ITOCHU Corporation

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ITOCHU Corporation

5-1-2 Kita-Aoyama
Minato-ku
Tokyo 107-8077
Japan
Telephone: (03) 3497-7295
Fax: (03) 3497-7296 Web site: http://www.itochu.co.jp

Public Company
Incorporated: 1914 as C. Itoh & Company
Employees: 5,775
Sales: ¥13.90 trillion (US$115.31 billion) (1999)
Stock Exchanges: Tokyo Osaka Nagoya Kyoto Hiroshima Fukuoka Niigata Sapporo
NAIC: 551112 Offices of Other Holding Companies

ITOCHU Corporation is the third largest of Japan’s general trading companies—which are known as sogo shosha-trailing only Mitsui & Co., Ltd. and Mitsubishi Corporation. These companies are general in nature both in that they handle a wide range of products and services in nearly every industry, and in that they can handle a broad range of functions. General trading companies specialize in bringing together—on a global level—buyers and sellers of a variety of products and services and handling finance and transport of the resulting transaction; the companies derive most of their revenues from commissions earned through these short-term transactions. In the late 20th century, however, many of the sogo shosha, including ITOCHU, were increasingly turning to longer term equity investments in joint ventures and affiliates. Known as C. Itoh & Company, Ltd. from 1949 through 1992, ITOCHU was also in the process of shifting to a holding company structure as it approached the 21st century. At the same time, ITOCHU was focusing more of its resources on key strategic business areas: information and multimedia industries, with involvement in broadcasting, content, network businesses, and mobile multimedia; consumer and retail, with activities in convenience stores, food, and textiles; financial services, including foreign exchange trading, securities investments, business financing, insurance, and online securities brokerage services; and natural resource development, which includes investments in petroleum, liquefied natural gas, and other fuels. ITOCHU has a global network of more than 1,000 subsidiaries and affiliated companies in more than 80 countries.

Early History

ITOCHU’s founder, Chubei Itoh, was born in 1842, the son of a dry goods merchant. In 1853, the year Admiral Perry from the United States “opened” Japan to international trade, Itoh began to accompany his older brother on sales trips to Osaka and Kyoto. By 1858 the younger Itoh was making his own sales trips, selling cloth to merchants in Okayama and Hiroshima. Two years later, at the age of 18, he established his own wholesale business and worked diligently to expand his small operation.

The 1860s were a time of upheaval and change in Japan. The 264-year-old government of the Tokugawa Shogun was overthrown in 1868 by loyalists of the Meiji Emperor. Itoh’s business continued to prosper in spite of the civil war. In 1872 he opened a small shop in Osaka and within five years was one of the largest textile wholesaler-retailers in the city. A branch was opened in Kyoto in 1883, and the Osaka shop was designated the Itoh Honten, or “head office.”

Chubei Itoh and his nephew Tetsujiro Sotoumi opened a third shop in Kobe in 1885. The Itoh-Sotoumi Company was primarily involved in the exportation of textile goods through shokan, or foreign trading agents. The export trade was very profitable, in spite of the shokan, who collected large commissions. Profits from export sales were reinvested in the company’s domestic operations. Itoh opened a foreign office in Shanghai in an effort to bypass the shokan and their commissions. It was a difficult market to enter, however, and the company’s representatives lacked the proper skills needed to deal effectively with Chinese merchants. As a result, the Shanghai office consistently lost money. In 1893 Itoh established Itoh Itomise (Thread and Yarn Store), from which C. Itoh & Company and ITOCHU were directly descended.

Itoh died in 1903 and his second son, also named Chubei, inherited the business. The younger Itoh was well trained and proved to be every bit as adept in business affairs as his father.

A few years before, Japan asserted its political dominance in northeast Asia when it defeated Russia in a war for influence in the region. In particular, Chosen (Korea) became a neocolonial possession of Japan. In 1898 a new shokan called Chosenya was established to handle trade between Japan and the Korean peninsula. It was a lucrative and developing market in which Chosenya had a monopoly. In 1905, however, the younger Itoh once again attempted to bypass the middlemen. He posted two company representatives in Korea, and later opened a full branch office in Seoul.

