Sumitomo Corporation
Corporate History & Strategy

The Sumitomo zaibatsu had no trading company division throughout the prewar era. During the First World War (1914–1918), Japanese trading companies expanded rapidly on the back of wartime prosperity, but many fell into financial difficulties during the postwar recession, exposing the risks of speculative commerce. In 1920, Masaya Suzuki, the chief director of the Sumitomo zaibatsu, issued a 'Declaration Prohibiting the Establishment of a Trading Company,' explicitly banning any entry into the trading business. The Sumitomo zaibatsu had its origins in the Besshi Copper Mine and was centered on the mining and manufacturing industries, and the lack of personnel experienced in commerce was also cited as grounds for the prohibition.

While the Mitsui zaibatsu had Mitsui Bussan and the Mitsubishi zaibatsu had Mitsubishi Shoji as their respective trading arms, the Sumitomo zaibatsu faithfully adhered to its management philosophy of 'not pursuing fleeting profits' and operated as a zaibatsu without a trading company. Suzuki's declaration was not merely a policy statement—it carried such binding force that for the next 25 years, no one within Sumitomo dared to raise the subject of establishing a trading company. The existence of this prohibition became a source of organizational tension when Sumitomo Corporation was eventually established after the war.

With the end of the war in August 1945, the Sumitomo zaibatsu faced an existential crisis. Military demand had vanished and overseas commerce had become difficult, making the urgent task of securing livelihoods for demobilized employees a pressing challenge. Mining and manufacturing alone could not absorb the employment, and opening up new business areas was unavoidable.

Chief Director Shunnosuke Furuta decided at this juncture to revoke the 25-year-old 'Declaration Prohibiting the Establishment of a Trading Company.' In November 1945, a trading division was established using the Sumitomo group company 'Nippon Kensetsu Sangyo' as its foundation. Shunya Taji, a former division head at Sumitomo Metal Industries, was appointed as the first president, and in 1952 the company was renamed 'Sumitomo Corporation.'

Furuta is said to have later remarked, 'I was the one who created the trading company. Do your best.' The decision to break a 25-year prohibition, even though it was to protect employee livelihoods, represented a significant exception to Sumitomo's management principles, and it was largely attributable to Furuta's personal resolve.

The establishment of Sumitomo Corporation represented an entry into a domain that the zaibatsu had explicitly prohibited. Therefore, if Sumitomo Corporation's performance were to deteriorate, it would be an intolerable situation for the entire Sumitomo Group, as it would call into question the very judgment to revoke the 'No Trading Company' declaration.

As a result, Sumitomo Corporation's fundamental management policy leaned toward risk avoidance. The company eschewed large-scale business investments and speculative transactions, positioning itself as a conservative trading company focused on serving the sales functions of Sumitomo Group companies. During the 1970s and 1980s, while Mitsubishi Corporation pursued major projects such as the Brunei LNG venture and Mitsui & Co. the Iran IJPC project, Sumitomo Corporation opted not to participate in such large-scale undertakings.

Sumitomo Corporation's risk-averse stance can be understood less as a deliberate management philosophy and more as something structurally determined by its origins as 'a company born from breaking a forbidden rule.' While rival trading companies suffered from the Lockheed scandal and massive losses at IJPC, Sumitomo Corporation maintained relatively stable performance and steadily improved its standing within the industry.

On June 14, 1996, Sumitomo Corporation disclosed an internal scandal involving copper trading. Yasuo Hamanaka, head of the Non-Ferrous Metals Division, had conducted off-the-books trades on the LME (London Metal Exchange) without going through Sumitomo Corporation for approximately 10 years from 1987 to 1996, generating losses of approximately 285 billion yen.

Hamanaka was known in the global copper trading market as a figure who moved '5%' of the world's copper trading volume, earning him the industry nicknames 'Mr. Five Percent' and 'Mr. Copper.' Hamanaka, who publicly declared that he had 'devoted his life to copper trading,' built long positions off the books in anticipation of rising copper prices, but the market did not move as expected and losses expanded.

