American sogo shosha: American trading companies in the twenty-first century.
Trading companies have been practising since colonial times when they were developing trade between nations (McNulty, 1972). But while most of them started out simply as commodity dealers, today Japanese trading companies serve a broader role. Most of these companies tend to perform three basic functions (Kojima and Ozawa, 1984). One role is to serve as an intermediary for all marketing, import and export transactions. Another function is to perform financial intermediary activities (or "quasi-banking"). Today these trading companies supply short- and medium-term loans associated with its trading activities along with offering equity capital to aid its own suppliers. A third function trading companies perform is information-gathering. These firms collect economic, social, political, legal, cultural and technological information -- and do it very well. In fact, it has been noted that the information-gathering done by sogo shoshas is superior to that of the Japanese government (Kojima and Ozawa, 1984). They perform some additional activities including logistical and warehousing services. Thus, some of the activities Japanese trading companies are involved in include trading and distribution, management consulting, manufacturing, risk-hedging to deal with exchange rate and price fluctuations, domestic and overseas importing and exporting of technology, and joint ventures to develop foreign industrial markets.
Prior to 1982, exporting companies were severely limited in their activities because of antitrust laws that placed numerous restrictions on what companies were allowed to do. At that time, President Reagan signed a bill into law that provided export companies more freedom in moving their products to foreign markets. This Export Trading Act, although passed with high hopes, turned out to be inconsequential. The trade deficit remains high and most efforts to decrease it have created minimal change. The sogo shosha, or Japanese general trading company, has been an integral part of the Japanese miracle. They are the driving forces behind Japan's global economic effort, serving as intermediaries for half of the country's exports and two-thirds of its imports. The nine biggest trading houses (C. Itoh, Sumitomo, Marubeni, Mitsui, Nichimen and Kanematsu-Gosho) account for over half of Japan's total trade (about 8.5 per cent of its GDP). Might this organizational structure benefit American companies? If so, what form would an American sogo shosha -- an American General Trading Company -- of the twenty-first century take?
Early forefathers of today's sogo shosha
General trading companies have been around for four centuries. The House of Mitsui (currently Mitsui & Co.) was created in 1616, but became more outward-looking and contemporary in its operations in 1874, when it first set up a trading network of 27 branch offices throughout Japan. It sold staples such as rice and tea, as well as durables like processed marine products. About the same time, Mitsubishi and Sumitomo were established. These companies grew rapidly during the Meiji period (1868-1912) when the government of Japan encouraged industrialization for the economy and modernized social institutions. At this time, Japan's well-known zaibatsu groups came into existence and established large mercantile houses.
Since Japan was (and still is) short on natural resources, it was heavily dependent on foreign markets for these necessities. Therefore, Japan was forced to import modern technology. To pay for most of the items, such as machinery and plant equipment, exporting was necessary to earn foreign exchange. But the Japanese were unskilled when it came to marketing and international trade. Thus they had to use Western businesses which set up shops in major port cities. Japanese firms would contact these businesses to purchase foreign products and sell their goods. But the Japanese government did not appreciate the business strength of foreigners in their marketplace. Therefore, they helped large Japanese trading companies to learn how to import and export effectively to ease out foreign traders from their market (Kojima and Ozawa, 1984).
Japanese general trading companies currently account for about 10 per cent of world export trade. Using their international offices, whose operations range across finance, distribution, technology, mining, oil and gas exploration, and information, they search worldwide to meet the needs of their customers (The Economist, 1991). They possess the power to create substantial amounts of credit, have invested in a network of offices abroad, thus providing an infrastructure to control global market reach. They eliminate a formidable barrier-to-entry to foreign trade for small struggling manufacturing firms which are too weak both financially and managerially to open their own overseas sales offices or to independently export. They act as market intermediaries for the domestic and international distribution of Japanese manufacturers. They possess foreign networks which can only function well when the sogo shoshas are closely linked to domestic distribution channels of diverse commodities and products (Tsurumi and Tsurumi, 1980).