Itoh’s business ventures on the Asian mainland deteriorated during 1907. In Chosen there was increasing dissatisfaction with the “low quality of Japanese products.” On the other hand, representatives in Shanghai found it increasingly difficult to manage exchange rate fluctuations between the gold-based yen and the silver-based Chinese currency. Mismanagement at the Shanghai office became so acute that by 1908 it was sold to its employees and severed from the Itoh company.

The company recovered quickly, due mainly to a rapid increase in domestic trading activity. In March 1910 Chubei Itoh, aged 23, went to London reportedly to study business administration. It is more likely, however, that he spent his time negotiating arrangements with English merchants. He discovered that the shokan, who presented themselves as powerful international figures in Japan, were actually small agencies with relatively little influence overseas. Itoh purchased large quantities of high-grade wool and other products directly from wholesalers in London and sent them to his company in Japan. Itoh also discovered that bank loans in London were commonly set at around two to three percent, substantially less than the 11 to 13 percent charged by the Yokohama Specie Bank in Japan. Taking advantage of these two factors enhanced Itoh’s ability to undersell competitors in Japan and reinvest a larger portion of the company’s profits. In 1914, meantime, Itoh reorganized Itoh Itomise under the name C. Itoh & Company. Four years later the company became a public stock company and changed its name to C. Itoh & Company, Ltd.

World War I to World War II

Japan was a victorious nation in World War I and, as a result, was awarded substantial commercial and military rights in the Pacific. It was a period of tremendous growth for large Japanese companies, particularly the large conglomerates which had become known as zaibatsu, or “money cliques.” C. Itoh & Company was not considered a zaibatsu like Mitsui, Mitsubishi, or Sumitomo. It was, however, a substantial company, engaged in commercial trading at a time when trade had become extremely important to the continued growth of the Japanese economy.

The strong economy and rising demand for textile products transformed the import trading division of C. Itoh virtually overnight. Demand for Itoh’s products continued to grow faster than supply, causing prices (and therefore, profit margins) to rise with them. By 1919 the trading division had grown to twice the size of its parent company, and foreign offices had been established in New York, Calcutta, Manila, and four cities in China. As Itoh’s volume of trade grew, so did its variety of products. In addition to textile and agricultural products, the company handled machinery, iron and steel products, and automobiles.

Like most economies that experience strong economic reversals during periods of rapid expansion, Japan entered a serious recession in 1920 which adversely affected consumer demand. Due to the fact that C. Itoh was still a relatively small company without the full backing of a zaibatsu bank, it was forced to borrow heavily in order to cover its obligations and went deeply into debt. The following year the company reorganized. C. Itoh & Company was restructured and named the Marubeni Company. Another new company called Daido Trading was created from a division of C. Itoh Trading. It had previously been responsible for trade with southeast Asia and the United States, but was ruined when demand for imports disappeared.

Key Dates:

1858:: Chubei Itoh, company founder, begins linen trading operations.
1872:: Itoh opens a shop in Osaka.
1903:: Itoh dies and his second son, also named Chubei, inherits the business.
1914:: Itoh Itomise is reorganized under the name C. Itoh & Company.
1918:: C. Itoh becomes a public stock company and changes its name to C. Itoh & Company, Ltd.
1921:: Serious recession leads C. Itoh deeply into debt; it is forced to restructure and is renamed the Marubeni Company; Daido Trading is created from a division of C. Itoh Trading.
1941:: Itoh merges with Marubeni and Kishimoto & Company to form Sanko K.K.
1944:: Japanese government orders Sanko, Daido Trading, and a subsidiary of Itoh called Kureha Textiles to merge and form a new company, Daiken Manufacturing.
1949:: SCAP, the military occupation authority, orders Daiken divided into several separate companies, including C. Itoh & Company, Ltd.
1977:: The Japanese government arranges for the acquisition of Ataka & Co., Ltd. by Itoh.
1985:: Company takes 40 percent stake in new joint venture, Japan Communications Satellite Co.
1992:: Company changes its name to ITOCHU Corporation.
1994:: Company writes off US$662 million in nonperforming assets in aftermath of the bursting of the Japanese bubble economy.
1997:: Restructuring continues with the disposal or writing off of US$1.8 billion in bad loans and nonperforming assets.
1999:: Global-2000 strategic plan is launched, aiming to shift ITOCHU to a holding company structure by March 2001; US$2.38 billion in additional nonperforming assets are written off.

