Japanese Trading Firms Buy Small
By investing in entrepreneurialUS companies, huge sogo shosha seek to tap US creativity
SMALL and medium-sized United States exporting companies may be getting help from an unlikely source: the titan-sized sogo shosha, or trading companies, whose global commerce commands nearly half of Japan's gross national product.In years past, sogo shosha retained relationships with firms that were their equals, generally large commodity groups or manufacturing conglomerates. But in the last few years, the trading companies have shifted toward investment in smaller entrepreneurial firms. This investment was under $50 million in 1984, reached $325 million by 1989, and by last year probably topped $400 million, the US Department of Commerce estimates. Licensing deals, brokering venture capital, and participation in technology-base d industries constitute most of the new activity. Many trading companies, including Mitsui, begin with licensing agreements. Mitsui USA has spearheaded the shift toward investing in smaller companies. It ranks as No. 2 among all sogo shoshas - and actually rates as the fifth largest US exporter, tallying over $5 billion in trade (of which $2 billion are exports to Japan). The shift satisfies several long-term objectives of the trading firms. One is diversification, since they were forced to recast product lines in the last decade. Second, they keep a watchful eye on US innovation in "sunrise" industries. A third goal - especially favored by Mitsubishi, another trading company - is fostering long-range ties with start-ups in niche fields. A Tokyo official of a third trading company, C. Itoh, says Silicon Valley's legend had much to do with the trend. Trading companies see such "Valleys" as spawning grounds for cutting-edge telecommunications, biotech, and other fields, and admire the capacity of small business to innovate.
Opening export doors Sogo shosha are part of Japan's keiretsu system, giving them integrated capabilities in finance, marketing, distribution, and transport systems. This can be useful to US-based medium-sized and small companies. Sogo shosha are "able to take care of the paperwork, the logistics, the documentation," says Mark van Fleet, director of Asia-Pacific affairs at the US Chamber of Commerce. They open export doors to Japan, as well as to non-Asian destinations. Trading companies are regarded as business catalysts. They seek new clients and will act in nearly any imaginable capacity. Their alliances are not limited to technology-based products. For example, when it was evident that Japan's home-grown yuppies were eager to purchase pricey American sportswear, several sogo shosha approached relatively young companies that had little expertise in global commerce. A $3.7 million offer by Mitsubishi enabled Free State Glass Warrenton, a Virginia-based niche player in the architectural arena, to overcome cash-flow problems. Mitsui USA approached Portac, a timber company in Beaver, Ore., and proposed that doubling output would be profitable. Japan needs wood, and Asian sources are no longer reliable, it was noted. For the depressed Pacific Northwest timber products industry, this deal was welcomed. One small company with eyes on Asian sales was Candela Laser Corporation in Wayland, Mass. Candela required help in going around complex Japanese import procedures and other barriers for health and medical products. These obstacles are in place despite a strong demand for advanced medical gear, plus the lack of equivalent "Made in Japan" products. After a year's "romance" with Mitsui, according to Candela vice president Horace Furomoto, a 60-40 percent partnership was formed, giving Candela a chance to s ell to Japan.
Partnerships increase To build working relationships, subsidiaries are being formed. A. E. Klauser, who recently stepped down as assistant to Mitsui USA's president Hisao Kondo, says over 70 subsidiaries were tallied in 1990 by Mitsui alone - and that figure should double this year. These are companies where Mitsui has a 35 percent, or higher, share. Mr. Klauser, the highest-ranking American citizen within any of the Tokyo- and Osaka-based multinationals, confirms that interest in smaller-sized firms is a long-term tactic, no t a temporary fad. By now, sogo shosha subsidiaries in the US sell over $20 billion in goods and services. Profits mostly run about 1 to 2 percent on sales. But the companies find this hardly troubling if other long-range goals are reached. Bureaucracy in some sogo shoshas is bothersome. Delays caused by newmawshi (informal lobbying) and by ringi (stages of proposals along the ranks) are sometimes difficult for their US partners to adjust to.