Warren Buffet Taps Five Sogo Shosha of Japan

Summary

• Berkshire Hathaway has disclosed over 5% stake in each of five leading trading companies of Japan, which include Mitsubishi, Mitsui, Marubeni, Sumitomo and Itochu.
• Warren Buffet intends to maintain a stake of less than 9.9% while further stake could be acquired after the Board approval from the five companies.

Sogo Shosha is a Japanese term referring to a general trading company. These conglomerates reflect the economic development of Japan over centuries. In the latter half of the 19^th century, Japan tasted rapid industrialisation and commercialisation during the Meiji Restoration.

After World War II, Japan underwent a rigorous overhaul propelled by the development of infrastructure and industry. Sogo Shosha also developed rapidly after the World War, helping Japan to transform into a superpower.

These large businesses in Japan have a presence in diversified sectors, including food, appliances, clothing, resources, and automobiles. With an extremely diversified business through products and services, the Sogo Shosha also offer geographical diversification due to global reach.

Over the years, these conglomerates have emerged as large-scale sophisticated businesses that are hard to replicate. They play a defining role as an intermediary in Japan’s import of raw materials and export of finished goods through multi-industry upstream and downstream supply chains.

South Korea, with the introduction of Chaebol, also followed a similar approach to economic prosperity through industrialisation and exports. In these lines, companies like Samsung and Hyundai emerged from South Korea.

The Sogo Shosha may not have name attached to the business, but they would control substantial stake in the business. Because they were established to mobilise the upstream-downstream supply chain of industries, the Sogo Shosha are usually wholesalers, distributors, suppliers, etc.

With large capital deploying capabilities, the conglomerates generally have strong relationships with the governments and overseas investment facilitation boards.

Warren Buffet Has Been Picking-Up Stakes in Big Five Sogo Shosha

On Monday, 31 August 2020, Berkshire Hathaway revealed that it has been buying Japanese Big Five Sogo Shosha over the past twelve months. It has now notified the Kanto Local Finance Bureau about slightly over 5% stake in each of five leading Japanese trading companies.

These five companies in order of the latest Global Fortune 500 ranking include Mitsubishi (42), Itochu (72), Mitsui (172), Marubeni (173), and Sumitomo (238).

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The press release by Berkshire Hathaway highlighted the long-term passive investing spanning around two to three decades in successful American businesses like Moody’s, Coca-Cola, and American Express.

Berkshire Hathaway is inclined to maintain investments in Big Five Sogo Shosha for long term. It may raise its stake in these five businesses to up to 9.9% on its own discretion. It was also highlighted that the equity stake of above 9.9% could be acquired after Board approval of the five companies.

In September last year, Berkshire Hathaway issued JPY 1.7 trillion of debt in the Japanese Corporate Bond market. Its highly-rated bonds were issued across maturities ranging 10-year, 15-year, 20-year, and 30-year.

In the press release, the company acknowledged little exposure to JPY/USD movement and 625.5 billion yen-denominated bonds with maturities beginning in 2023 and ending in 2060.

Mitsubishi Corporation

Mitsubishi is the largest among the big five trading companies in Japan. Mitsubishi has over 130 business units, around 1,400 companies in ~90 countries and regions worldwide, according to its integrated report 2019.

Its segment businesses include automotive & mobility, petroleum & chemicals, industrial infrastructure, power solution, natural gas, mineral resources, industrials material, urban development, and food and consumer industries.

In the year ended 31 March 2020, the conglomerate reported revenue of ¥14,779 billion and profit for the year attributable to owners of the parent of ¥535.35 million. Mitsubishi recorded free cash flow of ¥349 billion.

Itochu Corporation

Itochu Corporation is present in the textiles, machinery, metals & minerals, energy & chemicals, food, general products & realty, and ICT & financial business. In the year ended 31 March 2020, the company recorded consolidated net profit of ¥501.3 billion. Its core profit was ¥485.3 billion, after excluding extraordinary gains and losses of ¥16 billion.

Mitsui & Co.

Mitsui operates in the field of mineral & metal resources, energy, machinery & infrastructure, chemicals, mobility, healthcare, nutrition & agriculture, and retail & services. In the year ended 31 March 2020, the company recorded a gross profit of ¥839.4 billion and net profit attributable to owners of the parent was ¥391.5 billion.

Marubeni Corporation

Marubeni operates 14 divisions, which include lifestyle, ICT & real estate business, forest products, food, Agri business, chemicals, power, energy, metals & minerals, plants, aerospace and ship, finance & leasing, construction, and auto & industrial machinery.

In the year ended 31 March 2020, the company had revenue of ¥573.6 billion and net loss of ¥197.5 billion, largely due to impairments.

Sumitomo Corporation

Sumitomo Corporation operates segments in the areas of metal products, transportation & construction systems, infrastructure, media & digital, living related & real estate, and mineral resources, energy, chemical & electronics.