All three Itoh companies were forced to lay off hundreds of workers and suspend stock dividends for several years. Their recovery was slow, but gained momentum later in the 1920s. Ironically, these companies experienced their strongest post-recession growth during the worldwide depression of the 1930s. The Calcutta branch, which was closed in 1921, reopened in 1931. In the following years new offices were opened in Australia, Thailand, and Indonesia. It was during this period that the benevolent one-man-rule of Chubei Itoh II was replaced by a more consensus-oriented presidential form of management.

The decade of the 1930s was a difficult period for Japanese business and politics. Right-wing militarists had terrorized their way to power and threatened not only to nationalize the nation’s industries, but to dominate all of East Asia and the western Pacific. In the short term, the zaibatsu and other large companies stood to benefit greatly because they were the primary suppliers of machinery, weapons, and provisions to the growing Japanese military. In the long term, however, these same militarists had pledged to nationalize the zaibatsu and other companies. The Itoh companies were only three of hundreds that were placed in the difficult position of collaborating with the military government.

The militarists led Japan into a war against China in 1937, and later against Britain in 1940, and the United States in 1941. That year Itoh merged with Marubeni & Company and Kishimoto & Company to form a new company called Sanko K.K. The concentration of resources was intended to facilitate greater efficiency and conserve limited resources.

Despite the position of Japanese industry and the military, neither had the ability to mobilize or develop new technologies quickly enough to prevent the Allies from turning the war in their favor. Matters became particularly desperate when the Japanese mainland (and its factories) came within range of American bombers. In 1944, as part of an effort to rationalize Japanese industry, the government ordered Sanko, Daido Trading, and a subsidiary of Itoh called Kureha Textiles to merge. The new company, called Daiken Manufacturing, existed for about a year before Japan surrendered.

Postwar Reorganization

After the war, the military occupation authority, “SCAP” (for Supreme Commander of Allied Powers), implemented a complete reorganization of Japanese industry. Many American style commercial laws were enacted, including an antimonopoly law which outlawed the zaibatsu. Although Daiken (Itoh) was not as large as the zaibatsu, SCAP ordered it divided into several companies.

When the reorganization was completed in 1949 C. Itoh & Company, Ltd.; Kureha Cotton Spinning Co., Ltd.; Marubeni Co., Ltd.; and a small manufacturer of nails called Amagasaki Nail Works, Ltd. were made independent companies under separate management groups. Both Itoh and Marubeni were given the authority to conduct both domestic and international business. Itoh exported Japanese textile products on a barter basis in return for foreign grain. The trade was stable and profitable, and enabled the company to establish itself quickly. In 1950 Itoh trade representatives were dispatched to India, Pakistan, and the United States. The United Nations war effort in Korea necessitated a change in commercial policies in Japan. On short notice Japanese companies, including Itoh, were contracted to supply food, clothing, and other provisions to United Nations forces in Korea. Itoh, which had already established an international network of suppliers, was quickly prepared to meet the sudden increase in business. The company product line, long dominated by textile products, was diversified to include petroleum, machinery, aircraft, and automobiles.

When the Korean War ended in 1952 many of Itoh’s military contracts were canceled. The demobilization in Korea caused a serious recession during 1953 and 1954. Hundreds of smaller trading companies were forced into bankruptcy. C. Itoh, however, was larger and better able to endure the poor economic conditions. It later took over the business of the smaller bankrupt companies and continued to expand its product line.

Unlike the former zaibatsu groups, the postwar Itoh companies (C. Itoh, Marubeni, and Kureha) did not merge back together. During this period zaibatsu groups circumvented many antimonopoly laws by coordinating their individual company strategies through banking groups (called keiretsu). C. Itoh was neither a prewar zaibatsu nor a member of a postwar keiretsu group. During the later 1950s, however, the company accumulated enough capital to begin large-scale lending operations.

Evolving from Sogo Shosha to Holding Company: 1960s–90s

C. Itoh & Company and keiretsu group leaders such as Mitsui Bussan, Mitsubishi, and Sumitomo were engaged primarily in trading. They became know as sogo shosha, or “general trading companies.” C. Itoh experienced strong growth during the 1960s, particularly on the strength of its trading activities. An international information network was created which made the company more responsive to business opportunities around the world.

