ITOCHU Corporation
Corporate History & Strategy

In 1858 (Ansei 5), the first Chubei Ito (then 15 years old) and his elder brother, the sixth Chobei Ito, started a business wholesaling linen cloth. Both hailed from Toyosato Village in Omi Province, an area known as a base for Omi merchants where commerce thrived. Chubei Ito worked as an Omi merchant peddling linen cloth, with his sales territory spanning the entire Kansai region, and he reportedly also traveled to the Kyushu area at times. The joint founding by the two brothers constitutes the origin of what would become ITOCHU Corporation.

However, while peddling was profitable in the Edo period when transportation was undeveloped, the expansion of transportation networks through 'steamships and railroads' after the Meiji Restoration reduced the scope for intermediaries. As production areas and consumption centers became directly connected, it became difficult for peddlers to earn margins in between. With profits increasingly hard to secure, the first Chubei Ito began seeking a way out of the peddling business.

In 1872 (Meiji 5), the first Chubei Ito opened 'Benichu' in Honmachi, Osaka, and began dealing in kimono fabrics and cotton goods. In 1884, the business was renamed 'Ito Honten.' ITOCHU's strategy in early Meiji was geographical expansion, opening a Kyoto branch in 1882 to establish multiple locations. From around 1885, the company made a full-scale entry into overseas trading, setting up bases in Kobe and San Francisco to build a system for importing and selling sundry goods from Europe and America.

At the time, the mainstream approach to trading was through 'foreign trading houses,' and it was rare for Japanese trading companies to directly engage in sundry goods imports. ITOCHU and Morimura-gumi were reportedly the only Japanese firms handling sundry goods imports, making ITOCHU a domestic pioneer in the trading business. Stepping beyond the Omi merchant tradition of peddling to embark on direct overseas transactions set the direction for the company's later development as a trading house.

The turning point for ITOCHU in its founding period was the start of cotton imports from China. Following the end of the Sino-Japanese War in 1895, the company entered Shanghai that same year and entered the cotton yarn import business. By quickly securing import routes from the source, ITOCHU established its business model as a 'textile trading house' that sold imported cotton yarn to spinning companies concentrated in the Osaka area.

Throughout the Meiji and Taisho eras, spinning companies were emerging around Osaka, and ITOCHU built its position as a textile trading house by quickly recognizing the end of the Sino-Japanese War as a business opportunity and handling cotton imports from China. The process of progressively transforming its business from peddling to store management, trading, and then cotton imports embodied the Omi merchant approach of adapting business models in response to environmental changes.

In 1914, the second Chubei Ito (then 28 years old) assumed leadership of ITOCHU. To modernize management, he established 'Itochu Gomei Kaisha' that year by consolidating the Ito family's businesses, and in 1918 reorganized it into a joint-stock company, transforming it into a modern corporate organization. In parallel with organizational restructuring, he developed overseas bases, building a trading network comprising 4 branches (Tokyo, Kobe, Shanghai, Manila) and 6 representative offices (Yokohama, Hankou, Tianjin, Qingdao, Calcutta, New York).

In terms of business performance, World War I from 1914 to 1919 provided a tailwind. As European nations requisitioned vessels for military purposes, opportunities opened up for Japanese companies in overseas trade, and ITOCHU reportedly secured massive profits by exploiting this supply-demand gap. For ITOCHU, which had deployed trading bases primarily along the Pacific coast, the absence of European competitors during wartime presented an opportunity to expand its commercial territory.

With the end of World War I in 1919, the wartime boom came to an end. In 1920, ITOCHU fell into the red, and as its financial position rapidly deteriorated, the company decided on large-scale workforce reductions and business restructuring. In this process, Marubeni Shoten was separated, and the sibling companies of ITOCHU and Marubeni parted ways.

The core of the management restructuring was to concentrate resources on cotton yarn trading and divest the unprofitable trading division. The trading division was separated as Daido Trading, and ITOCHU sought survival as a 'cotton trading house.' Nevertheless, the business environment remained challenging throughout the Taisho era, and the company spent extended periods reducing debt. The wartime profits did not translate into a long-term growth foundation.

The business scale that had expanded during the World War I boom became excessive relative to the postwar contraction in demand. While the organization and bases had been rapidly expanded, the revenue structure dependent on wartime special demand was not sustainable during peacetime. The separation of Marubeni and the divestiture of the trading division were primarily measures for survival through business reduction.

As a result, ITOCHU survived by narrowing its focus to cotton trading, but its diversification as a general trading company retreated. The cycle of expanding during wartime booms and being forced to contract during postwar recessions is a recurring structural pattern in the history of Japanese trading companies. This experience also became the starting point for ITOCHU's later pursuit of expansion into non-textile fields.

