A sogo shosha is a form of industrial organization and a kind of vertically integrated trading company that originated in Japan and for the most part has remained unique to Japan. At the center of these organizations is a trading company that arranges financing, coordinates activities, and handles marketing functions for the companies in its group of companies. These subordinate companies may be considered operating companies, because they specialize in certain types of business. Since World War II, Japan has emerged as one of the dominant world traders in part because of the sogo shosha.

While the term sogo shosha is Japanese for "general trading company," the term generally refers to the entire group of operating companies that comprise the conglomerate or sogo shosha. Unlike typical Western trading companies and Japan's some 9,000 other trading companies, the sogo shosha are distinguished by their international networks, their trade of numerous commodities, and their large market shares. For example, a sogo shosha may control about 10 percent of Japan's trade, handle a range of 10,000 to 20,000 products including food, clothing, automobiles, and appliances, and have a network of over 200 offices throughout the world. Although developing and industrial countries have experimented with the sogo shosha system, few, if any, have succeeded in completely replicating the Japanese organization. The major sogo shosha include Mitsubishi, Mitsui, C. Itoh, Sumitomo, Marubeni, Nichimen, Kanematsu-Gosho, and Nissho Iwai Corp. In the late 1990s the sogo shosha controlled about 10 percent of the world's exports and over 50 percent of Japan's overall trade, according to Marketing Intelligence and Planning.

The sogo shosha are also characterized by their ability to issue large volumes of credit and to help small manufacturers buy and sell goods in the global market. These trading companies serve as intermediaries for distribution at home and abroad for Japanese companies. Nevertheless, the sogo shosha's responsibilities extend beyond trading because they take active measures to ensure stable levels of supply and demand over long periods. In addition to their ability to make the greatest use of the marketing intelligence network, the sogo shosha work on extremely thin margins, commonly little more than 1.5 percent. It is therefore necessary for these companies to maintain very high sales volumes and remain focused on longterm business development.


Typically, as the head of the several companies that comprise a group, the trading company is the primary shareholder of operating companies in its group. The trading company commonly places several of its own officials on the boards of these companies, while senior officials of the largest companies in the group maintain seats on the trading company's board of directors. This arrangement includes a loose system of interlocking directorships.

The sogo shosha differs from classical conglomerates, such as those in the United States and Europe, in that no single entity in the group owns more than a small percentage of any other company in the group. But taken together, the trading company and several of the other companies in its group may own a majority of shares in one of these companies, in effect, comprising a controlling interest.

All the companies in a typical sogo shosha own aggregate majority shares in each other, forming a complex system of cross-ownership. As a result, companies in a sogo shosha cannot technically be considered subsidiaries in the classic sense. Subordinate companies are merely "associated" with the sogo shosha because they are independently listed and substantial minority interests are held by investors outside the sogo shosha. Some sogo shosha include as few as a half dozen companies, while other larger organizations might contain as many as 150 or more subordinate companies.

This form of cross-ownership and board representation is not permitted in the United States, where strict antitrust laws preclude this type of control. For example, General Motors Corp. may hold shares in its EDS subsidiary, but EDS may not simultaneously hold shares in General Motors. Similarly, neither company's board may include more than one or two directors from the other company. In Japan, however, these are common features of a sogo shosha. This form of organization is allowed for several reasons.

First, the sogo shosha system has been in existence for more than a hundred years and has become a traditional, if not essential, feature of industrial organization in Japan. Second, the Japanese government recognizes that sogo shosha are highly efficient and synergistic: each company has a stake in the financial success of every other company and concentrates its resources to realize that success.

Third, sogo shosha generally are not anticompetitive. There are about a dozen such conglomerates in Japan, each of which is highly diversified and competes in specific industrial sectors against other sogo shosha and independent companies. For the most part, no sogo shosha dominates any of the industries in which it is involved—and it is likely that none would even if it could.

If, through expansion and acquisition, a sogo shosha built a large market share in a certain industry, the resulting concentration would enable that company to frustrate competition within that industry. Government regulators would require the company to reduce its presence in that market, specifically to preserve competition and protect the investments of other companies in that industry.

