If you’ve lived in Japan or have done business with Japanese companies long enough, chances are you’ve heard about the “Shosha” or Japanese trading companies. These companies are a big deal in Japan and working for a Shosha, particularly one of the larger players is considered prestigious and a popular career path for Japanese college students. Yet, for those unfamiliar with these companies, it may be a bit hard to picture what they do and what their importance is to the Japanese economy. Here I'll go over the different types of Shosha and their activities.
What is a Trading Company?
A trading company, in simple terms, acts as an intermediary between a manufacturer and an importer that wants to buy its goods. This is especially important for countries like Japan which is scarce in resources but has many manufacturing companies. Trading companies exist globally and you may have heard of companies like Glencore, a Swiss-based commodities trading company, or Cargill, a U.S. company that trades agricultural commodities. In Japan, Shosha can be classified into either Specialized “Senmon” or General “Sogo” trading companies.
Senmon Shosha (専門商社)
A Senmon Shosha is a trading company that has a specialization in a certain field or product which generally accounts for over 50% of their revenue. Senmon Shosha is generally classified into three different types in Japan.
1. Sogo Shosha affiliated companies (総合商社系): These are specialized trading companies that are subsidiaries of a Sogo Shosha company.
Examples: Mitsubishi Corporation Energy, Metal One, Marubeni-Itochu Steel
2. Manufacturer-affiliated companies (メーカー系): These are specialized trading companies that are affiliated with a specific manufacturer.
Examples: Nissan Trading, JFE Shoji
3. Independent trading companies (独立系専門商社): These are specialized trading companies not affiliated with a Sogo Shosha or Manufacturer.
Examples: Kanematsu Corporation, Hanwa, Toyoshima
Sogo Shosha (総合商社) – From 'Ramen Noodles to Rockets'
A Sogo Shosha on the other hand is not only involved in the trading of a wide range of products but also involved in investment and financing activities. There is a saying in Japan that Sogo Shosha companies will deal with anything from ‘Ramen Noodles to Rockets’ to illustrate the diversified lines of businesses they are involved in.
What makes them Unique?
One is their size and scale. If you take a look at the Topix Core 30 index, which is an index comprised of the 30 largest and most liquid Japanese companies on the first section of the Tokyo Stock Exchange, the index includes the likes of major well-known conglomerates such as Toyota, Sony, and Nintendo, as well as 3 Sogo Shosha companies. The 3 companies are Mitsubishi, Mitsui, and Itochu. They, along with Sumitomo and Marubeni are considered the “Big 5” Sogo Shosha in Japan. In addition to the Big 5, Sojitz and Toyota Tsusho, which are also well-known Sogo Shosha companies but not as large as the Big 5, are collectively referred together as the “Big 7”.
Warren Buffet
The Big 5 Sogo Shosha caught a bit of attention in 2020 when it was announced that Warren Buffet’s Berkshire Hathaway bought slightly more than a 5% stake in each of the Big 5 Sogo Shosha companies. Berkshire Hathaway has stated that they may increase their shareholdings up to a maximum of 9.9%. Perhaps inspired by the weaker yen, as of 2022, Berkshire Hathaway have increased their stake as below:
Mitsubishi: 5.04% to 6.59%
Mitsui: 5.03% to 6.62%
Itochu: 5.02% to 6.21%
Marubeni: 5.06% to 6.75%
Sumitomo: 5.04% to 6.57%
What is interesting to note is that Berkshire Hathaway, which is known as a long-term investor, shares a striking similarity in this respect to these trading companies which brings me to the second unique aspect of Sogo Shosha companies, which is their investing and financing operations.
Burst of the Asset Bubble
In the 1990s when Japan’s economy stagnated following the burst of Japan’s asset bubble, manufacturers were forced to cut costs by reducing their reliance on Shosha companies, which was made possible with the emergence of the internet. This asset bubble shock and declines in trading revenue forced Shosha companies to seek different business opportunities and therefore expand their business investment activities.
Like investment companies, Shosha would acquire shares of different companies and help in the management of the companies they invest in. However, unlike investment companies, Shosha would not necessarily have plans to sell their stake in mind and would invest in companies with synergies to their existing businesses.
Here are some examples of the different businesses the Big 5 have investments in:
Mitsubishi:
Cermaq (100%): A Norwegian salmon company
Lawson (50%): A popular Japanese convenience store chain
Mitsubishi Motors (20%): Japanese car company
Mitsui:
QVC Japan (40%): A Joint Venture with QVC, a televised home shopping network
IHH Healthcare (32.9%): Healthcare services from clinics to hospitals
Toyo Engineering (14.9%): Japanese engineering & construction company
Sumitomo:
Fyffes (100%): An Irish fruit and produce company
SCSK (50.5%): A Japanese IT and software company
Summit (100%): A Japanese super market chain
Itochu:
FamilyMart (94.7%): A popular Japanese convenience store chain
Descente (39.2%): A Japanese clothing company
Dole International (100%): Produce and processed food company
Marubeni:
Helena Chemical (100%): A U.S. agricultural distributor
Aircastle (75%): A U.S. aircraft leasing company
Marubeni Footwear (100%): a Japanese footwear company
As you can see, Japanese trading companies have an extensive role in the Japanese economy and global supply chain. It's little wonder these companies are popular amongst Japanese students and are competitive to get into.