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Trading Industry Overview

11, 01. 2004

Current State

Signs in the Air that Trading Companies May Finally Come Out of Prolonged Stagnation and Rise Again

The Tsukiji Market, Tokyo Metropolitan Central Wholesale Market of fisheries products
The Tsukiji Market, Tokyo Metropolitan Central Wholesale Market of fisheries products
 

   Trading companies, which were symbolic of Japan's economic growth, finally came out of the prolonged state of stagnation that began in the 1990s, and they are now showing signs of revival. According to the consolidated financial results for FY2003 (year ending March 31, 2004) for the five major trading companies in Japan (namely Mitsubishi Corporation, Mitsui & Co., Ltd., Sumitomo Corporation, Itochu Corporation and Marubeni Corporation), all but Itochu, which saw deficits, posted record-making profits. In addition to the sharp global appreciation of natural resource and energy prices, profits also improved through high stock prices.

These companies are shifting their focus from trading operations, where profit margins are slim, and are restructuring their businesses by making the income from dividends (from companies towards which they have made investments) as well as capital gains the backbone of their profits. All five trading companies are expected to set a new record in their profits in FY2004 (year ending March 31, 2005).

Business Integration between Trading Companies Progresses at a Swift Pace After 2000

Overview of Japanese Trade (yen basis)

   With the globalization of the economy and the financial Big Bang, Japanese companies entered into an age of consolidated accounting, and trading companies, like some other companies in Japan, were forced to integrate. Business integration between trading companies proceeded at an especially swift pace after 2000.
   Itochu and Marubeni, which traces their corporate histories back to the same founder, consolidated their steel products operations in October 2001 and established Marubeni-Itochu Steel Inc.

   In February 2002, Mitsui & Co., Ltd. and Sumitomo Corporation integrated their lumber and building materials business and established Sumisho & Mitsuibussan Kenzai Co., Ltd. Mitsubishi Corporation and Nissho Iwai Corporation also consolidated their steel product industry in January 2003 and established Metal One Corporation.
   Meanwhile, equity participation in retail companies has also been taking place. Sumitomo Corporation has invested in Seiyu, Ltd., while Mitsubishi Corporation has invested in Lawson, Inc., and Itochu in FamilyMart Co., Ltd.
   Trading companies have also been focusing on new technology (e.g. nanotechnology) and are proactively making investments in order to nurture firms into future sources of revenues. They are also taking a positive stance towards the resource development business.
   After the collapse of the bubble economy, major trading companies had a difficult time disposing the losses resulting from investment in real estate and financial products, as well as their less profitable businesses. However, they are at a state where they are endeavoring to build a structure that will enable a new strategy of growth. In this movement, they are shifting their business model from a commission-based business to a business investment model in which they will invest in areas that show potential for rich growth and earn income through dividends and capital gains.

Mergers and Acquisitions Also Taking Place among Specialized Trading Companies

Headquarters of Mitsubishi Corporation at Marunouchi, Tokyo
Headquarters of Mitsubishi Corporation at Marunouchi, Tokyo

   It has been some time since trading companies that specialize in fields such as steel, machinery, chemicals, textiles, pharmaceutical drugs and foods entered a period of winter-like hardship. For this reason, mergers and acquisitions have been taking place, one after another, among such specialized trading companies as well.
   In April 2000, Kasho Co. Ltd., which was a mid-level trading company with strength in the food field, was acquired by Toyota Tsusho Corporation, a trading company that is part of the Toyota Group. At the same time, in the field of pharmaceutical drugs, Kuraya Corporation, Sanseido Co., Ltd. and Tokyo Pharmaceutical Company merged to become Kuraya Sanseido Inc.

