The Sogo Shosha and the Supply Chain

Understanding the sogo shosha's business model

To understand the sogo shosha and their business model one only has to think of the supply chain or value chain, or what some call the flow of trade. They all mean the same thing. Simply, every product has a supply chain, from the raw materials that are processed into intermediate materials which in turn are used to make a finished product midstream, to the wholesaler and then the retailer in the downstream distribution process. The sogo shosha’s goal is to integrate the supply chain by being involved, if possible, at every stage of the chain. Of course, there are thousands upon thousands of product supply chains, and the sogo shosha cannot be involved in every one of them, but this is the basis of the sogo shosha’s thinking.

Let’s look at some examples using Marubeni cases:

Metals/Minerals/Motor Vehicle Supply Chain Example

iron-ore/coking coal - steel - autos

  • Originally, Marubeni would purchase iron-ore and coking coal directly from mining companies and arrange shipping to the buyers, which would be steel manufacturers in Japan. They would then buy the finished steel product, or receive it on consignment, from the steel producer, and arrange transport to the buyer, which in this case would be auto manufacturers (or electronic equipment manufactures). They would then arrange for export of the autos, let’s say to the U.S., where they would market or wholesale them to dealers.
  • As just a middleman in this supply chain Marubeni would receive either the profit from buying and selling or a commission for handling the sale and fees for arranging transportation. The profit margin and commissions are relatively small. This is an example of the sogo shosha's traditional trading business.
  • In the current model however, Marubeni has taken an equity stake (investment) in mining companies to secure a supply (ownership) of iron ore and coal to sell to steel companies in Japan. They would then, theoretically, arrange for shipping to Japan (logistics/distribution). Ownership allows Marubeni to receive the iron-ore and coal at cost thus increasing their profit margin.
  • Note that the steel companies and the auto and electronic makers could talk directly and eliminate Marubeni, meeting sogo shosha, in the supply chain. To counter this Marubeni invested in coil centers. As the specifications for steel used in the production of autos and electronic equipment are different, these coil centers will cut the steel to the customers standards. This was a type of outsourcing of part of this steel processing function to Marubeni, which allowed them to protect their position as a supplier, while adding value to their traditional role as just buyer and seller or go-between.
  • At one time Marubeni was the wholesaler for Nissan motor vehicles in the U.S. and Europe. However, over time they began to take on this function themselves. In response, already knowing the business as a supplier, they began to buy auto dealerships themselves at the retail end. In this way, through investment, we have maintained our upstream and downstream position in this particular supply chain.

Food Material/Food Product Supply Chain Example

grain - feed - chicken

  • Traditionally, Marubeni bought grain from grain trading companies, imported it to Japan and sold it to feed (soybeans/corn) and flour (wheat) processors, etc. They also handled distribution, in this case, of the feed to chicken farms, and then the chicken product to the food retailer, as a middleman and distributor.
  • However, while Marubeni still buys some volume of grain from grain traders, they have integrated this supply chain and increased their value-added potential by investing in various stages upstream and downstream.
  • In this example, Marubeni has invested in a subsidiary company in the U.S. which buys directly from farmers and can move the grain to its own storage facilities and port operations. They have also recently purchased one of the largest grain traders in the U.S. The grain can then be shipped (time charter) to Japan to their own grain terminals. The grain is then sold and transported to feed processors (corn, soybeans, wheat), one being their own majority-owned JV company (they also have a majority-stake in a flour milling company). The feed is then distributed, again, in this case, to chicken breeders/processors and then wholesaled to food retailers. Marubeni has two companies handling the production, processing and wholesaling of chicken and large ownership interests in supermarkets.
  • Marubeni has integrated the supply chain from the purchase of a raw commodity, grain, to the sale of chicken as a retail food product by investing in and handling the logistics and distribution, and managing the process at each stage of the grain - feed - chicken value chain.
  • Marubeni has also maximized their profit potential by securing products at cost at each stage increasing the potential return it receives from the companies (including dividends) they've invested in.

Energy Supply Chain Examples

natural gas - LNG - electric power

  • In the first example, Marubeni has taken an equity stake in oil field development in Qatar. They then arrange the supply (Marubeni-Itochu Steel) and installation of the pipeline to the gas liquefaction plant. They also organized the finance and construction of the liquefaction plant where the natural gas is liquified to be shipped to Japan.
  • Marubeni has also invested in LNG vessels and arranges the transport of the LNG to Japan to the buyer of the LNG, Japanese electric power utilities. Again, Marubeni has invested in every stage of the supply chain process.
  • Furthermore, Marubeni is one largest electric power plant developers in the world with significant holdings overseas. In Japan, Marubeni sells electricity through its own hydro, wind and solar power plants.

crude oil - fuel wholesaling - service stations

  • In the second energy supply chain example, crude oil/fuel wholesaling/service stations, Marubeni could assist in the organization of a consortium for oil field development or simply take an equity stake. Marubeni has also invested in oil refineries overseas from which they import various types of fuel into Japan.
  • Again, Marubeni will arrange for the fuels to be shipped to Japan to their own gas and oil terminals, from where the fuels are then distributed (sold) to retail outlets through Marubeni’s own energy wholesaling subsidiaries. Furthermore, Marubeni also owns a network of service stations at the retail end throughout Japan.
  • Through Marubeni’s business network, project finance, investment and logistics, you can see how they have been able to integrate the energy supply chain upstream from energy resource development all the way to the end-user downstream.

These are just a few examples to help you better understand how the sogo shosha think. This integrated upstream - downstream supply chain business model can be equally applied to products in the chemicals, textiles, forest products, and even in the information and communication technology fields. This integrated supply chain product trading for different industries combined with large-scale project development is basically what the sogo shosha do.

Top of Page