What makes a sogo shosha?
In the West, several large trading companies exist (i.e. Continental Grain, Cargil, Bunge). European trading companies such as East Asiatic, Sime Darby, Inch cape and Jardine Matheson play important parts in trade in Asia by performing many of the functions of sogo shosha; they are not simple intermediaries but are not quite sogo shoshas. To be a true sogo shosha, a trading company must have a worldwide network, handle numerous commodities and account for a large share of the foreign trade in the country of its domicile. For a trading company to be a sogo shosha, it must deal with many products (not just one product group), engage in both exporting and importing, have offices worldwide, and wield considerable power in the spheres of marketing and finance (Yoshihara, 1982). These companies continue to expand their talents. To defend their markets, they have gone into mining and manufacturing, as well as into retailing, an area they had purposefully stayed away from (The Economist, 1991).
Jardine Matheson, a British trading company in Hong Kong, began as a true trading company more than a century ago. But by today's standards, it cannot be called a trading company since it is engaged in light industry, shipping, tourism, insurance, merchant banking, leasing, real estate, resource development, engineering and construction. Trading is only one of its many activities -- and a small part of it at that. The Danish company East Asiatic started to export teak from Thailand to Europe over a hundred years ago and became one of the most successful European trading companies operating in Asia. Today, though, like Jardine Matheson, trading accounts for less than 30 per cent of its total sales.
Cultural separation is an important reason to create a sogo shosha. European trading companies exist as links between Asia and Europe but European manufacturers did not rely much on intermediaries when trading across the Atlantic. Having little knowledge of Asian languages, customs, and business practices, manufacturers traded through intermediary specialized trading firms.
To penetrate the Japanese market, Western manufacturers used Japanese trading companies. Japanese manufacturers wishing to do business with the West were also presented with considerable cultural barriers, even worse considering the hundreds of years of self-imposed isolation Japan had gone through before the Meiji. The other need was for a select group of people who could handle foreign language, culture and international transactions for numerous small merchants who were ill-advised, incapable, or fearful to do so.
Export Trading Company Act of 1982
Legislation enacted in 1918 led to Webb-Pomerene associations which allowed competing companies to co-operate with each other in different international marketing activities to their mutual advantage. This may include sharing in financing, pricing, sales allocation, market research and information-gathering. But Webb-Pomerene had cumbersome procedures, narrow scope, and while exclusively for exports did not include service exports. Later, Congress passed The Export Trading Company Act of 1982 to facilitate the formation of export intermediaries and to promote and stimulate export trade for the USA. The Act expected small- and medium-sized firms to join an export trading company (ETC) with a bank to provide major financing. While the ETC Act relaxed the above antitrust provisions, proponents of the Act predicted exports to increase by 20 per cent or $40 billion a year after five years. High expectations were given for the effects of the Act (Rao and Natesan, 1991). This Act relieved some of the restrictions placed on US companies by the antitrust laws. The highlights of the Act are listed below (Jain, 1993; Scouton, 1982):
* Bank holding companies and bankers' banks may invest up to 5 per cent and loan up to 10 per cent of their capital and surplus in an export trading company.
* Bank holding companies and bankers' banks may own up to 100 per cent of the stock of an export trading company.
* The Federal Reserve Board (FRB) must approve any proposed investment. Under this process, a bank need only notify the FRB of the intended investment. If no objection is made within 60 days thereafter, the bank may proceed with the intended investment.
* A bank is exempted from the collateral requirements contained in the Federal Reserve Act for loans to its ETC.
Antitrust certification provisions
* The commerce department is the certifying agency, subject to the concurrence of the Justice Department.
* Eligibility for certification is based on four specific antitrust standards.
* Only the Secretary of Commerce can revoke or modify a certificate.