   In 2002, Suzuken Co., Ltd., a rival that was experiencing an intensified sense of crisis through the birth of Kuraya Sanseido, merged with Ohmori Co., Ltd. Pharmaceutical trading companies Azwell Inc. (now Alfresa Corporation) and VITAL-NET, Inc. have also gone through repeated mergers. There is a possibility that further reorganization of the specialized trading industry will be accelerated in the future through the market entry of foreign-affiliated companies and venture firms.
   In December 2002, sogo shosha (general/integrated trading company) Tomen Corporation, whose losses through real estate and stock holdings had escalated, announced a restructuring plan that was based on the premise that a business merger with Toyota Tsusho would be made. The merger is expected to take place in 2006, and it should be seen as a major step towards the birth of the Toyota Shoji Trading Company.

History

Sogo Shosha: A Unique Business Configuration Seen Only in Japan

   There are two major categories of trading companies in Japan: a "sogo shosha," which is a general or integrated trading company, and specialized trading companies that deal only in specific fields.
   Among the sogo shosha are companies that were formed as a spin-off of the trading divisions of former zaibatsu groups, as well as those that started off as a specialized trading company but later expanded the fields that they dealt in and developed into a general trading company. The former type includes Mitsubishi Corporation, Mitsui & Co. and Sumitomo Corporation, while the latter includes companies such as Itochu and Marubeni.
   These sogo shosha are a unique type of business enterprise that is seen only in Japan. They supply raw materials and technologies purchased from around the world to steel, chemical and other manufacturing companies, whereupon those that were provided with such raw materials, etc., played the role of processing these materials and manufacturing them into products to be sold, and selling them in domestic and overseas markets. Sogo shosha was an engine that helped drive the high growth of the Japanese economy.
   Sogo shosha had business and information bases in all corners of the world. Armed with vast funds and massive amounts of information, they dealt with any kind of business so long as they thought that profits could be generated. They had the vitality to advance into wide-ranging fields, from the development of resources - such as oil and scarce resources - to biotechnology and even IT.

Countries where the export from Japan increased sharply in 2003 Countries where the import from Japan increased sharply in 2003

From Noodles to Missiles: The Negative Effects of the Something-for-Everybody Style of Business

   The functions of the sogo shosha included the following: transaction functions, such as trading; stocking functions, such as warehousing; information-related functions, such as information gathering; financial functions, such as financing; marketing functions; and coordinator functions. Because of this, their relationship with manufacturers and retailers went beyond that of a wholesaler that simply passed goods from one to another. They also supplied their customers with business-related information, made various business-related proposals, and became joint guarantors, etc., supporting their customers in various aspects as a business partner.

Marunouchi Oazo(the Esperanto meaning for oasis), a multipurpose commercial complex built just north of JR Tokyo Station
Marunouchi Oazo(the Esperanto meaning for oasis), a multipurpose commercial complex built just north of JR Tokyo Station

   While Japan was still in a period of high growth, the "something-for-everyone" style of business that handled anything from "noodles to missiles" was said to be the strength of the sogo shosha. However, during the deflationary economy of the 1990s, that "something-for-everyone" style of operations ironically hampered the general trading companies. As explained earlier, they dealt with massive amounts of items, and this resulted in their being hampered with vast amounts of interest-bearing debts focused around bank loans. This became a major burden for the sogo shosha under a deflationary recession.

The Spread of Internet Transactions, Etc.: Companies Are No Longer Dependent on Trading Companies

   There are an increasing number of retailers that are purchasing products directly from manufacturers without going through trading companies. B2B transactions over the Internet that take place directly between businesses without the intervention of trading companies are also starting to spread. The role that trading companies had to play in the economy decreased rapidly, and some people could even be heard saying that trading companies were no longer a necessity. Sogo shosha had no choice but to restructure their businesses under the catchphrase, "selection and concentration."
   Until the mid-1990s, the word sogo shosha pointed to nine companies: Mitsubishi Corporation, Mitsui & Co., Sumitomo Corporation, Itochu, Marubeni, Nissho Iwai, Tomen, Nichimen Corporation, and Kanematsu Corporation. Kanematsu, however, disposed of unprofitable divisions and made a new start as a specialized trading company that dealt in specific fields such as semiconductors. Nissho Iwai and Nichimen merged their business in April 2003 by establishing Nissho Iwai - Nichimen Holdings Corporation (renamed Sojitz Holdings Corporation). The company is currently undergoing corporate rehabilitation with the support of UFJ Limited, its main bank. Tomen, after receiving two debt waivers from its main bank, UFJ Limited, received additional support from the Toyota Group. It is aiming for future consolidation with the Toyota Group's Toyota Tsusho.

