PACIFIC RIM TRADE : Japan : Trading Companies Power Tokyo’s Economic Expansion : With their vast networks of employees and contacts, <i> sogo shosha </i> find business for other countries as well.
Every day 100,000 messages--all delivered within five minutes--flow through a single telecommunications network here that handles transactions worth $147 billion, an amount larger than the gross national product of Denmark.
Yet this is not a national system. It is the network of a single company--Mitsui & Co.--linking 11,000 employees in more than 200 offices in 88 countries.
This is the sogo shosha (integrated trading company), an institution that helped nurture this country into the world’s leading trader--as measured by surpluses--and promises to lead it into an even broader role in international business.
“From 1950 to 1970, with exports as the core, Japan grew by more than 10% a year. It was able to do this because of the trading companies. Every three years, they found a new product to drive exports--bicycles, motorcycles, cameras, radios, television, steel, cars. Manufacturers couldn’t have done it alone,” said Eimei Yamashita, a former vice minister of the Ministry of International Trade and Industry (MITI) and a retired Mitsui executive.
Trading companies are not unique to Japan. Jardine Matheson of Hong Kong is a trading company. South Korea mimicked Japan to establish trading companies for each of its chaebol (conglomerates). Even the United States, under Presidents Jimmy Carter and Ronald Reagan, attempted to create trading companies.
But none of the non-Japanese firms ever achieved the size of the shosha .
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Blanketing the globe, each of them buys and sells as many as 30,000 products--so many that top executives have trouble keeping track of what’s going on at their own companies.
Mitsui, for example, formerly divided its operations into product-line divisions. “But when the number of divisions reached 80, it became apparent we were losing sight of the overall picture,” company President Naohiko Kumagai told the newspaper Asahi. The divisions were reorganized into 20 headquarters “to broaden horizontal contacts,” he said.
Although 19 firms belong to the Japan Foreign Trade Council, five behemoths and four giants attract most of the attention. Their combined fiscal 1993 sales--excluding their subsidiaries--amounted to $957 billion, or more than a quarter of Japan’s GNP.
Beginning around 1970, Japan’s major manufacturers started selling their own products overseas, but the Big Nine trading companies still handle 65% of Japan’s imports and 37% of its exports.
Now, trading to and from Japan accounts for only 30% of the trading giants’ overall business, and the shosha are beginning to serve non-Japanese as well as Japanese clients, tackling new ventures and investing around the world. Mitsui, for example, now lists about 1,000 subsidiaries and “affiliated companies.”
“It is wrong to think of the sogo shosha simply as traders,” said Minoru Murofushi, president of Itochu Corp., the No. 1 trading company. “We are financiers, investors, developers, coordinators and consultants. We are innovators, continually venturing into new areas.”
Added Mitsui’s Kumagai: “The trading company has become a knowledge-intensive service industry.” In addition to traditional fields such as securing supplies of natural resources, fish and agricultural goods for Japan and exporting machinery, steel and chemicals, in recent years the shosha have entered the fields of computer software, telecommunications, satellites, real estate development, oil exploration and media and entertainment.
Indeed, nothing seems too big or too offbeat.
To bring liquefied natural gas to Japan, Mitsui, for example, put together developer consortiums and liquefaction plants in Abu Dhabi and in Australia and purchaser consortiums of electric power and gas companies in Japan; built liquefied natural gas tankers, and arranged all of the financing. The Australia project cost $19 billion.
New facilities under construction at a cost of $120 million at the Port of Los Angeles--to handle 9 million tons a year of steam coal and petroleum coke for export to Japan, South Korea and Taiwan--were financed in part by 11 Japanese trading firms.
At the same time, the shosha raise chickens for Kentucky Fried Chicken shops here and supervise box-lunch delivery three times a day to 7-Eleven stores.
They also serve as “sensors” for Japan’s business world--pinpointing demand for new products, discovering new technology that manufacturers can commercialize and shifting personnel to exploit new markets, Yamashita said.
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After the first oil shock in the 1970s, shosha bolstered their staffs in the Middle East and quickly increased Japanese exports to the region awash in petrodollars. The latest shift in focus is to China.
The largest chunk of business for the average trading company--44%--comes from wholesaling and business ventures in the domestic market. But the biggest growth segment is third-country trade in which Japan is neither the exporter nor the importer. A quarter of sales now come from this sector.