* A certificate holder has complete immunity from US antitrust laws, except for private part lawsuits for actual damages. Such lawsuits are subject to the following limitations:
-- the trading entity must have violated specific antitrust standards enumerated in the bill;
-- a two-year statute of limitations is applicable to any lawsuits;
-- A certificate creates a presumption of lawfulness;
-- The certificate holder can be awarded costs, including attorney's fees, if he prevails in any action brought against him. Before this law was enacted, firms with limited resources had no chance to market their products in foreign markets. The Export Trading Company Act gave them the opportunity to join together with other firms, without the fear of breaking antitrust laws, and form trading companies and enjoy the economies of scale to export their products. Their combined synergy also made the development of new markets more attainable.
Government aid for trading companies
The US government is doing its part in supporting international trade endeavours. To help in exporting, although it is underpublicized, the commerce department is ready and willing. In 1990, the commerce department employed in excess of 1,300 trade professionals. They had offices in 68 domestic locations and 122 foreign locations. Their purpose is to assist US-based companies in selling their goods in foreign markets. The export consultants, employed by the commerce department, assist trading companies by directing them to the necessary documentation to be prepared, methods of payment, proper packaging and shipping instructions, and guide them through the ubiquitous red tape. They are also instrumental in locating interpreters for the different foreign languages. The consultants can also provide information concerning markets for the US products abroad and assist in locating local distributors.
Congress had hoped that provisions of the Export Trading Company Act of 1982 and the establishment of government-sponsored organizations to promote exportation of US goods would stimulate US companies into developing trading companies. But the evolvement of successful trading companies has been very slow to materialize. Part of the problem lies in the fact that many firms did not know about the government-sponsored programmes and many of the firms did not trust any programme that was government-sponsored. In fact, in one study 129 manufacturers, which included 86 exporters and 43 non-exporters, indicated that government programmes for exporters were not viewed favourably by small companies. In this study only one of the 129 companies interviewed had started their exporting activities from the assistance of a government-sponsored programme.
The Export Trading Company Act of 1982 created the Eximbank (Export-Import Bank), which is an independent US government agency whose purpose is to guarantee loans to export trading companies. Each year approximately 100 such guarantees are provided by the Eximbank. The loan guarantees range anywhere between $10,000 and $25 million. The types of goods supported by this programme are very diverse, ranging from wood products and horse meat to semiconductor test equipment. The Eximbank will usually provide a repayment guarantee of 90 per cent of the loan value. In most cases, the terms of the loan are 12 months.
Eximbank helps provide insurance to trading companies through the Foreign Credit Insurance Association Management Company, Incorporated. Credit insurance provides protection against the risk of foreign buyers defaulting on their accounts and serves as an impetus to encourage and stimulate export activities by US companies. Some insurance contracts will cover up to 100 per cent of the value of the transaction. To qualify for the insurance, at least half of the product's value must comprise of US labour and materials.
The Overseas Private Investment Corporation (OPIC) is another US agency that provides insurance against loss from non-commercial international operating risks. It also engages in direct loans for development projects. These loans must be used for US jobs in developing nations and for products bought from the USA. But, unlike the Foreign Credit Insurance Association, OPIC does not provide coverage against commercial losses such as the buyer's refusal to pay.
As earlier noted, locating and developing markets for clients' products are major roles of trading companies. They often form joint ventures with local firms in foreign markets in order to obtain distribution channels for their products. Depending on the target country, the proper distribution channels can often be difficult to cultivate and the expertise of an established local firm is essential. Market development will depend on the nature of the exported goods. Differentiated products require more physical presence in the foreign market. These products are brand specific in contrast to undifferentiated goods such as food commodities and standardized type raw materials. Differentiated products require a representative's attendance at trade shows and development of foreign advertising in order to help stimulate demand. If a joint venture is not sought to market differentiated products, the trading company should send its own sales personnel to contact personally the foreign buyers and attend trade shows in an effort to make their presence known. In addition to locating markets, the trading company processes all documents for exporting the goods and handles distribution to the retailer or consumer.