Entering the 1960s, ITOCHU sought to break away from its heavy dependence on textiles and made expanding non-textile fields a management priority. The most significant decision in this effort was the entry into oil refining and oil extraction. In May 1963, the company began exploring entry into the oil refining business, and in 1965, it acquired a 38.5% stake in Toa Oil, a listed company primarily engaged in oil refining. The opportunity arose when Arabian Oil, a major shareholder, decided to divest its shares, allowing ITOCHU to acquire them.

The principal investment in Toa Oil was the construction of the new 'Chita Refinery.' Around 1970, pollution problems were becoming severe in Japan, and Toa Oil committed to the local government to introduce environmentally conscious equipment when building the Chita Refinery. As part of this, a gasification desulfurization system was installed, and an estimated 50 billion yen was invested in construction and equipment for the Chita Refinery.

In 1969, ITOCHU acquired a partial stake in U.S.-based IAPCO for $20 million, securing oil extraction rights off the coast of Java, Indonesia. The concession off the coast of Sumatra was at a stage where the feasibility of oil extraction had not yet been confirmed, but ITOCHU decided to invest despite this uncertainty. By acquiring extraction rights in addition to oil refining (Toa Oil), ITOCHU pursued a 'Japanese Major' vision of handling the entire oil business from upstream to downstream.

In 1971, IAPCO successfully reached oil in the concession off the coast of Sumatra. A system was realized where the extracted crude oil would be refined at Toa Oil's Chita Refinery, and ITOCHU's Japanese Major vision took tangible form. In the transformation from a textile trading house to a general trading company, the oil business became the investment involving the largest scale of capital.

With IAPCO's successful extraction, ITOCHU established a system handling everything from oil extraction to refining. At the Chita Refinery, the installation of gasification desulfurization equipment enabled compliance with environmental regulations while expanding refining capacity. For ITOCHU, which was seeking to break away from being a textile trading house, the oil business was the most important investment in the non-textile domain.

However, this oil business would face severe trials from currency fluctuations and the oil shocks of the 1970s onward. Insufficient hedging of currency risk became the underlying cause of the massive losses later incurred at Toa Oil. For ITOCHU, for which expansion into non-textile fields was an urgent priority, the oil business was both the biggest bet and the investment carrying the greatest risk.

Ataka & Co. was known as a major general trading company, with revenue reaching 2 trillion yen at its peak in FY1974. However, the company incurred massive losses in its Canadian oil refining business (the NRC Project), accumulating 200 billion yen in bad debts and falling into de facto bankruptcy. In FY1977 (ending March), Ataka reported a net loss of 133 billion yen, and Sumitomo Bank, Ataka's main bank, decided to rescue the company.

Sumitomo Bank requested ITOCHU, which was also in a main bank relationship with Sumitomo, to absorb and merge Ataka as a fellow trading company. Shoichi Echigo (ITOCHU President at the time) considered it an 'obligation' that Sumitomo Bank had provided financing when ITOCHU was struggling with financial deterioration in 1964. He therefore made the decision to accept the rescue merger of Ataka as a way of repaying his debt of gratitude to Sumitomo Bank.

In October 1977, ITOCHU decided to merge with Ataka & Co. While acquiring valuable trading rights held by Ataka in areas such as 'steel (including transactions with Nippon Steel) and chemicals,' the company declined to acquire businesses that were unprofitable or had lost their trading rights due to personnel departures (machinery, textiles, pulp, lumber). Of Ataka's 3,661 employees, only 1,058 transferred to ITOCHU, with approximately 2/3 losing their jobs through voluntary retirement.

For ITOCHU, the Ataka merger provided an opportunity to expand trading rights in non-textile fields. The steel division's transactions with Nippon Steel were particularly important trading rights for ITOCHU as it sought to break away from textile dependence. However, the fact that the merger was motivated not by strategic business rationale but by obligation to its main bank characterizes the nature of this merger.

Through the rescue merger of Ataka & Co., ITOCHU expanded its trading base in non-textile divisions, primarily steel. The declining textile ratio began to improve the business balance as a general trading company. The scheme of selectively acquiring valuable trading rights was designed to limit the risks associated with the merger.

On the other hand, this merger was distinctive in that the decision was motivated by 'obligation to the main bank.' Shoichi Echigo reportedly responded immediately to Sumitomo Bank's request with 'I will repay the debt of 39 years,' a decision made on a dimension different from business rationality. As a case in which the main bank relationship dictated a major management decision of a trading company in postwar Japanese corporate society, this merger holds structural significance.

