provided by these companies.)

I think this gives you an idea of how the sōgō shōsha leverage their comprehensive knowledge of industry and technology, both old and new, to, for lack of a better word, morph into new industries.

These value and supply chain samples are just a few examples to help you better understand how the sōgō shōsha think and work. This integrated upstream-downstream supply chain business model can be applied in varying degrees to products in the chemicals, textiles (raw textiles to retail apparel), forest products (tree plantations to pulp and paper), construction (materials and machinery to real estate development) and many other fields.

Masterminding giant projects

As mentioned in previous articles, organizing large-scale projects is the other main business of the sōgō shōsha. They originally gained experience in this field when they supplied Japanese manufacturing with industrial machinery and equipment and construction materials following WWII. Now they are involved in the development of various types of infrastructure projects, including electric power plants, water treatment and sewage facilities, railways, airports, ports, industrial parks, telecommunications networks and “smart cities” among others, as well as various types of industrial and production plants (petrochemical, refineries, chemical, industrial machinery, textile, etc.)

In general, the sōgō shōsha use their global information and business networks to identify potential projects. Once identified, a feasibility study is carried out to see if the project is viable from various economic, technical, market, infrastructure, regulatory, environmental and other perspectives. Once the study is completed, the international sourcing and cost estimation for all machinery and equipment, parts and materials needed for the project takes place using their global information and business networks to find the most suitable manufacturers and suppliers. At the same time contractors, both local or international, are selected for the construction work, costs assessed and construction arrangements agreed upon. Sōgō shōsha organize all of this as part of the planning stage of the project.

Once the costs and other details are finalized and the planning finished, financing must be arranged as in many cases the “owner” of the project is not able to fully finance it alone. The sōgō shōsha use their project financing expertise and wide experience in dealing with private banks and government financial institutions to do this, usually through a consortium of financial institutions, and provide credit (via loans) to the purchaser of the project.

Next is the tender negotiations and bidding stage of the project. If the bid is successful and the contract is signed, the execution stage begins. (In recent years, many projects have been carried out through public-private partnerships (PPP).) The types of contracts used to do this might include engineering, procurement and construction (EPC), operation and maintenance (O&M), build, operate and own (BOO), build, operate and transfer (BOT), or build, operate, own and transfer (BOOT).

With their logistics expertise and knowledge of trade procedures, the sōgō shōsha will arrange much of the transport and shipping of the machinery, equipment, intermediate goods and materials required for the project. Next they will coordinate the project’s execution with the consortium and handle any problems that may emerge.

Finally, if the project involves building a production plant, the sōgō shōsha may also act as upstream suppliers of raw materials for it and become the sales agent, buyer, or in case it has an equity or ownership stake in the plant, the off-taker of its products to distribute or sell further downstream as a wholesaler. In some cases, the sōgō shōsha may even receive the plant’s products as part of payment for the plant.

Electric power play

In terms of large-scale projects, Marubeni’s electric power business has become one of the most successful. Over the years, the sōgō shōsha have used global networks to supply electric power companies with the fuels (coal, LNG, oil and uranium) and the machinery and equipment (turbines, generators, boilers, nuclear reactors, etc.) needed to run their power plants. Through the knowledge of power plants gained through this, as well as their experience in organizing large consortiums, Marubeni, through the Power Business Division, has become one of the largest electric power plant developers in the world and acquired significant electric power holdings overseas as an independent power producer (IPP). And, in Japan, due to deregulation in the domestic market, Marubeni sells electricity to utilities and to retail users through its own hydro, wind, solar, natural gas and biomass power plants.

The diverse functions of the sōgō shōsha make them perfectly suited to carry out this kind of business activity. In fact, it can be considered a sophisticated form of trade and distribution in the supply chain, encompassing the supply of raw materials and the wholesale, or sometimes retail, distribution of the plant’s products.

This upstream-downstream supply chain, product trading and distribution activities, combined with the development of large-scale projects, are basically what the sōgō shōsha do.

This is the ninth 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.