Past "US trading company" failures
In early-1982, Sears formed its Sears World Trade Organization intending to export and import to trade with the third world, and countertrade to deal in services, consumer products and light industry. Later that same year, Sears formed a joint venture with First Chicago, committed $100 million to the project, and hired top government officials to head the newly-formed organization. But two years later, Sears was forced to lay off 10 per cent of its workforce and in 1985, to strengthen its foreign operations, bought Hagemeyer, a Dutch trading company with expertise in Asia and Europe. Unfortunately, towards the end of 1986, Sears closed the domestic end of its world trade business, folded the international operations into its merchandising group, and took a $28 million write-off on the venture.
General Electric also established a trading company after the Export Trading Company Act was introduced -- forecasting sales of $2 billion by 1987. Once again, though, it saw the same fate as Sears. General Electric cited the need for barter skills and countertrade for its failure to build a major trading company. Officers for both the Sears Trading Company and General Electric Trading Company agreed that part of the problem with their respective organizations and of trading companies operating in the USA was the lack of expertise and qualified managers in trading.
But Sears and General Electric were not the only groups seeking to form trading companies. In 1982, Security Pacific and Bank America announced their intentions to create their own trading companies (however, Bank America World Trade Corporation later closed). Other banks including Chase Manhattan, Chemical Bank and Banker's Trust reduced their commitment to export activities. By 1984, approximately 45 export trading companies had been formed but were failing to fulfil their intentions. By 1989, the number of certificates of review issued had increased to 108, coveting about 4,360 firms; however, ETCs accounted for only $200 million per year, which was less than one-tenth of 1 per cent of US annual exports.
Other reasons for the poor performance of the Export Trading Company Act can be found in the banking industry's relative inexperience with export trading, unduly restrictive conditions of Title II (10 per cent restriction on extension of credit and 5 per cent of consolidated capital and surplus restrictions), lack of formal ties between banks and manufacturers and the fact that US bankers are notoriously risk averse and asking them to become exporters was, and would still be, destined for failure. In addition, the act did not make arrangements for either barter or countertrade, or non-cash trade deals which some say account for one-third to one-half of all world trade. Another problem was that the Federal Reserve Board refused to allow bank-related ETCs to engage in service exports. The board adopted a very restricted regulatory definition of what bank-related ETCs could do.
ETCs were also foreign-based (export) and emphasized their own manufacturing. Besides the fact that the US culture is domestic-oriented, not foreign trade-based, the ETC neglected the fact that Japanese trading companies are integrally meshed with domestic related banking, shipping and production companies. Half their sales are domestic Transactions. The Act, which generally limited US trading companies to exports, only limits their viability.
It is necessary for banks to play a much greater role in the operation of trading companies of the future. Large amounts of capital are necessary to finance exporting operations. This is due to the fact that the trading company takes title and possession of the goods until they are able to transfer title to their foreign connections. Also, transportation to the overseas markets can take months by ship and the trading company must bear the costs of ownership during this transportation time. The bottom line is that these functions require large amounts of capital and it may become necessary for large banks to form partnerships. US risk-adverse banks must be provided incentives and insurance provisions to supply the necessary capital to the trading companies of the future and provide their financial support in order for the exporting endeavours to be successful.
Lastly, as if the ETC Act of 1982 did not have enough problems, the administrative burden of obtaining certification as an ETC proved too bureaucratic, time-consuming and subjective and killed off whatever incentive remained.
Why have US trading companies done so poorly while the sogo shosha continues to flourish? The answer may be revealed through a close look at the obvious differences between the two organizations. Table I compares the two forms of business.
