Japan’s sogo sosha — or general trading houses — have a distinctive culture, fierce competitive streak and a horror of being compared to their rivals.
One of them is the world’s biggest handler of endangered bluefin tuna; another had its management system forged in a Siberian prison. One has just installed garden swing-chairs to help its executives think; another was responsible for one of history’s worst trading scandals. A fifth has Botticelli’s La Bella Simonetta hanging outside its boardroom.
The entry of the world’s most famous investor on to the shareholder registers of the trading houses has prompted questions over the exact nature of a sector whose business model — somewhere between private equity funds, arbitrageurs, venture capitalists and asset managers — defies easy description.
As investors in Tokyo digested the news of the $6bn bet, some wonder whether Mr Buffett, whose conglomerate, Berkshire Hathaway, has taken a 5 per cent stake in each of the trading houses, has suddenly found kindred spirits in a market he has, until now, barely touched. “Berkshire Hathaway is actually similar to a trading house,” said JPMorgan analyst Tatsuya Kikkawa.
Others suspect Mr Buffett may come to regret his choice and has taken a plunge into a quintet of companies whose foibles he has not grasped and whose shortcomings he cannot hope to address.
Japan’s trading companies — part swashbuckling adventurers, part establishment bedrock — are the original globalisers of Japan. Their interests extend worldwide from snowboards, silk scarves and souvenir banana cakes to hydroelectric megaprojects, chemical plants and oil exploration.
Through their involvement in every sector, via thousands of subsidiaries and affiliates — as well as their pick of the nation’s graduates — they are the backbone of the Japanese economy. Several, particularly Mitsubishi and Mitsui, have been around in one form or another since the 19th century.
Their role — from securing commodities for a resource-poor country, to project finance and venture investment — has evolved significantly over time. But one defining feature has endured: they are relentless dealmakers.
Between them, the five trading houses have spent more than $50bn over the past five years in cross-border deals, according to Dealogic. For large swaths of the financial services sector, both in Japan and beyond, they are key clients: sources, said one M&A banker in Tokyo, of a constant stream of deals and demanding of permanent attention.
Not all of those are successful, and some high-profile commodity deals have led to large writedowns. But they are palpably different in their approach from the rest of corporate Japan.
Ken Lebrun, a partner at law firm Davis Polk in Tokyo, said: “Doing deals is their business. They are always readjusting their portfolio and they are able to do that without too much emotional baggage. Selling a business is not seen as a failure, but just as part of what they do.”
For fund managers that have spent years instructing their clients that Japanese companies were due for a great re-evaluation, Mr Buffett’s move looks like vindication. Tokyo’s stock market, where roughly half of all listed companies are trading below book value, has for years been pushed by brokers as a paradise for value investors — with the trading houses particular laggards.
But to others, including those who have worked inside the trading houses, Berkshire’s wager was a huge surprise.
Based on some metrics, the case is compelling. With the exception of Itochu, the four firms are trading below book value following a brutal sell-off at the height of the pandemic. And despite the disruption wrought by coronavirus, both Mitsubishi and Sumitomo are forecasting a healthy dividend payout and four out of the five expect to remain profitable.
“The fact that Warren Buffett chose to buy them speaks highly of his confidence in their corporate governance and business acumen,” said John Vail, chief strategist at Nikko Asset Management.
Beyond the valuation and a bet on a recovery in global commodity prices, Berkshire’s investment is a gamble, say analysts. Mr Buffett is betting, they say, that becoming a shareholder will give Berkshire access to a trove of quality assets the Japanese groups have bought — sometimes at peak prices — that appear to blend well with its own diverse portfolio that has recently increased its exposure to the energy sector.
Instead of plucking a winner from the trading houses, which generate a fifth of their net profit from commodities, investing in the entire sector gives Berkshire a wider selection of the different assets each owns.
Itochu, which has been most aggressive in expanding its non-resource businesses, such as food and apparel, owns Dole Food’s global packaged foods and Asian fresh produce businesses while Marubeni has recently sharpened its focus on automotive parts sales business in the US. Mitsui’s bet on healthcare has resulted in investments in Malaysia’s IHH Healthcare and Singapore-based DaVita Care, a subsidiary of Berkshire-backed dialysis clinic operator DaVita in the US.
Many of these assets have some crossover and opportunities for collaboration with Berkshire’s expansive portfolio that ranges from iPhone maker Apple, car insurance company Geico, oil producer Occidental Petroleum, food producer Kraft Heinz to ice cream chain Dairy Queen.
JPMorgan’s Mr Kikkawa says investing in the five major players is a smart call that plays into the very nature of the Japanese groups, which despite their varying strengths, compete fiercely by chasing after similar deals. With each of the companies saying there was no previous contact from Berkshire, top executives will be rushing to build a relationship with Mr Buffett’s group and competing to impress with proposals for investment synergies.
“It will fuel rivalry among the CEOs and they will scramble to clinch a flagship deal with Berkshire. As a result, only the best assets will be presented to Berkshire by each of the trading houses,” Mr Kikkawa said.
Jeremy White, a partner at the law firm Baker McKenzie in Tokyo who has worked extensively with trading companies, said that while Mr Buffett’s latest investment appeared to fall short of his famous insistence on backing simple business models, the Japanese groups were united by their endless appetite for deals.
“Yes, the business of trading houses looks complicated because the deals they are doing are complicated. But it’s not like Enron where there is lots of financial engineering behind the scenes,” said Mr White. “When you realise that these companies are basically collections of dealmakers constantly making deals, it’s actually quite straightforward,” he added.
Still, former executives at trading houses say the hardest challenge will be achieving potential synergies between the firms and other parts of Berkshire’s sprawling portfolio. Standing in the way are rigid corporate cultures, conservative managements, and complex politics between the trading houses and the thousands of subsidiaries they operate.
One former executive at Mitsubishi said trading houses are armed with rich resources, intelligence and talent to create value from their investments. “But the CEOs must perform better by making use of those intangible assets, hopefully with positive pressure from Buffett,” he said.
Jason Ollison, principal of Asialantic Global Advisors and a former senior director at Sumitomo, says drastic changes in corporate culture would be needed to meet the promise trading houses have as integrated conglomerates.
“Warren Buffett’s mantra is that the companies he invests in should be simple, transparent and well-run. The trading houses are challenged when it comes to operating in that manner,” Mr Ollison said.