Warren Buffett and the sogo shosha

Buffett adds to his position

Berkshire Hathaway recently announced that it has increased its holdings in the five major Japanese trading companies (sogo shosha) to around 8% of the outstanding shares. Its biggest position is in Mitsubishi Corp, which I regard as by far the best of the group.

what the sogo shosha are

It’s a little complicated…

Feudal Japan was ruled by an emperor, with his military leader, the shogun, as his number two. In the early seventeenth century, shogun Tokugawa Ieyasu seized control and established Edo (Tokyo) as the new capital. He kept the feudal barons in check by demanding that they provide family hostages and samurai troops to reside under his control in Tokyo. The samurai had nothing much to do, so they started businesses that evolved in to the powerful industrial conglomerates (zaibatsu) of the pre-WWII era.

Post WWII, the zaibatsu were officially disbanded by the US occupying forces for their role in carrying out the war. In practical terms, though, only the name disappeared. The industrial groups, and their commercial and social relationships, remained intact, but now known as keiretsu. At the heart of each is a bank and a trading company (sogo shosha) that are interfaces between the group and the world outside Japan. The trading company acquires raw materials for its keiretsu and helps distribute its products, in the same way the bank provides financing. Trading companies also act to some degree as national champions, taking on the obligation of acquiring natural gas, for example, for the country as a whole.

the samurai angle

I began investing in Japan in 1986. One of the first brokers I met was a former academic whose field of studies had been Japanese culture. In his (strong) opinion, the key to understanding the keiretsu was through samurai training manuals. One of his favorite illustrations was the slogan “Stamp your feet loudly and walk through a wall of iron.” The idea was that given a focused mind and strength of will, the laws of physics and economics mean nothing…and will wilt before samurai determination.

I thought he’d spent a little too much time in the library. But as I learned more I began to realize he was absolutely correct.

In the case of the trading companies, this means they are not economic profit maximizers, as they might be if they were in the US. They are the service arms of the keiretsu they are members of. Their main job is to maximize the profits of the group manufacturing companies.

what I think Buffett is doing

In old school Japan, companies cemented a business or banking relationship they were establishing by buying shares in each other’s firm. Such relationship shares symbolized the relationship and were not intended to be traded. I think this is, at least in part, what Berkshire is doing–greasing the wheels for Berkshire-controlled companies to do business with the keiretsu, and with the trading companies in particular.

About 15 years ago I asked the then chairman of Mitsubishi Corp, whom I considered to be a savvy executive, if he would ever consider consolidating his 400+ main subsidiaries (given that the span of control was impossibly wide). His body-language reaction was that only a crazy foreigner could entertain such a lunatic thought.

That was back then. Buffett may think the shareholdings give him a better chance of acquiring stray trading company subsidiaries that will complement companies he now controls. I think this makes sense. The much bigger prize, in my opinion, would be the value created by the trading companies breaking up into more focused units. In my day, this was unthinkable. But maybe things have changed.

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