Table I Comparison of US ETCs and sogo shoshas Operation US ETCs Beginning first attempts in early-1980s years Evolution large outgrowth of existing manufacturers Group size wide variety of company sizes Product mix one type of good, one industry Financial few banks, rely on own resources associations Operation Sogo shoshas Beginning 1616 - House of Mitsui years 1874 - modern Mitsui & Co. Evolution emergence as independent traders Group size huge companies Product mix widely diversified Financial wide variety of financial services, associations traditional links with keiretsus (large domestic Japanese banking groups)
Japanese trading companies, sogo shoshas, have been much more successful than US trading companies due to several reasons. Besides the vast size and experience, along with financial support, there are other reasons for the one-sided success. One explanation for the US companies' lacklustre performance is the fact that some Japanese manufacturers are in business specifically to make products for export and not for domestic consumption. To the contrary, US manufacturing companies are in business to typically supply their domestic demand; any export products are usually from a marginal operation. They export to maximize their company's output, not specifically for the company's output. If trading companies could meet the US firms' needs in supplying overseas markets and transaction-creating activities, more US companies would probably be willing to dedicate more of their manufacturing capabilities to export endeavours.
The record of US trading firms is not encouraging; few make money, there are a few small deals, and difficulties range from economic conditions to start up (recruitment, location of clients, venture funds). The few US trading firms that do exist are small compared to the mammoth-size Japanese companies. Size may be the key to success, bringing with it a global market presence, extensive communication networks, world sourcing capabilities, and the ability to attract and adequately compensate personnel who are experienced in trading. But size may also be a drawback. Because of their size and financial power, the sogo shosha can dominate markets. Does the USA want such large behemoths (even if US-based) with such a considerable affect on the economy? Historically, America has not favoured this sort of configuration.
Important services performed by today's trading companies
Three of the most important services provided by a trading company include:
1 the ability to locate new foreign markets;
2 the establishment of personal contacts with potential foreign buyers; and
3 the knowledge of the foreign markets' competitive conditions.
Another significant concern is the ability to advise export clients regarding tariff increases. Clients are also more interested in their trading company's ability to be proficient in transaction-creating activities than the physical fulfilment requirements.
Services that trading companies typically perform well, such as documentation, arranging insurance, freight and packaging were ranked low in importance. Therefore, trading companies are not providing what their clients place importance on and are performing well in areas their clients do not think is important.
US trading companies
A true trading company is a separate legal entity that can negotiate and carry out entire countertrade transactions. Some of the functions they perform include: locating ways to release blocked funds, dealing with the foreign country's central bank, setting up and staffing an offset office in a foreign country, global sourcing, monitoring the performance of subcontractors, and co-ordinating the company's activities in fulfilling offset obligations. The association between trading companies and multinational companies (MNCs) usually unnecessary; MNCs already have their own international divisions, distribution channels, and procurement offices. Typically the only thing left for the trading company to do is to handle countertrade transactions.
The Coca-Cola Trading Company goes much further than simply selling syrup and taking back local products; the company transfers food and beverage technology and assists in developing foreign marketing programs. Coca-Cola assisted Yugoslavia and Romania in the production of wine for the US market. In Turkey, Coca-Cola set up a joint venture to produce tomato paste for the US market and other markets, providing management and technology for the plant.
Contritrade Services Corporation provides international trade finance to multinationals and exporters, using countertrade as necessary The company is an offshoot of Continental Grain, operates in 50 countries through 200 offices and specializes in agricultural products and bulk commodities (grains, tobacco, cotton, animal and vegetable oils, textiles and yarns). Prudential-Bache Trade Company operates a global network of trading and finance subsidiaries with offices in ten countries.
Cyrus Eaton World Trade Ltd (CEWT) was formed in 1985 as part of the Eaton Group. It has participated in over 140 East-West trade projects since 1954 and has an extensive network of contacts in many of the Eastern European countries. Services include arranging financing, matching US companies with potential partners, marketing of countertrade products and services, and negotiating and drafting contracts. Products handled include agricultural items, beverages, petroleum, natural gas, metal ores, chemicals, fertilizer, pulp, paper, rubber, building materials, textiles and apparel. Services handled include construction, hotels, television and films and transport.