In the late 1960s Itoh identified an opportunity to develop a nickel and cobalt mine at Greenvale in northeastern Australia. Itoh, in partnership with Australian interests, Mitsubishi, and Nissho Iwai, started the project in 1971. Raw materials from the mine were to be sold to Kawasaki Steel and Nisshin Steel, among others, and used to produce stainless steel.

When OPEC countries forced a dramatic increase in the price of oil in 1973, oil-dependent countries such as Japan found themselves seriously vulnerable to inflation and interruptions of supply. C. Itoh recognized this as an area of great opportunity. In coordination with C. Itoh Fuel Company, Itoh invested heavily in the development of new technologies for petroleum production.

In the mid-1970s the Japanese government became concerned about another trading company called Ataka & Co., Ltd., which was nearly bankrupt. Ataka had gained a reputation for mismanagement and inefficiency. It was repeatedly warned by banks and the government to practice greater discipline. When it appeared that Ataka’s demise was inevitable, the Japanese government stepped in. In order to prevent the failure of such a large company (Ataka was Japan’s tenth largest trading firm), the government hastily arranged for a major portion of it to be absorbed by Itoh. When the merger was affected on October 1, 1977, C. Itoh & Company moved from being the fourth to the third largest Japanese trading firm. The merger greatly increased Itoh’s interests in steel and chemicals, and further reduced textiles to about 20 percent of total sales volume.

In addition to its trading activities, C. Itoh was involved in a number of large industrial projects in the 1980s, acting as a coordinator and providing financial support. Itoh’s largest foreign projects were the Hassi-R’Mel natural gas plant in Algeria, a cashmere factory in Mongolia, the Baoshan steel complex near Shanghai (led by Nippon Steel), and the Kaduna oil refinery in Nigeria (with Chiyoda Chemical). Early in 1987, however, Itoh backed out of the Greenvale Mine project when it appeared that demand for nonferrous metals would not recover. The company was also involved in the development of natural resources, including petroleum products and uranium, and metals (despite ending its involvement with Greenvale).

The late 20th century was marked by the steady decline of the traditional sogo shosha activities-providing marketing, financial, and distribution services to other companies. Their customers grew more powerful thanks to the help of the trading companies, but as their customers grew in size they increasingly decided to bring in-house the services they had once paid the sogo shosha to perform. As noted in a 1988 Financial World article, the trading companies were putting themselves out of business.

Under the leadership of president Isao Yonekura, Itoh responded to this fundamental shift by adding to its trading activities longer term equity investments in joint ventures and affiliates actually producing products and services—thereby shifting from a pure trader to more of an investment holding company. Two of the main areas for the company’s investments were the related fields of telecommunications and multimedia. In 1985 Japan Communications Satellite Co. (JCSAT) was formed as a joint venture of C. Itoh (40 percent), Hughes Communications (30 percent), and Mitsui (30 percent). Four years later JCSAT became the first company in Japan to launch and operate a private communications satellite. In 1991 Itoh and Toshiba Corporation each contributed US$500 million to gain a combined 12.5 percent stake in Time Warner Inc.’s movie, television, and cable TV businesses. The partners also formed a joint venture, Time Warner Entertainment Japan Corp., to operate Time Warner’s operations in Japan, including home video, movie, and TV program distribution. Itoh and Toshiba each held 25 percent of this venture, with the U.S. firm holding the remaining half. In 1992 C. Itoh & Co. changed its name to ITOCHU Corporation, adopting a transliteration of its Japanese name. At the time of the name change, ITOCHU had held the position as the largest of the sogo shosha for several years; consolidated sales for the year ending in March 1992 stood at ¥20.6 trillion (US$154 billion).

The bursting of the late 1980s Japanese economic bubble led to prolonged difficulties for most of the sogo shosha. As a byproduct of the stagnation of their core trading activities, nearly all of the sogo shosha had diversified aggressively into financial investments during the speculative bubble, which reached its peak in 1988–89. The trading companies built up large stock portfolios and became hooked on the revenues they could gain through arbitrage (or zaiteku, as it is known in Japan). Once the bubble burst, the sogo shosha were left with huge portfolios whose worth had plummeted; the companies were forced to eventually liquidate much of their stock holdings. ITOCHU’s troubles were even greater because the company had made large investments in the hot Japanese real estate market during the bubble. In fiscal 1994 ITOCHU recorded about US$662 million in extraordinary losses to write off insolvent financial and real estate subsidiaries and other nonperform-ing assets. This led the company to post a net loss of ¥14.13 billion (US$137.5 million) for the year.