Such brash moves to dominate certain industries could seriously disrupt the business of competitors. While concern for the welfare of competitors is not particularly important in the United States, it would be treated gravely in Japan, where social mores demand a high level of respect for competitors, because many are capable of retribution that might prove destructive to the business of other enterprises in the group.

The government maintains a powerful agency—the Japanese Ministry of International Trade and Industry—to regulate and coordinate the actions of the conglomerates. In addition, the conglomerates have established an executive council called the Keidanren specifically to prevent such actions and maintain industrial harmony. This "coordination" among major producers would clearly constitute collusion in the United States.

The sogo shosha are populated with largely homogeneous personalities. They are male-dominated organizations whose staff are culled from the finest universities and placed on extensive socialization programs that include years of cultural preparation. By this process, a profound team mentality is established among the workforce. Employees of one company may deal with counterparts elsewhere in the organization free from cultural barriers and acclimated to a common code of conduct.


Before World War II, the term sogo shosha was not used; instead companies such as Mitsubishi Shoji and Mitsui Bussan were referred to as boeki shosha, or foreign trading companies. Nevertheless, the sogo shosha system has its origin with the political rebellion in 1868, in which the Tokugawa government was replaced by a restoration of the Meiji emperor. The new government initiated an ambitious industrial modernization program in which large state enterprises were established, using the British East India Company, Jardine Matheson, and other firms as models.

But because government officials lacked the managerial expertise to run these companies, the government was forced to turn the enterprises over to existing companies that, while small, had nonetheless demonstrated strong management skills.

These family-run businesses—which included Sumitomo, Mitsui, Mitsubishi, Ono, and Shimada—were primarily involved in import and export trading. Most were not manufacturers; their primary function was marketing products made by other companies and international trade, bearing characteristics of sogo shosha from the very beginning.

During the 1870s, many of these companies grew tremendously. Mitsui became Japan's leading trading firm, while Mitsubishi grew to dominate the shipping industry, and Sumitomo the mining industry. Ono and Shimada eventually dissolved, but were replaced by Yasuda, which became Japan's largest bank. Mitsui in particular quickly established itself as a major trading institution, because the Mitsui merchant family had sponsored the Meiji leadership. Consequently, Mitsui was given the privilege of entering into banking, mining, and trading and attained a semiofficial status. The government granted these favors not just to repay supporters but more importantly to advance Japan's industrialization.

These trade enterprises continued to grow in scope and scale, helped by strong relationships with local and national political figures and their involvement in Japan's military conquests of Korea, Manchuria, Taiwan, and China. So dominant were these companies in Japanese trade and industry, that they became known as zaibatsu, or money cliques.

The zaibatsu commonly consisted of a primary enterprise—usually a sogo shosha—surrounded by subsidiaries engaged in banking, insurance, shipping, mining, real estate, food processing, and manufacturing. By virtue of their assets in human and fixed capital, as well as their considerable political power and technological expertise, the zaibatsu became essential components of Japan's economic modernization, and remained so through the 1920s, when they reached the peak of their power.

Japanese colonial interests in Korea, Manchuria, and China were developed mainly by zaibatsu companies. They provided their homeland with a wealth of natural resources from these areas, including lumber, coal, and agricultural and animal products. Several of these areas became highly developed industrial centers.

During this period, the majority of Japan's import and export trade was conducted through the zaibatsu companies. This placed them in positions to identify promising new industries and either capitalize them for an equity interest or purchase them outright. In either case, growth companies were quickly made captive to a zaibatsu very early in their development stages.

The zaibatsu gradually lost their independence from political forces during the 1930s, after a nationalist military faction gained power over government and political organs. The zaibatsu were made targets of this faction, which denounced the companies as monopolist (in fact, Mitsui's chairman was assassinated by military fanatics).

For the most part, this was a valid criticism. The zaibatsu benefited greatly from recessions and other public crises, and exercised extensive control over government and public resources.

In 1937 the militarists launched a war of conquest against China. Despite their disdain for the zaibatsu, the military leaders recognized that these enterprises were essential to a successful prosecution of the war. By 1941 the zaibatsu had become synonymous with the Japanese military-industrial complex.

That year, the war expanded to include Britain, the United States, and the Netherlands. Far from reducing the companies' influence, the military leaders placed the zaibatsu in charge of large areas of the economy, resulting in tremendous concentration of the industrial sector. During this period, major trading companies largely acquired and distributed products according to government directives.

