Keiretsu – The Japanese Business Network System

The cooperation may be witnessed in highly competitive business environment. Tata and Fiat have arrangements in relations to cars. Such cooperation is not necessarily restricted to the organizations producing or dealing in same product or services. They may identify some common interest for cooperation between them. A cold drink manufacture may enter into arrangement with a chain of restaurants to offer its beverages to the clients of restaurants. Lately, various credit card companies are entering into arrangements with other businesses to launch co-branded credit cards. Such arrangements help in reaching greater number of customers.

The benefits of cooperation are also seen in Japan, where large cooperative networks of businesses are known as Kieretsus. Keiretsu, also known as Kigyo Shudan, is an umbrella term that describes various highly complex and interdependent relations. These are formed in order to enhance the abilities of individual number businesses to compete in their respective industries.

A small history………Prior to the Second World War Japan was dominated by four large monopolistic organisations, Mitsubishi, Mitsui, Sumitomo and Yasuda, called Zaibatsu. Post war controls introduced by the United States aimed at creating a competitive environment through dissolution of the Zaibatsu. This policy continued until 1952, when the Japanese government relaxed its constraints on economic considerations, but maintaining its stance on monopolistic power. Subsequently some of the former Zaibatsu reformed into these enterprise groups called Keiretsu.

Keiretsus are futile families of firms with ambiguous boundaries that separate ostensibly independent firms which are in reality closely related. A single Keiretsu usually encompasses a large group of firms in different industries which maintain close relationships. These relationships are typically more social than legal structures. An organization’s position within the keiretsu structure determines its social networks that allows it to use tight-knit financial and technical ties to engage in mutual business endeavors.

Keiretsu Networks

Keiretsus are characterized by the presence of a dominant firm which organizes and partially finances the other associated companies, ‘extensive intra-keiretsu stockholding,’ and frequent purchases of intermediate goods from other keiretsu members. However, they are different from conglomerates (common in western countries and also found in India) wherein all members are lineated through ownership pattern. A Kieretsu also differs from a consortium or an association, as the primary purpose of a Kieretsu is not to share information or agree industry standards, but to share purchasing, distribution or any other functions. In Kieretsu members remain independent companies in their own right: the only strategy they have in common is to prefer to do business with other Kieretsu members, both when buying and when selling.

Keiretsu Types

Keiretsu are divided into two types: horizontal and vertical. Horizontal keiretsu are usually organized around a bank and consist of a variety of companies that perform different functions. Horizontal Keiretsu have adopted the so-called one set principle “wan setto shugi.” This requires the Keiretsu to limit membership to only one major firm in each major industry. Thereby, there is no direct or limited direct competition between Keiretsu members. Most contemporary horizontal Keiretsu encompass vertical Keiretsu as well. Mitsubishi is an example of a horizontal keiretsu. Key players in horizontal network are commercial banks or main banks, commonly referred to as the big six: Mizuho, Mitsuisumitomo, Mizuho, UFJ, Risona, Mitsubishi Tokyo. In each group a city bank or main bank, a trading company, and one or two very large manufactures form a horizontal keiretsu as “flagships.” For example, Mitsubishi bank, Mitsubishi Corp., and Mitsubishi Heavy Industrial group play a pivotal role in Mitsubishi group. Mainly, four important elements strengthen the connection among them: cross-shareholding relationship, assigned directors, intra-group financing, and intra-group trade.

A typical vertical keiretsu is composed of a large industrial organization and its part suppliers positioned in a hierarchical pyramid according to size. Vertical keiretsu are generally found in the auto, steel, and electronics industries and are characterized by extensive subcontracting networks. Large industrial organizations, such as Toyota and its suppliers, are also part of an inter-market keiretsu that is composed of a large bank that provides it with reliable sources of capital and a stable group of long-term corporate shareholders. This alliance required companies in the keiretsu to support one another by engaging in such activities as buying stock in each other and purchasing each other’s products.

On the process of defining the horizontal and vertical keiretsu, it is very difficult to clarify the distinction between these because these two classifications sometimes overlap each other. That is, the Big Six companies in horizontal keiretsu also form their own vertical keirestu. A vertical or pyramid keiretsu is made up of one very large company and hundreds or thousands of small companies subservient to it. For example, Mitsubishi Motor Corp. has numerous subcontractors because it needs so many different parts such as tire, windshield, and so on to product a car. The subcontractors are not supposed to contract other big car companies if they contract a big car company. This strong sense of group affiliation insulates them from outside competition.

Keiretsu Advantages

Keiretsu’s style closeness among related firms arguably increases the flexibility of the lead industrial firm to compete effectively against other Keiretsu lead firms and in international markets. The timeliness of production changes and shipping from suppliers reinforces this competiveness. Confidential assistance between firms assures technological compatibility and product quality. These advantages are secured through joint ventures and research and development activities.

The keiretsu system assures the member companies both a constant supply source and a constant market. This policy means suppliers can always sell their goods to the manufacturers and manufacturers have a continual supply source.

A final major advantage to the Keiretsu style affiliation is a strong takeover protection. Keiretsu members are expected to jointly act as a group in protecting any potential takeover target. If a keiretsu fears that one of its member companies may be taken over, it can deliberately shield itself by raising “mutual shareholding[s]” to fight off potential takeover attempts.

Keiretsu Disadvantages

Japanese style Keiretsu relationships are not costless. Keiretsu are organized to spread the costs of business among the member companies. Their profit margins can be lower than they otherwise would be for a highly profitable company within the keiretsu because they must devote capital to other less profitable member companies.

Participants are deprived of their free will and choice among suppliers and customers. This loss of independence and liberty probably costs all firms in the Keiretsu group certain opportunities and higher profit margins from unused capacity and foregone sales. The relation among Keiretsu members: suppliers, customers, distributors, and lead industrial firms reinforces their tendency to purchase and sell within the Keiretsu group. In some instances, this tendency is actually strong pressure to support Keiretsu members products and services exclusively. With suppliers and distributors exclusively tied to a lead industrial firm, these members of the distribution chain have little alternative but to sell for and through the lead industrial firm. This loss of transaction liberty brings benefit primarily to the lead industrial firm.

Keiretsu also pose a problem of misallocation of resources. This happens when a member company has excess plant capacity as a result of each keiretsu’s desire to have a member company represented in all major industries.

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