Keiretsu (Japan)

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Keiretsu
Location: Japan
Japan map.png
Author: Katsuki Aoki
Affiliation: Meji University

Original text by Katsuki Aoki

Keiretsu consists of two kanji (Chinese) characters, kei meaning ‘series’ and retsu meaning ‘line’. It denotes a type of informal business group and may be translated as ‘cluster of interlinked firms’ (Lincoln and Gerlach 2004: 1[1]). A multilayered concept, keiretsu is rooted in traditional Japanese society’s tendency to build business partnerships on the basis of family or clan. In the Edo period (1603-1868), it became common for employees who had served a merchant family over a long period to be granted ownership of their own businesses while remaining within the structure of the family. This practice is known in Japan as norenwake; a comparable English concept is a franchised business. Norenwake is still practised in Japan and is common in small businesses; a typical example is a ramen noodle chain.

The Meiji Revolution of 1868, which propelled Japan into the modern era, saw the rise of powerful family-controlled business conglomerates known as zaibatsu (family-owned corporate groups in which there are strong capital and human ties between member-companies). Typical examples of keiretsu in the years preceding the Second World War, the zaibatsu dominated the Japanese economy until the war and influenced both foreign and domestic policy.

In prewar Japan, the Mitsubishi, Mitsui and Sumitomo conglomerates were known as the sandai (Big Three) zaibatsu. They controlled companies in a wide range of activities including the mining and chemical industries as well as banking and finance. Comparable family-controlled conglomerates known as chaebol were found in Korea (e.g., Samsung and Hyundai) and India (e.g., Tata and Birla).

In the late 1940s, during the Allied occupation of Japan, the zaibatsu were dismantled as part of the Allied Powers’ occupation policy. However, many zaibatsu reorganised themselves by means of share-purchases to form horizontally-integrated kigyo-shudan, or horizontal keiretsu. The big three zaibatsu companies plus the Fuyo, Daiichi-kangin and Sanwa corporations, became known as the rokudai (Big Six) kigyo-shudan. There was no longer an overall controlling company, but member-companies remained connected by means of cross-shareholdings. Horizontal keiretsu contributed to the development of large companies during the post-war economic miracle that saw Japan grow into the world’s second largest economy (after the USA) by the 1960s. Researchers sometimes use the degree of cross-shareholding as an indicator of group ties in horizontal keiretsu, but the practice of cross-shareholding has been reduced since the economic bubble burst in Japan in the early 1990s and, as a result, the practice of horizontal keiretsu in Japan has weakened.

Another form of keiretsu, known as vertical keiretsu, is seen as a key characteristic of the Japanese automotive industry. It resembles a supply-chain management system in which an original equipment-manufacturer (OEM) draws on collaborative, long-standing relations with dozens of key suppliers. There is no well-accepted definition of this practice; indeed, it can be difficult to define the border between keiretsu and non-keiretsu firms. For example, OEMs’ supplier associations, kyoryoku-kai, are considered one of keiretsu’s key characteristics, but these associations usually include companies that supply parts to multiple OEMs and thus cannot be considered keiretsu firms. In vertical keiretsu, an OEM holds a certain percentage of shares in some of its suppliers. However, Japanese OEMs have collaborative, long-standing relationships with suppliers whose shares are not owned by the OEM. Therefore, capital ties are not a sufficient condition for the existence of vertical keiretsu.

Some researchers analyse the role of keiretsu by means of transaction-cost economics. Vertical keiretsu allows an OEM to reduce costs arising from market failure by establishing collaborative relations with suppliers; it also helps to reduce costs arising from organizational failure through sharing the development and production burden with suppliers. Others highlight the way in which vertical keiretsu enhance the competitiveness of the Japanese automotive industry by developing mutual trust between OEMs and their suppliers. Unlike the arm's-length OEM-supplier relationship found in the West, Japanese suppliers often offer to provide OEMs with high quality parts at cheaper prices. At the same time, these suppliers can receive various forms of support from the OEMs, such as expert advice on improving production or training and education opportunities. Such collaboration contributes to ongoing improvement, or kaizen, in Japanese OEMs’ production systems, their supply-chains included.