When the war ended in 1945, government authority was assumed by the American-led military occupation authority, known by its acronym SCAP. The first priority of SCAP was to prosecute war criminals, including senior officials of the zaibatsu who had been sympathetic to military and then to implement economic, political, and social reforms.

SCAP saw the zaibatsu companies not only as the core of Japan's ability to wage war, but also as an impediment to democratization. Furthermore, the high concentration of manufacturing capacity in the zaibatsu was incompatible with the American tradition of antitrust law.

As a result, SCAP decreed the establishment of antimonopoly laws that necessitated the dissolution of the zaibatsu into thousands of independent companies, none of which was allowed to retain its association through the old zaibatsu or even use the zaibatsu name. Consequently, Mitsui Bussan was divided into over 200 separate companies and Mitsubishi into 139, and so sogo shosha activities all but ceased during the period of occupation.

Despite the mandate, the captains of the defunct zaibatsu established in 1946 a loose federation called the Keidanren to coordinate reconstruction projects with the government. After the occupation ended in 1950, the Keidanren lobbied for the relaxation of antimonopoly laws that limited contact between former zaibatsu affiliates. This was largely achieved by 1952, and over the ensuing years, Mitsui, Mitsubishi, Sumitomo, and others gradually reestablished their groups around the banks that had been members of their groups.

At this stage, the relationships were merely commercial. As the former zaibatsu companies expanded the scope and volume of their business, they became known as keiretsu, banking conglomerates, and zaikai, financial circles.

The banks provided a legitimate medium for association between former affiliates, but the crossownership and interlocking directorships that had been features of the prewar zaibatsu were still prohibited. Several of the old groups reconstituted themselves through acquisitions, but also used the opportunity to expand into completely new lines of business.

The government recognized that the old zaibatsu groups could be very effective at rebuilding the shattered Japanese economy. They were best positioned to provide capital to small start-up enterprises and, given Japan's lack of natural resources, to develop a neomercantilist economy that would generate growth through exports.

They established foreign offices to sell goods in new markets, generating capital to develop primary industries, such as steel making, ship building, oil refining, automobile manufacturing, power generation, and road building.

The new sogo shosha conglomerates—again led by Mitsui, Mitsubishi, Sumitomo, and others—participated in the construction of a modem industrial infrastructure that facilitated the growth of thousands of smaller enterprises, fueling economic expansion through exports as they had 60 years earlier.

Through the Keidanren, the new sogo shosha worked closely with the government's Ministry of International Trade and Industry (MITI) to develop industries in which Japan had a distinct international competitive advantage. They brought products such as textiles, handicrafts, and simple electronics to markets in the United States, Europe, and Asia.

The cycle of investment enabled many of the sogo shosha to capitalize new ventures in heavy industry. By the 1960s Japan was positioned to enter international markets for automobiles, electronics, steel, and maritime products.

The sheer size of the sogo shosha made them essential partners in carrying through government policies. They employed most of the available managerial talent, and their banks had more capital than any other source.

The sogo shosha helped to create an environment in which independent companies were able to grow. Companies such as Honda, Hitachi, Kubota, Toyota, Sony, Ricoh, Canon Inc., Matsushita, Minebea, and Hino—none of which were officially associated with sogo shosha—built their own marketing networks independent of the sogo shosha. This forced many of the sogo shosha into increasingly risky ventures.

Despite their size, the sogo shosha operated on such narrow margins that the failure of even a small venture was catastrophic. Indeed, a medium-size sogo shosha called Ataki was forced into insolvency when its Canadian oil venture failed.

By 1978 Japan had nine major sogo shosha, led by Mitsubishi and Mitsui, and followed by C. Itoh, Marubeni, Sumitomo, Nissho-Iwai, Kanematsu-Gosho, Tomen, and Nichimen. Smaller groups included Chori, Itoman, Okura, and Toshoki.


Modern sogo shosha remain loosely organized. There is no powerful central parent company as there was before World War II. Contact between the principals of operating companies usually takes place in informal weekly or monthly gatherings, called clubs. The sogo shosha still concentrate on three core activities: (1) acting as an intermediary for marketing, import, and export transactions; (2) providing financial intermediary services; and (3) collecting economic, legal, political, and social information from their networks.