The Rockwell International Trading Company was established in 1978 and assists any Rockwell division in negotiating and implementing offset and countertrade programmes. Caterpillar's trading entity, The Caterpillar World Trading Company, has as its main function to finance exports of CAT equipment through counterpurchase of minerals, agricultural commodities and raw materials. It also handles licensing and technology transfers, does global sourcing and released blocked funds. Through countertrade, it was able to replace Komatsu as the major supplier of earthmoving equipment to China and now sells $100 million annually there.
The Export Trading Company Act of 1982 started banks getting more involved in the creation of export trading companies. Through Title H, 40 banking ETCs were formed by 1984, but they were restricted by the 51/49 rule which required that bank ETCs must export more than they imported. This rule penalized banking ETCs for participating in countertrade. The export part was not credit towards the ETC export sales but the import position is counted against export sales. Other problems with the Act included audit requirements and Federal Reserve regulations. Regarding the audit, every two years non-bank ETCs were required to file an annual report confirming compliance and were then not audited. The Act did not exempt banks from Rule 23A of the Federal Reserve Act, which limits the amount of credit banks can extend to its ETC relative to the ETC's collateral; this made it very difficult for bank ETCs to secure joint venture partners. Conservatism, risk aversion and short-term profit desires also are negatives against bank participants. Banks want safe deals and pass up many potentially lucrative countertrade deals that involve risk. Trading company competition is fierce, barriers-to-entry are low, capital requirements may be high, and difficult to be prosperous for long.
Nonetheless some bank ETCs remain. Bank ETCs include: Chase Trade Inc. (Chase Manhattan Bank), a full-service countertrade unit which can structure and implement transactions as well as provide financing. Manufacturers Hanover World Trade Corp. handles all aspects of countertrade Wansactions and will take title to the good also providing financing.
A look at the twenty-first century trading company
The Japanese sogo shoshas have a century of historical, political, social, cultural and economic development to utilize. If such a system were to develop in the USA, it probably would be one that would adapt to meet the standards and customs of America and the US way of doing business. The USA should not attempt to carbon-copy their trading companies after the Japanese sogo shosha. These are two very different cultures operating in two very distinct business environments. For example, the Japanese operate on a much lower profit margin than do Americans, who tend to prefer higher profits rather than market share. Sarathy (1985) suggests that would-be US trading companies could best emulate Japan's special, rather than general, trading companies. Regardless, the trading companies should be formed with US values. The Japanese have a close relationship with the government and were born out of economic necessity as part of a national economic policy. To have the US government driving the industry, dictating to corporations what markets they can and cannot enter into, and selectively sharing information (which is common in Japan) would be viewed as un-American.
The possibility of a sogo shosha forming outside Japan is remote since sogo shoshas are Japanese-specific. But the likelihood of a foreign trading company succeeding is conceivable. After all, it is not as if there has never been such a thing. In fact, historically there have been a fair number of successful trading companies. The Astors made their fortune trading western furs. The British East India and Hudson Bay companies were major contributors to the success of the Empire. Even today, the USA has several uniquely large trading companies, major grain companies operating out of home offices both in the USA and abroad. These companies control major portions of world trade in basic food commodities with values totalling more than $50 billion back in 1982. They also offer global services in market intelligence, sales, shipping, insurance and finance, similar to the Japanese trading companies. They deal primarily with small farmers or co-operatives in the USA and government or major wholesale purchasers abroad. In this respect, they are very similar to the Japanese general trading companies and were set up for many of the same reasons (Kaikati, 1983). Also like the Japanese trading companies, considerable size appears to be a prerequisite to participate in the global grain market. In general, US trading companies tend to be rather specialized in terms of the products they handle, the services they offer, or both.
Trading companies are certainly not only seen in developed nations; but also found in newly-industrializing and developing countries. Korea, Brazil, Mexico, Taiwan, Thailand, the Philippines, and Malaysia and others have established sogo shosha-like organizations. South Korean trading companies have become substantial in scope and size in recent years and have contributed significantly to the economic development of Korea. Brazil and Hong Kong have done the same, but to a more limited extent. Even in Europe some trading companies operate efficiently, although not to the extent seen in Japan.
