In 2020, Berkshire Hathaway (BRK) began to buy shares of Japanese trading companies, called sogo shosha. He’s since built the positions to just below 10% of the outstanding equity of each of the major players in this group.

what they are

When Japan shifted from imperial rule to shogunate in the seventeenth century, Tokogawa Ieyasu, the first shogun, kept feudal warlords in line by keeping as hostages members of the warlords’ families and parts of their samurai armies in his new capital, Tokyo. Having basically nothing to do, the samurai groups eventually formed industrial businesses organized along martial lines. These zaibatsu (money clans) really hit their economic stride in the nineteenth century, after they helped restore the monarchy shortly after the black ships arrived in the mid-nineteenth century. They ended up being the key players in Japan’s decision to go to war with the US in 1941.

Because of this last, the zaibatsu were outlawed by the US when it occupied Japan after the war. As the country rebuilt, however, the structure and functions of the zaibatsu still remained key forces. The conglomerates renamed themselves keiretsu (groups) and resumed business as usual. That is, without changing their samurai code of unquestioned obedience, the assumptions that the oldest are the wisest and that warrior spirit trumps research and planning, with a healthy dose of distain for women and foreigners. Technically a different structure; in reality, pretty much no change in operating procedures.

The keiretsu all have a similar structure: a bank at the head, manufacturing operations and a sogo shosha, a company (pretty much import-export) that serves as an interface between the entire keiretsu and the outside world–domestic or eternal. Mitsubishi, Mitsui, Sumitomo, Fuyo (Fuji) are probably the most familiar names to foreigners.

they’re cheap, but for a reason

For several years just after 2000, funds I managed held in aggregate more shares in Mitsubishi Corp, which I regarded as the best of the keiretsu, than any other foreign entity. My reasoning? As now, the sogo shosha were very cheap on a price/book and price/earnings basis, so they unlikely to go down a lot. And there was at least some possibility that they would restructure in a way that would add value. I thought the first to do so would be Mitsubishi.

I got to be sort of friendly with the chairman as time passed–at least as friendly as one might be with someone who viewed me as not quite fully human, at best as like a pet dog. I’d check in with him when I was in Tokyo and he visited me once or twice in New York. At one point, I asked him if the company had ever thought of refocusing itself and reducing the number of subsidiaries from the 400+ it had. It would certainly make coordination and control easier. He was stunned in a way that told me that this was nowhere near being on the agenda.

why did BRK buy, and so much?

I don’t know, but I can think of several reasons:

–the group is still cheap, even though it has run a lot since BRK announced its initial buys

–buying a significant position in another firm is a traditional Japanese way of establishing/cementing a business partnership. So the BRK holding may be meant to be relationship shares

–if these are relationship shares, and if the purchase causes the keiretsu to see BRK as a long-term business partners, they may be willing to offer bits and pieces of their trading empires to BRK in a way that will enhance BRK’s existing industrial businesses. This could happen as, say, joint ventures, technology transfer (in either direction) or rationalizing existing businesses by selling sub-scale units to each other.