The Nixon Shock of 1971 and the Oil Shock of 1973 ushered in an era of major fluctuations in currency exchange rates and crude oil prices. Business profitability became dependent on oil purchasing and sales conditions, but the executive responsible for ITOCHU's oil business failed to adequately hedge these currency risks. The younger brother of Shoichi Echigo (ITOCHU President at the time) served as the representative of Toa Oil, but management did not improve.

In the fiscal year ending March 1976, Toa Oil reported an ordinary loss of 12 billion yen, and the Chita Refinery's utilization rate declined to 60% by the fiscal year ending March 1978. The Chita Refinery, in which an estimated 50 billion yen had been invested as environmentally conscious equipment, fell into unprofitable operation due to the declining utilization rate. While ITOCHU had positioned the oil refining business as a pillar of its non-textile expansion, the company could not keep pace with managing currency and crude oil price risks.

In the late 1970s, ITOCHU established an internal 'Toa Oil Problem' project, and in 1978 decided on a policy of business reduction. That year, the company decided to transfer management control of Toa Oil and sold a portion of its shares. In March 1985, it sold its remaining shares (approximately 10%) to Showa Shell, completing its full withdrawal from Toa Oil.

The cumulative losses ITOCHU incurred related to Toa Oil reportedly amounted to approximately 130 billion yen. Despite building an integrated system from oil extraction to refining in the 1960s aspiring to become a 'Japanese Major,' inadequate management of currency and crude oil price fluctuation risks was the structural cause of the massive losses. Shoichi Echigo reflected that he had 'done the worst thing at the best of times.'

To strengthen its food distribution business, ITOCHU acquired a 29% stake in FamilyMart (then part of the Seiyu Group) in 1998 for an estimated approximately 100 billion yen. Partnering with group food trading companies such as ITOCHU-Shokuhin, the company pursued downstream business development through the convenience store retail channel. Subsequently, ITOCHU made additional share acquisitions in 2014 and 2016, and in 2018 invested approximately 120 billion yen to further increase its ownership ratio.

In September 2016, the management integration with Uny Group Holdings formed 'Uny-FamilyMart Holdings,' and in January 2019, Uny's shares were sold to Don Quijote Holdings, establishing a structure focused on the convenience store business. In 2020, a tender offer was conducted to acquire 94.7% of shares for an estimated 580 billion yen, completing the consolidation of FamilyMart as a consolidated subsidiary. This was a staged acquisition spanning 22 years from the initial investment in 1998.

While FamilyMart became a core entity in ITOCHU's food business, Seven-Eleven had established an overwhelming dominant position in the domestic convenience store industry. Seven-Eleven built unassailable profitability through dominant-area store openings and logistics network development through vendor collaboration, and FamilyMart has been unable to compete effectively, remaining in second place in the industry.

ITOCHU invested a cumulative estimated total of over 800 billion yen in FamilyMart from 1998 to 2020, but has not been able to narrow the profitability gap with the industry leader. While the business model of a trading company directly operating a convenience store business has the advantage of managing the entire food distribution chain from upstream to downstream, it also entails continually facing the competitive environment inherent to the retail industry.

In April 1972, ITOCHU established 'ITOCHU Data System' as a wholly owned subsidiary. This is the origin of today's CTC (ITOCHU Techno-Solutions). At founding, the staff numbered approximately 100, but reportedly only a handful of employees had experience with computers, which were expensive at the time. The main business at founding was handling magnetic tapes for computers.

By 1989, ITOCHU had consolidated its system-related subsidiaries into 'ITOCHU Techno-Science,' and in 2006 changed the trade name to 'ITOCHU Techno-Solutions.' The CTC abbreviation derives from 'C.ITOH TECHNO-SCIENCE CO., LTD' and has been in use since the ITOCHU Techno-Science era. As an entity providing system equipment sales and system integration as services, CTC grew from being a trading company's IT subsidiary into an independent enterprise.

CTC's business model was to acquire domestic sales rights from overseas IT equipment manufacturers and provide both equipment sales and system integration to Japanese companies as a bundled service. This was a form of applying the trading company approach of 'securing trading rights' to the IT field—a business model unique to an ITOCHU subsidiary.

The catalyst that propelled CTC's business was the acquisition in 1984 of domestic sales rights for Unix workstations from U.S.-based Sun Microsystems. At the time, Sun Micro was a venture company, but department head Hiroo Satake (later CTC chairman) recognized the potential of UNIX and, sympathizing with Sun Micro's vision of 'open systems,' obtained the sales rights.