Despite the reemergence of limited cross-ownership and interlocking directorships and the collusory nature of the Keidanren and the club system, the concentration of industrial capacity in Japan is little different from that in the United States. In fact, in many cases there are fewer competitors in certain American markets than in Japanese ones.

The sogo shosha form of organization is by no means monolithic; groups vary in scale, scope and degrees of cross-ownership. While some sogo shosha are very tightly knit (to the extent of sharing strategies, names, and even chairmen), others are little more than associations of convenience whose companies may not even hold shares in each other.

The government maintains a strong degree of control over the sogo shosha through MITI, although its relationship with the companies is almost exclusively cooperative. MITI and the Keidanren frequently hold panels to study the companies' investment plans as part of an effort to coordinate production.

There are, however, patterns of price leadership in certain markets. This feature of cartel organization is allowed, and sometimes even condoned, by the government as a measure of demand control. While the sogo shosha frequently cooperate in certain areas, they avoid oligopolistic patterns by mounting rivalries that produce high rates of investment in new industries, often yielding low-cost products in brief cycles.

As more independent Japanese companies have grown in sales and volume, they have outgrown the need for representation and capitalization by the sogo shosha and established their own international marketing networks. To some extent, this has forced the sogo shosha "down market" into lower-technology goods in declining industries. This stems from the fact that most of the sogo shosha are historically concentrated in basic industries, handling low-margin primary—rather than higher-margin finished—products.

In addition, the sogo shosha tend to lack experience in marketing products—automobiles, electronics, and cosmetics—that require extensive consumer research and sales support. Firms in these industries are less likely to do business through a sogo shosha because the trading companies lack the necessary expertise—a deficit in experience that is self-perpetuating.

Despite the difficulties encountered by many sogo shosha during the late 1980s and 1990s, it is unlikely that any will meet their demise. The sogo shosha remain the largest companies in Japan and are sufficiently diversified to withstand periodic downturns in certain sectors of the economy. Even still, the market share of the sogo shosha has declined because numerous manufacturers in a variety of industries have opened up plants in countries with weaker currencies and because Japanese companies have started to manage their own international trade.

In the 1980s and 1990s the sogo shosha found themselves at a crossroads again, needing to adapt to new market conditions and opportunities. These opportunities include biotechnology, computer technology, information technology, and telecommunications. Furthermore, the sogo shosha have had to prepare themselves for the increasing globalization of the world market. The sogo shosha have responded to the new opportunities and the globalization by diversifying and investing. The sogo shosha have turned to stable albeit expanding regions such as South America and invested in new and growing areas of businesses such as telecommunications, according to the Japanese Chamber of Commerce and Industry.


One of the closest modern equivalents to the sogo shosha in other countries occurs in South Korea, where conglomerates such as the LG Group, Samsung, Hyundai, Ssangyong, and others—called chaebol —have been encouraged to follow the example of Japanese companies. While there are obvious differences between sogo shosha and chaebol, they have produced strikingly similar forms of industrial organization and economic growth. South Korea is today approximately where Japan was 20 years ago.

In addition, China, with the assistance of Japaese companies, began to establish sogo-shosha-style trading companies in the mid-to-late 1990s. These efforts gave rise to the joint venture Lansheng Daewoo Co., between Lansheng Corp. and Daewoo Corp. The sogo shosha also have helped a variety of companies set up general operations in China.

The United States tried to replicate the sogo shosha in the early 1980s with the signing of the Export Trading Company Act of 1982. This legislation was designed to facilitate the establishment of trade intermediaries and to encourage U.S. exports. The act's architects envisioned small and mediumsized companies joining export trading companies backed by banks offering financing. Such export companies, however, never developed for the most part. Suspicion of government-sponsored programs and the lack of publicity are often cited as reasons for the act's failure to produce the intended results, according to Paul Herbig and Alan T. Shao in Marketing Intelligence and Planning. Moreover, some of the trading companies that formed because of the act, such as Sears World Trade Organization and General Electric Trading Company, wound up defunct by the mid-1980s.

SEE ALSO : China, Doing Business in ; Japan, Doing Business in ; Korea, Doing Business in the Republic of

[ John Simley ,

updated by Karl Heil ]


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