With the spread of Japanese factories in Asia, for instance, shosha are increasing exports to the United States and Europe of Japanese products made offshore. The U.S. Commerce Department last year found that Japanese subsidiaries in the United States got 23% of their imports from third countries, more than any other nation’s U.S.-based subsidiaries.
And increasingly they also are handling non-Japanese products.
Mitsui & Co., for example, is marketing Du Pont chemicals in the Asia Pacific region; Unisys computers in Latin America, Eastern Europe, the Commonwealth of Independent States and Southeast Asia; Caterpillar bulldozers in Russia, and General Electric power plants in Thailand and Indonesia.
The steep appreciation of the yen has promoted such alliances.
Mitsui serves as General Electric’s agent in Japan, and its relationship with the U.S. giant dates back to prewar days. But GE’s major sales here consisted of selling the first power plant of its kind and then turning over to either Toshiba or Hitachi the manufacture of all subsequent same-model plants, “thus developing the heavy electric machinery industry in Japan,” said Hiroshi Otaka, general manager of Mitsui’s electric machinery international division.
Beginning around 1965, Mitsui started exporting power-generating equipment made by Toshiba, one of the 34 Mitsui Group companies.
“Japanese products were not that good, but the price was very inexpensive,” Otaka said. “But at an exchange rate of slightly more than 100 yen to the dollar, (Toshiba products) no longer are competitive.”
That’s why Mitsui is now selling GE products to its Asian customers, he added.
GE finds it advantageous to use Mitsui because the trading company pays for the machinery upfront, assumes the risk of building the power plants and arranges the financing--part of which has recently been provided by the export-import banks of both Japan and the United States, Otaka said.
Trading companies also are unique in Japan for ranking among the world’s least profitable businesses. Although figures for turnover are bloated by accounting practices that include the value of products sold--not just shosha fees--net profit has been recently running as low as 0.1% and 0.2% of sales, according to Yukio Onuma, manager of Itochu’s research department.
Shosha executives claim they are determined to raise profits, yet they remain committed to activities that American executives would have abandoned long ago. Amano, for example, explained his company’s dedication to ensuring a steady supply of iron ore to Japan by declaring that the low-profit business has a “social meaning.”
Tolerance of minuscule profits is even more amazing in view of the risks.
A shosha will either buy exports or imports directly from a manufacturer, eliminating any possible loss from foreign exchange fluctuations, or provide hedges against currency movement. In multibillion-dollar overseas projects, trading companies even hedge risks by entering alliances with their rivals.
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But disasters, such as development by a Mitsui-led consortium of a petrochemical complex in Iran, do occur. Launched in 1971, the complex was damaged during the Iran-Iraq War and collapsed under political turmoil in Iran.
Mitsui, which held a 60% share, lost nearly $2.4 billion (at the current exchange rate) while other Japanese partners saw nearly $1.6 billion disappear, a Mitsui spokesman said. Only 20% of the losses were covered by Japanese government insurance, he added.
Perhaps most fundamental to shosha is the intimacy and the history of business relationships built up over generations.
Mitsui salespeople, for example, visit Tokyo Electric Power Co. nearly every day and obtain information on all of the power company’s investment and purchase plans, according to Otaka.
For Toyota, which needs exporting help perhaps less than any other firm in Japan, Mitsui helps sell products in Canada, Latin America, Southeast Asia and Africa. It also is a partner in Toyota production in Colombia and Turkey.
The relationship began when Mitsui--in 1899--started acting as agent to sell an automatic spinning loom invented by Sakichi Toyoda, whose son was later to found Toyota Motor Co. That contract, which lifted the invention from obscurity, is still remembered by executives of both companies.
Japan’s Trading Giants
Company: Sales* (in billions of dollars)
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Itochu: $149.6
Mitsui: $147.1
Marubeni: $140.5
Sumitomo: $139.4
Mitsubishi: $131.0
Nissho Iwai: $ 88.9
Tomen: $ 60.5
Nichimen: $ 50.9
Kanematsu: $ 48.9 billion
TOTAL: $956.8 billion
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*For fiscal year ending March 31, 1994 on an unconsolidated basis
Source: Japan Foreign Trade Council