Sumitomo Corporation was a trading company that had upheld 'not pursuing fleeting profits' as its fundamental management philosophy and had pursued risk-averse management. The fact that a single trader could continue off-the-books trading for 10 years within such an organization exposed a blind spot in its management control systems.

Sumitomo Corporation filed a criminal complaint against Hamanaka for breach of trust, and he was arrested and indicted on charges of forgery of private documents with seals and fraud. In handling the incident, what Sumitomo Corporation prioritized most was maintaining its international credibility. Copper is a commodity traded on global markets centered on the LME, and depending on how Sumitomo Corporation responded, market order itself could have been affected.

President Kenji Miyahara (at the time) judged that 'what we must be most careful about is not losing our international credibility,' and made full cooperation with the U.S. Commodity Futures Trading Commission (CFTC) and the UK Securities and Investments Board the top priority. Regarding the timing of the disclosure, while acknowledging that 'we would have preferred to announce after learning more details,' the company went ahead with the announcement on June 14 out of consideration for the UK and US authorities.

The incident was handled by a team of approximately 100 people within Sumitomo Corporation, with an awareness of minimizing the impact on copper markets. Drawing on the precedent of Daiwa Bank's overseas scandal, which had led to deteriorating relations with US authorities, Sumitomo Corporation placed cooperation with foreign authorities as its top priority in handling the incident.

In the fiscal year ending March 1997, Sumitomo Corporation recorded a special loss of 285.2 billion yen under 'copper trading-related losses,' and the net loss for the period reached 145.6 billion yen. For Sumitomo Corporation, following the 1996 copper incident, this was the largest-ever loss in its history.

The financial impact was enormous, but the losses were within a range that could be absorbed by Sumitomo Corporation's equity. Total shareholders' equity decreased from approximately 714.8 billion yen at the end of FY1995 to 558.2 billion yen at the end of FY1996, and the equity ratio fell from 13.2% to 10.3%. The company did not fall into negative equity, and the levels were not at a point that would impede business continuity.

The fact that speculative actions by a single individual caused approximately 280 billion yen in losses at Sumitomo Corporation, a company that had espoused risk avoidance, demonstrated the limits of its organizational management system. At the same time, the equity accumulated through years of conservative management served as a buffer to absorb losses of this magnitude.

In 2005, Sumitomo Corporation decided to participate in the Ambatovy Nickel Project in Madagascar, one of the world's largest integrated nickel mining and refining operations. It was a three-company joint venture with Sherritt International (Canada) and Korea Resources Corporation, with Sumitomo Corporation investing 47.7% to lead the project. Sumitomo Corporation's investment amount was not disclosed but is estimated at over 260 billion yen.

The total investment for the project was initially estimated at $3.7 billion (including borrowings), but costs ballooned during the construction phase, ultimately reaching $7.2 billion—approximately double the original estimate. Since its founding, Sumitomo Corporation had maintained a risk-averse policy of not participating in large-scale projects. The participation in Ambatovy represented a clear departure from that long-standing policy.

Ambatovy commenced operations in 2012, and mining and refining of nickel began. However, plant equipment malfunctions occurred and nickel prices entered a downturn, causing the project's profitability to fall far short of the initial plan.

In the fiscal year ending March 2016, Sumitomo Corporation recorded an impairment loss of 77 billion yen related to Ambatovy. The structure in which returns could not keep pace with the scale of investment became apparent, and Sumitomo Corporation continued to record impairments on this project thereafter.

Ambatovy was a symbolic project in which Sumitomo Corporation departed from its 'conservative management' policy and ventured into a large-scale resource investment. However, the doubling of construction costs, equipment malfunctions after the start of operations, and a prolonged slump in nickel prices combined to create a structure in which the investment could not generate returns commensurate with the amount invested.

For Sumitomo Corporation, which had built its competitive advantage on the organizational principle of risk avoidance, the outcome of Ambatovy was ironic. A trading company that had achieved its relative superiority by not taking risks ended up saddled with its largest loss-making project through a change in course. This structure cascaded into the massive impairments across resource investments in the fiscal year ending March 2015, and further into cumulative impairments on Ambatovy alone.