As an ex-trader, a recent article in the Economist piqued my interest. I remember in 1994, when I had interviewed for my first job as an aluminum trader out of graduate school, I had asked my soon-to-be-boss how he thought the role of the trading company would remain relevant with the advent of the internet. I had specifically referred to the notion of disintermediation, one of those consulting buzz words popular in the late 1990’s. And as my former boss had told me, “there will always be a place for a trader.”
And yet somehow 14 years on, I still doubt him. I’m particularly struck by the notion that holding information between a supplier (or producer) and end-user and essentially keeping both parties ‘at bay’ could possibly be considered a value-added business model. In fact, that Economist article articulates the point, “JAPANESE trading companies have long been reviled by Western businessmen as inefficient middlemen and huge, monolithic entities that strangle the Japanese economy.” I can’t comment on the later but I can say that as to the former, I’m not sure how much has really changed. The Economist article does however point out several ways in which the Japanese shoga shosha (trading houses) create value.
The first relates to using knowledge of a market to move into other similar areas whereby the trading company takes over the supply chain. The example provided talks about Mitsubishi moving from importing food to processing it and then distributing it to stores in which they have an ownership stake. The second area in which the trading firms have added value is in their role as wholesalers. But I would argue they are less like wholesalers and more like trade financing arms or supply chain integrators…taking the role as the logistics and financial lead in transactions. Finally, the third area in which the trading companies add value relates to to their ability to provide loan guarantees and take equity stakes in companies who do business with them. So as a finance vehicle, they do add value though the amount of credit they extend to trading partners has dropped from the 1980’s.
In the few situations in which I am aware of the shoga shosha, I can see how Westerners view them as ‘inefficient middlemen’. They still largely appear to play the role of the mark-up middleman without articulating their unique value proposition. And after having looked at the specific services they provide to companies buying metal products from overseas, I’m not sure how much can’t be provided by alternative means. But clearly a better case can be made to other Japanese firms or to their suppliers/mills in their host country of Japan. Let’s see how these firms fare in a downward market, when everybody looks to streamline and cut costs, especially metals importers.