Japanese Keiretsu

The Japanese corporate system of governance known as Keiretsu dates back to the Meiji Restoration of 1866 and the world’s introduction to the industrial revolution. Because Japan has always been a small, very educated and very advanced society, the only way to compete among its larger Asian neighbors and ensure perpetuity was to group their companies into tightly knit relationships, a cultural trait some would argue. The English translation for Keiretsu denotes lineage while its forerunner Zaibatsu means monopoly or financial clique.

Some would argue whether Keiretsu or its older rival even exists as the group form they suspect. Some find the modern day basis for existence in a 1952 Japanese law that mentions the word Keiretsu, others assume Zaibaitsu existed because of the perpetuation of major Japanese companies that formed long before the Meiiji Restoration and are still powerful and profitable today. One example is Matsui.

Matsui began as a dry goods shop in 1673, ten years later they opened money changing shops for the Japanese government, the Tokugawa Shogunate in the capital city of Kyodo. With the introduction of a Japanese monetary system, Matsui later became a bank, today a leading bank of Japan. Other examples include Sumitomo who originated as a mining and smelting company and later expanded into copper, today a leading bank of Japan. Mitsubishi later formed as a bank in Kochi Prefecture, a region of Japan much like the county system in the United States. Yasuda formed as a bank in Toyama Prefecture and Okura formed as a bank in Niigata Prefecture. Later these banks and other businesses formed as holding companies, all family owned and managed.

These so called Zaibatsu holding companies were eliminated after World War 2 by the United States and written into the new Japanese constitution because of its undemocratic nature and governmental policies that perpetuated their existence. With Japan devastated after the war, it was time for Japanese companies to reinvent themselves. Along came these called Keiretsu.

A Keiretsu is a corporate governance system that has a bank as its first line of formation. Major banks established in the Zaibatsu period all formed a leading Keiretsu based in the region they began as a Zaibatsu corporation. The next Keiretsu line is a major corporate conglomerate such as Toyota, Nissan, Matsushita Electric, and Nippon Steel. All formed for a specific business purpose, called vertical Keiretsu while horizontal Keiretsu are the six largest banks of Japan. The remaining companies of a Keiretsu are ancillary companies that  perpetuate the conglomerate company by supplying parts, distribution, trading for exports. All corporate needs are met within the Keiretsu so other Keiretsu don’t conduct business with each other. The all important companies in the Keiretsu are the bank and the conglomerate company, some argue the controllers of the Keiretsu who’s goals are profits and long term existence by restricting competitors and hostile takeovers.

Features of a Keiretsu are established long term relationships, vast supply of workers, permanent employment, a steady supply of capital from the bank, share information with suppliers, manage inventory to reduce costs and increase efficiency and increase supply chain management. Some allude to the just in time inventory devised by the automobile Keiretsu as a show of success of Keiretsu formations to increase demand for foreign demand.

Financing begins by Keiretsu companies owning shares of stock of other companies. especially between banks and the major conglomerate company. Yet major conglomerates are said to own majority stakes in smaller Keiretsu companies for control purposes as well as supply members to sit on their corporate boards. Control means conglomerates consult with smaller companies regarding investment decisions with the ability to take over smaller companies.

The cost of a Keiretsu includes inefficiency, no reason to worry about existence since a large supply of capital exists from banks. To much debt and bankruptcy prone. Risk averse, why take chances. Less profitable firms grew slowly without innovation or structural changes to its formation.

The term Keiretsu first appeared in July 1952 when the Small and Medium Enterprises Planning Bureau issued guidelines for a program to target general machinery for productivity improvement. This program was called Keiretsu Shindan, Keiretsu diagnosis. This led scholars and the popular press on a course to prove the existence of Keiretsu, diagnose its operations and cry foul when outside nations couldn’t establish operations in Japan.

Factors to consider regarding Keiretsu existence is the 2002 merger of Sumitomo and Mitsubishi banks as well as the second historic merger of Fuji and Daiichi and banks. Lunch clubs existed in Japan for major company executives once a month since 1967. Not only hard to prove that Keiretsu exists regarding these factors but it has never been proven despite the many studies published over many years.

Due to the economic crisis that hit Japan in the late 1990’s and major conglomerates loss of profits, all Japanese companies have opened to competition. Firms now compete for price and quality by using market based systems instead of what is termed Keiretsu relational arrangements. Globalization and technology is said to also open Japanese companies because of the need to identify new customers, increase efficiency of orders and research so all Japanese companies are leaving their Keiretsu ways and going it alone.

Never has the existence of Keiretsu been definitively proven. Some say Marxist economists identified Keiretsu because it satisfied their ideology. Others say it came from attacks from unsatisfied companies. Either way, Japanese companies are opening more and more as economic crisis hits them harder and harder.

November 2009 Brian Twomey

 

Brian Twomey is a currency trader and Adjunct Professor of Political Science at Gardner-Webb University

 

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