Japanese Keiretsu

Introduction:

This assignment will present the Japanese business network structure. It will contain an explanation of the inter- corporate relationships known as the ÐŽ§keiretsuЎЁ system.

I will explain the main strength and weaknesses this system bears and the contribution of this system to the rapid growth of Japans economy after World War 2. Finally I will explain the change in this system. Why it is changing and how this is changing.

History and founding of the Keiretsu

The keiretsu were founded after World War 2, after the American occupational authorities have made the Zaibatsu, holding companies illegal in 1946. By doing so they wanted to enforce their type of democracy and economic system into Japan. They believed that by doing so they would spread the concentration of wealth and economic power.

Shares of companies owned by the holding companies ( Zaibatsu) were given to employees and locals.

But because the smaller companies within the former Zaibatsu had often no own financial department and lacked the knowledge of how to operate individually, they banded together by means of cross shareholding. These major groups were then led by their respective banks which held most of the shares.

The cross holding of shares led to very stable business. The shares were not to be traded at any price, so therefore there was hardly any stock exchange. If a company had shares in another one they would refuse to sell them at any price fore that would effect the business relationship in a negative way.

Types of Keiretsu

There are two different types of keiretsu present in Japan. The horizontal and the vertical one.

„« The horizontal keiretsu

This is a group of large companies (that are of equal status) with common ties to a powerful bank. These companies are from unrelated industries, but are united by shared stockholdings / trading relations - they revolve around a financial core.

At the centre of these industrial groups, there are one of the six main banks: Dai - Ichi Kangyo (DKB), Sakura, Sumitomo, Fuji, Sanwa and Mitsubishi. They are the strongest and most representative of all the horizontal keiretsu

„« The vertical keiretsu

Vertical keiretsu connects firms within the same type of business. It is made up of one very large "parent" company and hundreds / thousands of smaller companies beneath it - this takes on a pyramid form.

Example of vertical keiretsu:

Both types of keiretsu have group concerns, they try to promote unity and loyalty, by offering financial support for any of the groups companies. Thus creating bonds through these cross - shareholding interests.

Keiretsu and Japanese economy

The keiretsu system proved to be of great importance to the Japanese post war economy. The Japanese government relaxed the Anti-Monopoly law that was set up by the Americans and allowed interlocking directorates and mergers. To maximize the efficient use of resources, the Ministry of International Trade and industry (MITI) quoted that it would be beneficial to have competition limited to a small number of large companies.

The government also protected its own market by means of import tariffs. This to keep the foreign producers out. As a result the Japanese manufactures controlled the home market and thus ensured high profit margins.

With this policy the Japanese industry turned to exports, mainly to the US. They often sold products on the international market below cost price in order to drive other producers out of business. This was of huge importance for the Japanese economy fore it got a immense financial cashflow into Japan. Which then in turn was used to build up the industry.

The keiretsu helped to provide long-term stability, efficiency and reduced risk for its members. Finally, the distribution was also arranged by these keiretsuÐŽ¦s. They allowed to prevent price competition among retailers. By doing so they ensured high profit margins in the domestic market and as a result they were able to have a cutthroat competition in the international market.

So one could argue that the Japanese consumer was the force behind JapanÐŽ¦s enormous international trade success.

Present situation

The effects of globalization, the rising yen, foreign government pressure and the burst of the economic bubble in the late 1980 have caused a change in the system of the keiretsu. Much of the wealth that Japan has gathered in the 1970s and the 1980s has been used up in the 1990. There are speculations that the ties that bind companies together in Japan are loosening. Foreign investors hope that this phenomenon will provide opportunities for Foreign Direct Investment (FDI). Within companies that were until now inaccessible for them.

These speculations are now backed up by the fact that the Japanese have embarked on a nationwide process of rooting out nasty truths about their system.

Minoru Makihara, the chairman of Mitsubishi Corp. has acknowledged that inefficiencies, badly considered investments and wrong decision making have empowered their system.

Also the Japanese culture has a huge part to do with the fact that management cannot make radical decisions. The managers of the different Mitsubishi departments for instance hate to embarrass underperforming colleagues in public. They never raise any topic related to the management of individual companies. The management is also to reserved to put forward any radical decisions and they donÐŽ¦t reject other membersÐŽ¦ ideas.

Because Japanese Keiretsu system is so ridged and the corporate collegiality is so strong, it has cost the Keiretsu a lot.

One example: sticking with proprietary computer technology when the world moved on to Microsoft Corp. software and Intel Corp chips.

According to Hiroshi Okumura, a Chuo University professor who studies the keiretsu, this is not a temporary change due to the recession. These groups have become weak because of a structural change in the economy.

JapanÐŽ¦s distribution system is also very inefficient. (e.g. around 230,000 primary wholesalers deal with secondary