There seem to be five major factors contributing to the formation of GTCs: underdeveloped infrastructure, industrial base dominated by small- and medium-sized firms, standardized products composing the country's main manufactured good, highly fragmented distribution channels, and governmental agencies which may offer strong financial and strategic support for formation to GTC-like organizations. It is obvious that the forming of successful GTCs in the USA is suspect since these factors are not common characteristics found in the USA and, in fact, most industrialized countries.
Most companies do not start out as sogo shoshas. After years of operating, they may progess into one. To evolve into a sogo shosha from a senmonshosha (a specialized trading company), three qualifications are needed:
1 development of professionals who are committed to trading a wider range of products and services;
2 creating common goals of creating and expanding diverse manufacturing activities at home and abroad; and
3 cultivating a guaranteed access to an almost unlimited line of credit for expansion of international trade and investment (Tsurumi and Tsurumi, 1980).
The evolution of a GTC is a multi-stage process. The first stage is when the firm's purpose is dominated by purchasing and sales agents. The next stage involves diversifying and providing financial intermediary services. Then they may concentrate on standardized products or can trade up to higher technology goods. If standardized products are selected, they must have access to low cost suppliers or captive client bases to remain profitable -- which is unlikely in the long run. In the later case, a more viable alternative is to develop businesses in fields with prospects of future growth. All must proactively respond to development of modern industries.
There have been three possible models offered to build US trading companies (Tsurumi and Tsurumi, 1980). One model involves building a trading company on the strength of commodities (wheat, pulp, coal, iron ore and other minerals). These exportable products would be linked to supply contracts in foreign countries so as to exploit the synergistic benefits of linking exports of commodities to the exports of other goods as well as to imports. The second model involves establishing the trading company as importers of many manufactured goods, then developing them into export-import firms. New trading firms must first develop the capacity to supply widely scattered small- to medium-sized manufacturing firms with products and technology from abroad as well as establishing themselves as importers of standard manufactured goods. These would be domestic as well as internationally-based. The third possible model resembles the Korean approach of watching and tracing products being exported by foreign multinational corporations. USA trading companies could compete with foreign exporters to the USA on their superior knowledge of North American markets.
US trading companies: needless or a necessity?
Is there really a need for US firms to develop their own trading companies? Since sogo shoshas and several huge foreign-based trading companies already exist, is it really necessary for this redundancy? Nationalism provides part of the answer. Many of the foreign-based trading companies were organized, in part, as an integral portion of that country's foreign economic policy -- including the Japanese sogo shosha. To tie one's own corporations under those constraints would be, to a degree, giving up sovereignity. Indeed, a nation must develop its own trading companies to expand their exports of manufactured goods to as many foreign markets as possible. Some have said that globalization of existing trading companies have occurred because of national pride more than necessity. They have typically tied themselves to their own suppliers outside North America.
Furthermore, to become a successful exporter to Japan, exporting firms need to have a solid business base in Japan that provides essential customer services and can effectively deal with custom clearances and other import procedures. These non-tariff barriers present insurmountable barriers to many small and medium-size firms without such a third party to guide them through the process. US-based trading companies can provide this assistance.
Large industrial firms that also operate as multinational organizations are candidates for forming trading companies. The larger firms could likely obtain the financial backing that is necessary to perform the functions of a trading company. Some prime candidates include IBM, Dow, Hewlett-Packard, Boeing, Du Pont, etc., or the commodity traders like Cargill. Banks must have a presence, both in the financing and risk-sharing part of a company Since developing countries should be a clear target for trading companies, countertrade policies must be available. These undeveloped countries with soft currencies could provide goods for which trading companies could exchange for other products needed by the country.
