The structure of large Japanese companies, called keiretsu, is full of traditions and relationships. We can see that the roots of Keiretsu’s organizational structure can be traced back to the Industrial Revolution in the 1600s and 19th century. However, it wasn’t until the end of World War II that the keiretsu model was formally formed and became the main partner network to promote modern Japanese business. In this article, we will understand the history, structure, advantages and disadvantages of the keiretsu system.
- Keiretsu refers to a Japanese business structure composed of a network of different companies, including banks, manufacturers, distributors, and supply chain partners.
- Before the keiretsu system, the main form of Japanese corporate governance was zaibatsu, which refers to small family businesses that eventually evolved into large monopoly holding companies.
- Horizontal keiretsu refers to an alliance of cross-holding companies led by a Japanese bank that provides a range of financial services.
- Vertical keiretsu is a partnership of manufacturers, suppliers, and distributors that work together to increase efficiency and reduce costs.
- One disadvantage of the keiretsu system is the easy access to capital, which may cause the company to assume excessive debt and invest in risky strategies.
Japan’s corporate governance system can be traced back to the 1600s, but as the world entered the industrial revolution, the Meiji Restoration established by the Japanese government in 1866 promoted Japan’s corporate governance system. These early corporate forms were called “zaibatsu”, which translates as “monopoly” in English. Zaibatsus was originally a small family business established in various prefectures in Japan to meet the different business needs of the country. With the growth of the Japanese economy, the chaebol gradually developed into a holding company.
When the United States occupied Japan and rewritten the Japanese Constitution after World War II, it cancelled the chaebol holding companies and the Japanese government policies that kept them alive. The reason for this action was centered on the monopoly and undemocratic nature of the chaebol. Studies have shown that chaebol holding companies buy politicians in exchange for contracts, exploit the poor in pricing mechanisms, and create dysfunctional capital markets, all of which are to perpetuate their existence.
After Japan was defeated after World War II, Japanese companies needed a new organizational structure. They are reorganized into keiretsus, which translates to “blood lineage” or “corporate grouping” in English. The management will use horizontal or vertical integration models to build their company.
Under the chaebol, the largest industrial groups allow banks and trading companies to be the most powerful aspect of every cartel and sit at the top of the organizational chart. These banks and trading companies control all financial operations and the distribution of goods. The original founding family completely controlled all businesses.
Today’s keiretsu horizontal model still sees banks and trading companies at the top of the chart, with significant control over the keiretsu portion of each company. Since Japanese law allows holding companies to become joint-stock companies, shareholders replace the family that controls the cartel. Vertical integration is still part of the larger horizontal structure of keiretsu today. For example, Japan’s six automobile companies are all one of the six major automobile companies, as do Japan’s major electronics companies.
Modern level Keiretsus
The typical Japanese level keiretsu is Mitsubishi. The Bank of Tokyo-Mitsubishi is located at the top of keiretsu. Mitsubishi Motors and Mitsubishi Trust Bank are also part of the core group, followed by Meiji Mutual Life Insurance Company, which provides insurance to all members of the Economic Cooperation Agency. Mitsubishi Shoji is the trading company of Mitsubishi Keiretsu.
Their purpose is to strictly distribute goods all over the world. They may find new markets for the economic cooperation company, help merge the economic cooperation company in other countries, and sign contracts with other companies around the world to provide goods for Japanese industry. Undoubtedly, you have noticed that many companies in this chain use “Mitsubishi” as part of their name.
Hyundai Vertical Keiretsus
A vertical keiretsu is a group of companies within a horizontal keiretsu. Automobile giant Toyota is such a company. Toyota’s success depends on suppliers and manufacturers of parts; production employees; real estate of dealers; suppliers of steel, plastic and electronic products for automobiles; and wholesalers. All affiliates operate within Toyota’s vertical OECD, but are members of the larger horizontal OECD, albeit much lower on the organizational chart.
If there is no Toyota as the main company, these companies may not exist. Toyota exists as a major member of the economic chain because its history and relationship with major horizontal members can be traced back to the early Meiji government as the first silk exporter.
Keiretsus and the chain relationship
A bank usually owns a small portion of the shares of its keiretsu member, and the member owns a portion of the bank’s stock. This forms an interlocking relationship, especially if the member company borrows from horizontal member banks. Interlocking relationships allow banks to monitor borrowing, strengthen relationships, monitor customers, and help solve supplier network issues.
This arrangement restricted keiretsu’s internal competition and prevented keiretsu’s outsiders from acquiring the company. These early arrangements later resulted in the supply of workers by the ECO and the board of directors directly from the ECO. All companies involved need to ensure business sustainability within the OECD. However, while some people may have seen the success of keiretsu, others have seen the problem.
The Japanese’s attention to social relations and cross-shareholding has allowed keiretsus to continue successfully since World War II.
Pros and cons of Keiretsus
Limited competition within keiretsu may lead to inefficient practices. Because Keiretsu knows that it can easily obtain funding, it can easily assume excessive debt and risky strategies. On the other hand, lower costs due to dealing with internal economic cooperation companies can increase efficiency in the supply chain. The instant inventory system invented by car keiretsus is a good example.
Information sharing within keiretsu is another argument for improving efficiency. Information is shared among customers, suppliers and employees. This leads to faster investment decisions and suppliers, employees, and customers understand the goals and objectives of these investments. However, critics blamed that because of their size, keiretsus could not adapt to market changes fast enough to make these investments profitable.
Some would argue that the economic crisis in Japan in the late 1990s forced Japanese companies to compete for price and quality by using market-based systems rather than keiretsu relationship arrangements. This is due to the profit reports of major horizontal banks. Japanese companies are forced to seek financing outside of Jinglian by borrowing from the bond and commercial paper markets.
For the first time in modern Japanese history, Japanese keiretsus discovered their first crack, which led to the forced relaxation of traditional standards. Globalization and technology are forcing Japanese companies to accept other aspects of competition by identifying new customers, improving order efficiency, and researching new markets. The main remaining question is: Is this a permanent solution or whether keiretsu will evolve into another new entity-just like zaibatsus became keiretsus half a century ago.