(FORTUNE Magazine) – By the reckoning of some learned analysts, the world's largest company--Mitsubishi Corp. of Tokyo--should roll over and die. Mitsubishi, as they see it, is a lumbering, prehistoric beast that has outlived its epoch and no longer fills a place in the commercial food chain. The same goes for the other huge Japanese trading companies that with Mitsubishi fill six of the top ten spots on this year's FORTUNE Global 500 list. The doomsday analysts have a point. The core business that built the trading companies--hauling raw materials into Japan and speeding finished goods out into the world--has been declining for more than a decade.

Mitsubishi's annual revenues of $176 billion are indeed gigantic. Imagine a company whose sales equal those of General Motors, the largest U.S. corporation, with Dow Chemical's revenues piled on top. Not impressed yet? Try this. Mitsubishi's revenues are bigger than those of AT&T, Du Pont, Citicorp, and Procter & Gamble combined. In serving its 45,000 customers, Mitsubishi moves as many as 100,000 products, from kernels of corn to huge power generators, around the world. Among the dozens of properties it owns outright are all or parts of cattle feedlots and coal mines in Australia, pulp mills and iron ore mines in Canada, copper mines in Chile, a resort in Hawaii, and the liquefied natural gas fields off the coast of Brunei that have made the sultan of that tiny state one of the world's richest men (he's worth about $37 billion).

Now here's the pin that punctures the balloon. The sultan may be thriving, but Mitsubishi is scraping by on meager earnings of $219 million. That translates into a pintsize profit margin of just 0.12%. The other big trading companies, or sogo shosha as they are known in Japan, suffer similarly. Even at their best in the 1960s and 1970s, profit margins were never higher than 3% or so; now rising costs threaten to swallow those earnings altogether. The image that Mitsubishi brings to mind is that of a monster munching the flora in a warm swamp, while slowly but inexorably sinking.

Still, this particular beast happens to be a very smart monster, as well as a very well-connected one. Minoru Makihara, Mitsubishi's chief executive since 1992, is keenly aware that the footing is dangerous. His challenge: to persuade subordinates, who may have become too comfortable, that the need for transformation is urgent. "We have to change the contents of our business," says Makihara. "But in order to change the business, I have to create a sense of crisis. If you are running IBM, you can create a sense of crisis by firing people. Tradition won't allow me to do that here." Makihara believes he must impress on his troops how vital it is to become truly global, to invest in faraway businesses that have no ties to Japan. He also believes the company should have a major place in the multimedia business.

For most foreigners, Mitsubishi Corp.--as distinct from sister company Mitsubishi Motors, which makes familiar automobiles-- barely registers on their radar, despite its size. But in Japan, Mitsubishi Corp. is an eminence that commands the sort of respect from informed citizens that Americans accord J.P. Morgan bank and maybe one or two other institutions. Its history is entwined with modern Japan's. In 1870, Yataro Iwasaki, member of a minor samurai family, borrowed a few steamships and began trading goods between Tokyo and Osaka. Over the decades, Iwasaki and his descendants founded various Mitsubishi companies that expanded into banking, insurance, shipbuilding, chemical refining, construction, and a lot of other businesses, and became a vital part of the war machine in the 1930s. The Mitsubishi Zero was one of the deadliest aircraft of the era, so it was not surprising that the Mitsubishi group and similar family-run combines, or zaibatsu, were smashed with a vengeance during the U.S. occupation.

Mitsubishi Corp. was constructed from the ruins in 1950. It and other trading companies enjoyed their heyday in the 1960s and 1970s when they marketed Japan's increasingly popular cars, TV sets, and other goods to the world. In 1974, for example, the 14 largest trading companies, with Mitsubishi at the top, handled 62% of Japan's exports and the same amount of its imports. But starting in the 1980s, trends began to run in the wrong direction. Two years ago the Hong Kong brokerage firm Jardine Fleming evaluated the prospects of Mitsubishi and five of the other trading companies--Mitsui (No. 2 on the Global 500), Itochu (No. 3), Sumitomo (No. 4), Marubeni (No. 6), and Nissho Iwai (No. 9). A cartoon Tyrannosaurus rex with a crushed cigarette clenched in its teeth decorated the cover of the Jardine Fleming report. The well-reasoned analysis concluded that the trading companies "are creatures of a bygone age." Reason: Worldly-wise manufacturers like Nissan, Toyota, and Matsushita no longer need trading companies to hold their hands on the road to Rio or Kuala Lumpur. They can make their own arrangements with shippers, dealers, and advertising agencies. Result: The share of Japanese exports guided by the sogo shosha has fallen to 30%.

Imports managed by the big traders have tumbled as well, though not as drastically, to 44% of Japan's total. Some big Japanese retailers have started to buy directly from overseas suppliers. Even some foreign retailers in Japan are bringing the goods in themselves. In 1970, when Kentucky Fried Chicken opened the first of its 1,050 restaurants there, it hired Mitsubishi to keep it stocked with legs, breasts, and the rest. (Mitsubishi also bought a one-third interest in KFC of Japan.) But when Toys "R" Us was launching its first Tokyo store in 1991, the company concluded it didn't need a trading company's help to import Barbie and Huffy bikes. Toys "R" Us toddled in solo and has expanded to 29 stores despite the sluggish Japanese economy.

Finally, the trading companies bought lustily in the Japanese stock market in the mid-1980s when prices soared. Now that the Nikkei index stands at just 38% of its 1989 peak, those purchases look reckless.