Three Key Points towards the Future

Point 1
Which Sogo Shosha Will Survive?

   The consolidation of sogo shosha divisions will most likely continue to progress. Business integrations started with materials-related fields, such as steel and metals, as well as in information related areas. However, from now on, there will probably be an increase in active integration in retail and services related fields. Which trading company, then, will be able to survive to the end under such circumstances? It is no surprise that the interest of those related to the industry is being focused on this point.

Japan's Exports and Imports by Product in 2003

   At the current time, Mitsubishi Corporation and Mitsui & Co. are in a class of their own. Itochu has already integrated its steel products business with Marubeni, and Itochu also has an alliance with Sumitomo Corporation for a distribution system of fresh produce. Itochu is also highly motivated in its retail strategy. By acquiring FamilyMart, it has made a strategic move towards downstream industries, and as for former Saison Group-related companies, Itochu has also invested capital in beef-bowl restaurant chain Yoshinoya D&C Co. Ltd. and The Seibu Department Stores, Ltd. Itochu is making an all-out effort to survive as a sogo shosha by capturing a position as number three in the category. Its strategy will most likely become a centerpiece of the industry's reorganization.

Point 2
How Much Strength Will Sogo Shosha Be Able to Exhibit as Coordinator?

   While it is expected that the standing of the sogo shosha within the Japanese economy will continue to decline, a possible role that it can play within the economy in order to apply brakes to its fall is as coordinator. By drawing on its knowledge and experience in such areas as market cultivation, resource development, information provision, financing, human resources provision, risk management, and legal affairs - know-how that is necessary for unearthing or launching new businesses - sogo shosha will be able to create new added-value. It may involve cutting-edge high-tech areas such as IT and biotechnology, or in the case of the traditional retail industry, it may be about how they can support supermarkets and convenience stores and enable them to come out ahead of competitors.

Head Office of Dentsu Inc., the leading advertising agency , at Shiodome Area, Tokyo
Head Office of Dentsu Inc., the leading advertising agency , at Shiodome Area, Tokyo

   Other possibilities may be how they can establish business models that focus not on companies, as in the past, but on the software side by focusing on general consumers. Another is how a bridgehead can be established in the significantly growing Chinese market in order to avoid being overcome by Western rivals. The key to the development of such growth strategies is dependant on how much coordinating function capabilities, unique to sogo shosha, can be exhibited. The view is that only a few of the major sogo shosha, such as Mitsubishi Corporation and Mitsui & Co., will be able to display their strengths in such coordinating functions.

Point 3
Will Specialized Trading Companies Find a Path to Survival through Alliances with Foreign Capital?

   While some specialized trading companies are trying to find a means of survival through mergers with other trading companies, there are also an increasing number of companies that are beginning to seek a path for survival through alliances or distributor agreements with foreign capital companies.
   Toyo Corporation, which is a specialized trading company, has concluded an exclusive distributorship agreement with Dilithium Networks, an American measuring instrument manufacturer for 3G (third generation) mobile phones. The company has already commenced marketing activities. This agreement was tied in line with Dilithium Network's advancement into the Japanese market. The measuring instrument being handled by Toyo is a device used to confirm whether call data originating from a mobile phone overseas can be accurately sent or received. Toyo aims to gain a one-step lead over other companies by focusing on the global spread of 3G mobile phone services. Cases of such alliances with foreign capital companies should be increasing by great amounts from now on.

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