Times are changing, and the US business system must change with it. While the trade deficit continues to grow and as markets become increasingly mature in the USA, it is imperative that US trading companies become an integral part of the future. For them to succeed, they must be given entire government support so that they can effectively operate worldwide. Some of the bureaucratic red tape must be eliminated to attract exporters. Any government-sponsored programmes should be publicized in order to inform the business community of their existence and available assistance.
Asao (1983) offered some important points regarding successful Global Trading Companies. First, it is difficult for them to succeed if they are involved only with exporting. The Japanese expanded their businesses through imports of raw materials for domestic business and exports of manufactured goods. Second, GTCs must respond to new inventions or development plans. Third, they must become more involved in co-operative societies to advance into domestic rural markets. Fourth, they need to allow for participation in manufacturing industries through investment. Fifth, they must emphasize internationalization by establishing overseas branches -- thereby despatching staff overseas. Finally, they need to require governmental support and clearly define the division of roles between public and private sectors.
While nothing is for certain, there are some trends that are likely to be seen concerning GTCs and global trade. One trend will be increased international offices, overseas subsidiaries, and local management. Another likelihood is the continuance of information gathering and processing capacity of GTCs through expansion and greater depth of analysis. Offshore trade is likely to continue to expand rapidly, giving GTCs a more active role in trade promotion in more nations. The number of import-oriented trading companies is likely to increase. There will also probably be a continued investing in production facilities throughout the world. Finally, smaller trading companies will recognize and capitalize on market niches through specialization, where GTCs find it difficult to compete.
Trading companies seem to thrive when rampant changes occur; however, when changes are not so apparent, companies begin to catch up and encroach upon trading company functions -- creating a lesser need for their services. With the dynamics of international markets to be at an all time high with no reprieve in sight, it seems that the environment is ripe for potential and current trading companies.
Existing trading companies should take advantage of studies that have already been conducted and concentrate on improving their companies in the areas where clients have expressed interest. If they do not take the initiative and make improvements where necessary, their chance of survival is minimal. As the life cycle of more products mature, the only remaining market to concentrate on will be overseas. As a result of this, more firms will be trying to locate companies to help them export their goods. The expertise of international marketing managers needs to be elevated to a higher level. It will take a concerted effort of these observations to assure success for the US trading companies in the twenty-first century.
References and further reading
Amine, L.S., Cavusgil, T.S. and Weinstein, R.I. (1986), "Japanese sogo shosha and the US export trading companies", Journal of the Academy of Marketing Science, Vol. 14 No. 3, pp. 21-32.
Asao, Y. (1983), "Establishing sogo shosha in ASEAN countries", Management Japan, Vol. 16 No. 2, Autumn, pp. 16-21.
Barrett, G.R. (1990), "Where small and midsized companies can find export help", Journal of Accountancy, Vol. 170, September, pp. 46-50.
Bello, D.C. and Williamson, N.C. (1985), "The American export trading company: designing a new international marketing institution", Journal of Marketing, Vol. 49 No. 4, Autumn, pp. 60-9.
Brasch, J.J. (1978), "Export management companies", Journal of International Business Studies, Spring/Summer.
Business America (1992), "Eximbank provides financing for US export trading and management companies", Vol. 113, 9 March, pp. 21-3.
Cao, A.D. (1981), "US export trading companies, a model of export promotion in the 1980s", Business, Vol. 31, September, pp. 32-8.
Cappiello, T. (1982), "The changing role of Japan's general traders", Journal of Japanese Trade and Industry, Vol. 4 No. 4, pp. 18-30.
Castaldi, R.M., De Noble, A.F. and Moliver, D.M. (1989), "Export intermediaries: small business perceptions of services and performance", Journal of Small Business Management, Vol. 27, April, pp. 33-41.
Cho, D.S. (1984), "The anatomy of the Korean general trading company", Journal of Business Research, Vol. 12, June, pp. 241-55.
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|Author:||Herbig, Paul; Shao, Alan T.|
|Publication:||Marketing Intelligence & Planning|
|Date:||Jun 1, 1997|
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