To avoid extinction, what Mitsubishi and its rivals must do is hold on to as much of their traditional business for as long as they can while transforming themselves into ferocious new animals. For Mitsubishi the first part will be relatively easy. It is one of the three central members of what is perhaps Japan's most powerful keiretsu--a group of companies with interlocking ownership. The 30 or so Mitsubishi companies that were either reborn or created after the war make cars, chemicals, elevators, paint, Nikon cameras, and Kirin beer among their hundreds of products. On average, a third of each one's shares is owned by the other members. The trading company takes a lead role in looking out for the good of the group.

One Friday each month the heads of all the Mitsubishi companies gather for lunch. Foreigners assume they scheme to crush nongroup members, or at least freeze them out of the Japanese economy. That's farfetched. Mitsubishi trading does business for competitors of Asahi Glass, a fellow keiretsu member, for example. Even so, it's hard to take seriously Makihara's explanation that the Friday club exists only to listen to lectures on such matters as the cause of the Kobe earthquake and to vote on whether a new undertaking should be allowed to use the Mitsubishi name. Group members toss a lot of critical business one another's way. Among the most important products that Mitsubishi trading sells are electric power generators and other machinery made by Mitsubishi Heavy Industries. In some years these account for as much as 10% of the trading company's profits. Togetherness can hurt as well. When Mitsubishi Estate took a $400 million-plus bath on its Rockefeller Center investment (FORTUNE, July 10), other group members that own shares in Estate got splashed.

A portion of Mitsubishi's import business is protected from erosion because the trading company has bought all or a slice of many supply sources. Take the corn trade it runs between the U.S. and Japan. The trading company owns three grain elevators in central Nebraska where it stores the corn it buys locally. Back home Mitsubishi owns Japan's largest livestock operation, so it feeds some of that American corn to its own chickens and pigs. A number of those chickens, in turn, end up on the tables of Japan's 1,050 KFC restaurants, of which Mitsubishi is a proprietor. Now that's synergy.

Mitsubishi's greatest strength for the long term--one that it shares with rivals Itochu and Mitsui--is its continued ability to attract top talent. University students rank all three among the half-dozen Japanese companies for which they would most like to work. So Mitsubishi can dispatch some of the brightest and the best of Japan's graduates to its 108 overseas offices, one of the world's great information-gathering networks. (In New York, Mitsubishi employs 117 Japanese and 418 local hires.) During the buildup to the Gulf war, Mitsubishi's expatriates in the Middle East sent the home office more political and economic intelligence than foreign service officers provided the Japanese government.

How and where should the trading companies deploy that talent as they struggle for a new role? The prevailing wisdom in much of Japan, indeed in much of the world, is that the "where" is simple: fast-growing Southeast Asia, China, and India. "As Japanese companies increase their direct investment in the region, they're going to travel in caravans," says Victor Fung, head of one of the largest Overseas Chinese trading companies in Hong Kong. "And they're going to need someone to show them the way. That should make this a golden age for traders." Itochu has moved aggressively into China, where it has put its own money into 150 or so projects, ranging from a brewery to a plant in Dalian where it, U.S.-based PPG, and others are making office window glass for export.

By contrast, Mitsubishi is spreading its bets more evenly around the globe. It has invested in only about a third as many China projects as Itochu--mostly airports, roads, and other public works. With Mitsubishi Motors as a partner, it has also built an auto assembly plant in Malaysia. The trading company continues to search with equal zeal, however, for growth opportunities in the West.

Makihara, 65, is himself as much a product of the West as of the East. He is a true Mitsubishi man. His father was a company executive, and his wife is a descendant of the founding Iwasaki family. But Makihara was born in England while his father was posted overseas, attended St. Paul's prep school in New Hampshire, and graduated from Harvard. He is so comfortable with Western ways that recently he invited a dozen foreign journalists into his private office for a lunch of sandwiches and wine. That's an extraordinary gesture in a land where outsiders rarely penetrate beyond formal meeting rooms and tea.

Since Akio Morita, founder of Sony, became ill some months ago, the Japanese business community has lacked a voice that can command attention in the West. Could Makihara fill that role? Maybe, but if so, he'll have to be ready to take the heat. A few days before the lunch, he had told a reporter that "generally speaking, the Japanese market is closed, making it necessary to implement deregulation." U.S. automakers heard about his remarks and built an ad in the Washington Post around it. That created a stir in Tokyo. Makihara's amended assessment of the Japanese market: "It's not as open as the Japanese believe, nor as closed as foreigners think."

Makihara is more at ease talking about Mitsubishi. "We must become a completely international company," he says. "We recently named our first blue-eyed board member, Jim Brumm of the New York office." (That's Japanese shorthand for Westerner. Actually, Brumm, 52, has brown eyes.) Makihara plans to add more non-Japanese to the board. Whether the globalization of Mitsubishi will take is far from certain. Makihara exhorts managers to find "sound global enterprise" for investment, but many are puzzled about what that means or where to look. The only investment under consideration that clearly fits the description is an 8% share of a Venezuelan natural gas field that will supply the U.S. or Europe.

Makihara's particular passion at the moment is directing the company more deeply into multimedia, a business that already includes eight cable TV systems in Japan, two communications satellites in orbit, and pieces of long-distance telephone companies. Mitsubishi's most ambitious media project, still in a shakedown phase, is called the MC Cybermarket. For $3,100 a year, customers will get access, via a computer network, to a vast trove of products and services--from second-hand packaging machinery to fleets of cars--mostly offered by third parties. In time, Mitsubishi hopes, even the biggest deals will be transacted in its MC Cybermarket.

And Mitsubishi knows biggest. Now if only it can learn richer too.