The entire decade of the 1990s was a challenging one for the sogo shosha not only because of the lingering effects of their overzealous 1980s investments but also due to the stagnant Japanese economy of the early and mid-1990s, the Asian economic crisis that began in 1997, and the Japanese recession that followed the latter. ITOCHU was heavily involved in such troubled nations as Thailand and Indonesia. In late 1997, then, ITOCHU continued to restructure with the disposal or writing off of ¥230 billion (US$1.8 billion) in bad loans and nonperforming assets. This led to an even larger loss of ¥91.93 billion (US$713.9 million) for fiscal 1998. Still reeling from its financial difficulties, the company raised additional cash—US$1.17 billion—through the sale of its Time Warner stake in three separate transactions in 1998 and 1999. Losses for fiscal 1999 were reduced to ¥34.09 billion (US$283 million), but the company did not pay a dividend for the first time in 50 years. By this time, ITOCHU had fallen to the number three position among sogo shosha, having been surpassed by Mitsui and Mitsubishi.

Under the leadership of President and CEO Uichiro Niwa, ITOCHU in April 1999 initiated a two-year strategic plan called Global-2000. A key aspect of the plan was the shifting of the company to a holding company structure, with ITOCHU’s seven division companies gaining greater management autonomy. Headquarters staff would be slashed from 280 to about 100 and would be responsible only for corporate planning and auditing. In another streamlining move, the company’s board of directors would be reduced from 45 members to between 10 and 15. In addition, consolidated subsidiaries would be reduced by about one-third by March 2001, with a goal of increasing the portion of profitable subsidiaries from about 60 percent to 80 percent. The increased emphasis on profitability was a major shift for a trading company as the sogo shosha had traditionally valued market share and sales growth ahead of returns on investments. The newfound pursuit of profits was also evident in the industries ITOCHU targeted for future growth, which included such potentially lucrative fields as information, multimedia, and financial services. It was difficult to predict whether the Global-2000 program would position ITOCHU to profitably succeed in the more highly competitive, deregulated environment of the early 21st century. But the October 1999 announcement of yet another huge nonperforming asset writeoff—this one concentrating on real estate projects and totaling ¥253 billion (US$2.38 billion)—was certain to lead the company to its largest net loss yet for the fiscal 2000 year.

Principal Subsidiaries

ITOCHU has 1,027 subsidiaries and associated companies in more than 80 countries. Its overseas trading subsidiaries are: ITOCHU International Inc. (U.S.A.); ITOCHU Latin America S.A. (Panama); ITOCHU Brasil S.A. (Brazil); ITOCHU Europe PLC (U.K.); ITOCHU Deutschland GmbH (Germany); ITOCHU France S.A.; ITOCHU Italiana S.p.A. (Italy); ITOCHU Middle East E.C. (Bahrain); ITOCHU Australia Ltd.; ITOCHU Asia Pte., Ltd. (Singapore); ITOCHU Hong Kong Ltd.; ITOCHU (China) Holding Co., Ltd.; ITOCHU Taiwan Corporation.

Principal Divisions

Textile Company; Plant, Automobile & Industrial Machinery Company; Aerospace, Electronics & Multimedia Company; Metals & Minerals Company; Energy & Chemical Company; Food, Forest Products & General Merchandise Company; Finance, Realty, Insurance & Logistics Services Company.

Principal Competitors

Archer-Daniels-Midland Company; Daewoo Group; Hutchison Whampoa Limited; Hyundai Group; Inchcape pic; Jardine Matheson Holdings Limited; Kanematsu Corporation; LG Group; Marubeni Corporation; Mitsubishi Corporation; Mitsui & Co., Ltd.; Nichimen Corporation; Nissho Iwai Corporation; Samsung Group; Sumitomo Corporation; Swire Pacific Limited; TOMEN Corporation.