Toyota’s supply chain is a typical example of vertical keiretsu. Toyota’s supplier association, Kyohokai, had 224 members in 2015. These suppliers have differing degrees of closeness to Toyota. Thirteen of them belong to the Toyota Group, and Toyota holds at least 20 per cent of the shares of these companies. Toyota transfers corporate executives to posts on the boards of these companies. Their presidents and Toyota’s head meet on a monthly basis. Then there are another 30 companies that do not belong to the Toyota Group, but of whose shares more than 20 per cent are held by Toyota; Toyota also transfers corporate executives to serve on their boards. Of the remaining Kyohokai member companies, 180 do not have capital ties with Toyota. However some companies, such as Kojima Press Kogyo, are exclusively dedicated to Toyota, and are believed to have strong loyalty to Toyota. Kyohokai’s activities include: 1. General Assembly – an annual meeting of member-companies. 2. Meetings of the board of directors are held three times a year. 3. Executive Round-table: representatives of member-companies meet with Toyota’s executives to promote mutual communication. 4. Business Management and Special Interest Lectures: lecturers and Toyota executives provide insights on topical management issues to member-companies. 5. Social Events: various events aimed at fostering close relations and effective communication between Toyota and member-companies. 6. Theme-specific Research Groups: joint research activities on topics such as safety and human resource development. 7. Body- and Unit-part Sectional Meetings: a variety of activities aimed at promoting two-way communication between Toyota and member-companies and developing a common understanding of the issues affecting the automotive industry (Kyohokai web site[2]).

During the period of Japan’s rapid economic growth (which came to an end with the bursting of the Japanese asset price bubble in 1991), most of the Japanese automotive OEMs depended heavily on their keiretsu suppliers for parts-purchasing. However, the vertical keiretsu in the Japanese automotive industry in general has weakened since the bubble burst. This was particularly the case with Mazda, Mitsubishi and Nissan which formed capital ties with overseas OEMs. In the case of Nissan, which formed an alliance with Renault in 1999, COO Carlos Ghosn clearly stated that Nissan’s keiretsu system had not functioned well. Nissan subsequently launched the Nissan Revival Plan and tasked its suppliers with reducing their prices by 20 per cent over three years. Toyota also initiated a competitive purchasing strategy in 2000, ‘Construction of Cost Competitiveness for the 21st Century,’ the aim of which was to reduce purchasing costs by 30 per cent over three years. However, Toyota did not use this scheme to terminate its dealings with uncompetitive suppliers. Rather, it provided support to help existing suppliers improve their competitiveness. In the mid-2000s, Nissan again began to stress the importance of collaborative, long-term relationships with suppliers, and initiated new supplier-support activities.

The cases of Toyota and Nissan suggest that vertical keiretsu continues to operate in the Japanese automotive industry. However, today’s keiretsu differs from that which existed before the 1990s. It may be said that vertical keiretsu has developed by incorporating competitive aspects, and formed a hybrid style between Japanese collaborative ways and Western competitive ones.

References and Bibliography

  1. Aoki, K. and Lennerfors, T. 2013. ‘The new, improved keiretsu’, Harvard Business Review 91(9): 109-113
  2. Aoki, K. and Lennerfors, T. 2013. ‘Whither Japanese keiretsu?: The Transformation of vertical keiretsu in Toyota, Nissan and Honda 1991-2011’, Asia Pacific Business Review 19(1): 70-84
  3. Aoki, M. 1988. Information, incentives, and bargaining in the Japanese economy. Cambridge: Cambridge University Press
  4. Bhappu, A. 2000. ‘The Japanese family: An institutional logic for Japanese corporate networks and Japanese management’, Academy of Management Review 25: 409–415
  5. Okumura, H. 2000. Corporate Capitalism in Japan. New York: St. Martin's Press
  6. Sako, M. 1992. Price, quality and trust: Inter-firm relations in Britain and Japan. Cambridge: Cambridge University Press
  7. Womack, J., Jones, D. and Roos, D. 1990. The machine that changed the world: Based on the Massachusetts Institute of Technology 5-million dollar 5-year study on the future of the automobile. New York: Rawson Associates

Notes

  1. Lincoln, J. and Gerlach, M. 2004. Japan’s network economy: Structure, persistence, and change. Cambridge: Cambridge University Press.
  2. Kyohokai web site, Activity contents, http://www.kyohokai.gr.jp/english/outline/activity.html, accessed 18 November 2015.