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Opinion

Can Japan's trading companies remake themselves?

Only if they diversify management to boost global competitive advantages

The traders could be trailblazing in hiring women returning after a career break for their families.   © Reuters

The Japanese general trading companies are peculiar creatures. Belonging to the dying species of classic conglomerates, they are powerful and complex, spinning their commercial webs across all sectors and corners of the world.

But the traders -- Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Itochu, Marubeni, and their smaller rivals -- are running into growing headwinds.

Digitalization is eroding the margin as well as a crucial competitive advantage -- wide-ranging and deep-seated global business knowledge. Once the traders held the keys to many doors. Now, even small provincial client companies can find their own information about the remotest economies.

Meanwhile, financial deregulation has encouraged the growth of private equity and other fund managers, which compete for investment opportunities, taking away business from the traders and eating into returns. For the traders, the classic conglomerate discount hinders effective equity fundraising.

Is the future bleak, then, for the once mighty trading companies?

On the contrary. I think they have the opportunity to reinvent themselves -- into suppliers of high-skilled international management. But they can grasp the chance only if they modernize career development and open their recruitment to new sources of talent.

The trading groups have remade themselves before. In the export-dominated high-growth era of the last century, they had focused on trade -- exploiting their knowledge of shipping, crossing borders and negotiating barriers.

Over a decade ago, they pivoted from this old-established game of chasing trading volumes and turned to providing investment finance -- stepping into the vacuum created by the decline of Japan's debt-laden banks.

In the last few years, venture capitalists and private equity funds are increasingly supplying such risk capital, often raising the money more effectively than the traders.

So the trading companies are remodeling themselves again and offering to provide the management talent that financial investors often lack.

There is a gaping gap for modern management skills in Japan and around the world. Small to mid-sized Japanese manufacturing companies typically lack talent to grow their domestic business, never mind reaching into overseas markets. As many are family owned, generational change often exposes holes that can be fixed only with outside talent. Rather than relying on passive investors whose representatives merely sit on the board, such companies need hands-on executives.

Those companies which have already expanded overseas often struggle with local regulatory and governance challenges, as well as balancing the strategy of the Japanese headquarters with local market requirements.

Only a handful of Japanese companies, such as Toyota Motor, have become successful global multinationals. Most of the rest still have difficulties bridging the gap between Japan and the rest of the world, not least in finding people to fill key posts both in operating locations and head office.

Such talent is in critically short supply in Japan. So much so that the very few high-profile CEO-level managers who have the capacity to smoothly switch companies are, rather oddly, called "professional management," as if other managers are not professional. An example is Masahiko Uotani, an ex-Coca-Cola executive now running Shiseido.

The trading companies are well placed to combine providing capital with supplying managers dispatched from the mother ship to their many operating companies. These managers can be moved about and run different subsidiaries.

The trading companies' competitive advantage is that they each have a large breeding ground of management on a scale private equity funds cannot match. For example, Sumitomo Corp. has over 63,000 staff, in over 900 companies in 65 countries, in six sectors ranging from metal products to digital and media.

The trading companies can still recruit bright college leavers thanks to their prestige. With their access to a wide range of industries, they can train flexible managers just when technology change has created huge demand for such people. This advantage will grow with as conventional manufacturing industries such as autos converge with information technology.

By crafting varied career paths for young men and women, the traders can attract the millennial generation with aspirations to run their own companies. They can start small and progress. For many young people that can be a much attractive option than working either at single-industry companies or as business technocrats for consultancies, where they would rarely have hands-on experience.

Granted, the traders already do supply management talent to their group companies big and small, a notable example being Osamu Masuko, CEO of Mitsubishi Motors who originally came from Mitsubishi Corp.

But they need to take things further.

First, they should try much harder to recruit and promote non-Japanese managers. Especially in subsidiaries outside Japan, such people can bring new ideas and new skills. Limiting management to Japanese executives means relying on people with narrow Tokyo-centric views which may be an obstacle in making decisions in fast-changing local environments, for example in Southeast Asia.

Next, they should develop career paths for such non-Japanese managers that bring them to Japan and perhaps later let them return to senior posts in their countries -- a powerful idea, particularly in Asia's closely-integrated economies.

The variety of career paths for Japanese managers could also be expanded. The traders, once major suppliers of sponsored MBA students to top business schools, largely withdrew after many new graduates left the companies on their return for other opportunities, leaving the traders out of pocket.

The companies should revive the tradition and try to retain the talent by offering dynamic post-business school positions such as management jobs in overseas subsidiaries. Secondments to unaffiliated companies such as internet startups, tech companies or venture capital outfits could be attractive.

Moreover, the traders could be trailblazing in hiring midcareer, a marginal practice in Japanese recruitment, targeting middle-level executives with deep IT knowledge or women returning after a career break for their families.

The traders' biggest hurdle is their own conservatism. The traditional bias in the system favors men over women, and Japanese over non-Japanese in promotion. Today, women and foreigners are a small minority even in middle manager ranks. The current boards of the top five are occupied by Japanese males with the exception of external nonexecutive directors.

Even for Japanese men, promotion can be slow, taking close to 20 years until managers have any decision-making authority. This holds back younger people, who are often more likely to have the tech skills needed today.

This personnel model needs to be modernized to make it far more flexible so that the traders can indeed profit fully from their greatest competitive advantage. They should focus on growing their global management talent pools regardless of gender, age or nationality.

Nobuko Kobayashi is a partner with EY-Parthenon, a strategic consulting group within E&Y Transaction Advisory Services. Based in Tokyo, she specializes in the consumer sector with a special focus on multinational corporations operating in Japan.

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