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The structure of major companies in Japan, known as keiretsu, is steeped in tradition and relationships. A keiretsu is an interdependent group of companies, each with its own banking partner, manufacturers, distributors, and supply chain partners.
The roots of the keiretsu organizational structure can be traced as far back as the 1600s and well into the Industrial Revolution in the 19th century. However, it wasn’t until after World War II that the keiretsu model became the dominant partnership network that drove modern Japanese business.
Key Takeaways
- A keiretsu is an interdependent group of companies, each with its own banking partner, manufacturers, distributors, and supply chain partners.
- Before the keiretsu system, commerce in Japan was dominated by zaibatsus, family-owned businesses that evolved into monopolies.
- A horizontal keiretsu is an alliance of cross-shareholding companies led by a Japanese bank that provides the necessary financial services.
- A vertical keiretsu is a partnership of manufacturers, suppliers, and distributors that work cooperatively to increase efficiency and reduce costs.
- The easy access to capital in the keiretsu system can lead a company to take on too much debt and invest in risky strategies.
The Zaibatsus
Japan’s corporate governance system dates back to the 1600s. It began as small, family-owned enterprises formed in various prefectures across Japan, each specializing in a distinct industry.
As the world entered the Industrial Revolution, zaibatsu evolved into larger and more powerful holding companies. Zaibatsu translates to English as “monopoly.”
Post World War II Breakup
When the U.S. occupied Japan and rewrote the Japanese constitution after World War II, it eliminated zaibatsu holding companies and the Japanese governmental policies that permitted them to operate.
The rationale for their breakup centered on the monopolistic, undemocratic nature of zaibatsus. The holding companies were accused of buying politicians in exchange for contracts, exploiting the poor in their pricing mechanisms, and creating dysfunctional capital markets, all to perpetuate their own existence.
Japanese companies needed a new organizational structure. They reorganized as keiretsus, which translates to “lineage” or “grouping of enterprises” in English. Management would structure their companies with either a horizontal or vertical integration model.
Under a zaibatsu, the largest industrial groups allowed banks and trading companies to be the most powerful aspects of each of the cartels and sit at the top of the organizational chart. These banks and trading companies controlled all financial operations and the distribution of goods.
In their early years, the original founding families were in full control of all operations.
The Modern Keiretsu Model
Modern Japanese corporations still have banks and trading companies at the top of their organizations. However, shareholders have replaced the families that once controlled the cartels.
Despite the horizontal model, vertical integration is still a part of the structure. All of Japan’s six car companies belong to one of the big six keiretsus, as do all of Japan’s major electronics companies.
Horizontal Keiretsus
Mitsubishi is a typical Japanese horizontal keiretsu. At the top sits the Bank of Tokyo-Mitsubishi with Mitsubishi Motors and Mitsubishi Trust and Banking making up the core group.
Providing insurance to everyone is the Meiji Mutual Life Insurance Company while the trading company for the Mitsubishi keiretsu is Mitsubishi Shoji.
The company’s purpose is to facilitate the global distribution of goods. They may seek new markets for keiretsu companies, help incorporate keiretsu companies in other nations, and sign contracts with other companies around the world to supply commodities that are used in Japanese industry.
As you’ve no doubt noticed, many companies within this keiretsu have “Mitsubishi” as part of their name.
Modern Vertical Keiretsus
Vertical keiretsus are a group of companies within a horizontal keiretsu. Automobile giant Toyota is one such company.
Toyota’s success is dependent on suppliers and manufacturers for parts; employees for production; real estate for dealerships; steel, plastics, and electronics suppliers for cars, and wholesalers.
All of the ancillary companies needed to provide these needs operate within the vertical keiretsu of Toyota but are members of the larger horizontal keiretsu, although they sit much lower on the organizational chart.
Without Toyota as the anchor company, these companies might not have a purpose for their existence. Toyota exists as a major keiretsu member because of its history and its relationships with major horizontal members dating back to the 19th-century silk export business.
Keiretsus and Interlocking Relationships
Banks regularly owned a small percentage of their keiretsu members’ stock, and members owned a portion of the bank’s stock. This formed an interlocking relationship, especially if the member company borrowed from the horizontal member bank. Interlocking relationships allowed the bank to monitor borrowings, strengthen relationships, monitor customers, and help with problems such as supplier networks.
This arrangement limited competition within the keiretsu and prevented company takeovers by outsiders of the keiretsu. These early arrangements would later lead to the supply of workers by keiretsu firms and a board of directors that would come directly from the keiretsu. All businesses involved need to ensure business sustainability within the keiretsu. But while some may see the success of keiretsu, others see problems.
The Japanese focus on societal relations, as well as cross-shareholdings, allowed keiretsus to successfully recreate themselves after World War II.
The Pros and Cons of Keiretsus
The limited competition within the keiretsu may lead to inefficient practices.
Because a keiretsu company knows it can readily access capital, it could easily take on too much debt and overly risky strategies. On the other hand, the reduction of costs due to dealing with intra-keiretsu firms can increase efficiency within the supply chain.
The automobile keiretsus’ invention of the just-in-time inventory system, which has been adopted globally, is a prime example.
Information sharing within the keiretsu is another argument for increased efficiency. Information is shared among customers, suppliers, and employees. This leads to quicker investment decisions and a better-informed community. However, critics argue that keiretsus, due to their size and complexity, are slow to adjust to market changes.
Japan’s Troubled 1990s
The economic crisis that hit Japan in the late 1990s forced some of its companies to compete for price and quality by using market-based systems instead of keiretsu relational arrangements.
In fact, they had to look outside the keiretsu to obtain financing. With the major horizontal banks reporting profit losses. Japanese companies sought financing outside the keiretsu and began drawing on the bond and commercial paper markets.
What Are the Biggest Japanese Companies?
Of the three biggest companies in Japan, two are household names in the U.S.
Toyota, in first place, produces not only its namesake brand but also Lexus, Subaru, and Daihatsu vehicles.
In second place, Nippon Telephone and Telegraph is primarily a telecommunications company but also has subsidiaries in real estate, finance, and data processing, among other businesses.
Sony is a dominant player in electronics and media. It also produces the PlayStation game console and operates a game development studio.
What Are the Best-Known Japanese Brands Globally?
It would be hard to beat Toyota or Sony for brand recognition but there are others that will ring a bell. They include Nintendo, Canon, Shiseido, and Studio Ghibli, the animation studio.
How Does Japan Rank as a Global Economic Power Today?
Japan has bounced back from its economic stagnation of the 1990s, and the devastating earthquake that followed in 2011, not to mention the global COVID-19 pandemic.
Japan today is the world’s third-largest economy measured by GDP. Its 2022 GDP was about $4.2 trillion, a decline of 15.4% from the previous year. However, by the second quarter of 2023, its economy was growing at an annualized rate of 6%.
The Bottom Line
For the first time in recent Japanese history, Japanese keiretsus found their first crack in the 1990s, resulting in a loosening of traditional standards.
Globalization and technology are other aspects that have forced Japanese companies to open to competition by identifying new customers, increasing the efficiency of orders, and researching new markets.
The major question that remains: Is this a permanent solution, or will the keiretsu evolve into another new entity—much as the zaibatsus morphed into keiretsus in the mid-20th century?
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