Subsequently, CTC established a method of quickly discovering U.S. venture companies and securing exclusive domestic sales rights. In 1992, CTC began selling products from both Cisco Systems and Oracle in rapid succession. The approach of focusing on products from growth-stage venture companies rather than established products from major manufacturers, and proactively securing sales rights, became the source of CTC's competitive advantage.

In 1994, Hiroo Satake was appointed CTC president (then 63 years old). From building the relationship with Sun Micro to becoming CTC's top executive, he consistently promoted the expansion of business with U.S. IT companies. As domestic internet adoption grew throughout the 1990s, demand for server equipment and other products increased, and CTC grew to report consolidated revenue of 175.3 billion yen and ordinary income of 8.7 billion yen in FY1999 (ending March).

In December 1999, ITOCHU listed CTC shares on the stock exchange. In a stock market caught in the dot-com bubble, CTC shares received high valuations, with the opening price market capitalization reaching 1.1 trillion yen. The listing came at a time when investor expectations for IT-related companies were overheated, making CTC one of the emblematic stocks of the dot-com bubble.

At the time of CTC's listing, ITOCHU sold approximately 30% of its holdings and recorded extraordinary gains. These sale proceeds were allocated to the disposal of non-performing assets, primarily real estate acquired during the bubble era. In processing the 395 billion yen in extraordinary losses that ITOCHU recorded in FY2000 (ending March), the proceeds from CTC's share sale covered a portion.

The IT subsidiary established in 1972 had, after 27 years, become an entity that supported its parent company's financial restructuring. While the timing of CTC's listing coinciding with the dot-com bubble was largely coincidental, it functionally served as the groundwork for ITOCHU's survival as an independent general trading company.

Following the burst of the bubble economy, the value of real estate held by ITOCHU declined and its financial condition rapidly deteriorated. The primary cause was that investments in real estate including golf courses uniformly fell into unrealized losses. By the fiscal year ending March 1998, total interest-bearing debt reached 5.2 trillion yen, and debt repayment became the most pressing management issue.

In November 1997, ITOCHU announced a 'management improvement plan,' planning to improve its financial position through the sale of real estate and subsidiary shares. In April 1998, Uichiro Niwa was appointed as the new president, accelerating management reform centered on disposal of non-performing assets. While the measures were primarily about cleaning up after bubble-era investments, a change in leadership was effected to carry them through.

In FY2000 (ending March), ITOCHU recorded 395 billion yen in extraordinary losses, writing off the negative legacy primarily of real estate acquired during the bubble era in one batch. Through recording corporate tax adjustments of 129.8 billion yen and utilizing the proceeds from the sale of CTC shares listed in December 1999, the net loss was contained to 163.2 billion yen.

The structure of offsetting the real estate bubble's negative legacy with the proceeds from listing an IT subsidiary during the dot-com bubble was the result of two bubbles intersecting with a time lag. Without the timing of CTC's listing, the one-time disposal of non-performing assets might not have been feasible. Under Uichiro Niwa's leadership, financial restructuring progressed, and ITOCHU secured its path to survival as an independent general trading company. In 2001, the company also embarked on post-restructuring business reorganization, including listing subsidiary ITOCHU-Shokuhin and establishing ITOCHU-Marubeni Steel.

ITOCHU entered China in 1972 and was designated a 'Friendship Trading Company' by the Chinese government. It subsequently deepened its relationship with the Chinese government, signing a comprehensive strategic alliance with CITIC (China CITIC Group) in January 2011. CITIC was a Chinese state-owned enterprise with net income reaching 730 billion yen in FY2013. It was a conglomerate centered on financial services (primarily trust and securities), also engaged in real estate, construction, resource development, and aluminum manufacturing.

In July 2014, ITOCHU signed a strategic business and capital alliance with Thailand's C.P. Group. ITOCHU and C.P. each contributed 50% to establish a joint venture company, CTB, through which they would acquire a combined 20% stake in CITIC. ITOCHU's investment amounted to 689 billion yen, the largest investment by a Japanese company in a Chinese enterprise in history.

In January 2015, ITOCHU acquired a 10% stake in CITIC. Financial services accounted for 80% of CITIC's business, and the company was said to be targeting expansion in non-financial fields going forward. ITOCHU positioned itself as a partner for CITIC in consumer-related fields, with then-President Masahiro Okafuji explaining that 'by making a capital alliance, we aim to achieve greater results.'

However, due to CITIC's deteriorating performance, ITOCHU recorded an impairment loss of 143.3 billion yen related to CITIC in FY2019 (ending March). This represented an impairment of approximately 20% against the 689 billion yen investment. While the relationship built over 43 years since entering China in 1972 culminated in a large-scale investment, the structure inherently carried the risk of being linked to the performance fluctuations of a state-owned enterprise.