Japanese Keiretsu-Past,

present and Future

SWATI SAINI MBA/0118/58

ANIKET SINGH MBA/0275/58
ADNAN CHOWDHARY MBA/0327/58
KANCHAN NAKHATE MBA/0333/58
DAKSHINA R J MBA/0368/58
SRINIVASAN G MBA/0453/58
Brief background of Case

• Reading - Japanese keiretsu: Past, present, future

• Authors - Jean McGuire and Sandra Dow

• Journal - Asia Pacific Journal

• Year - 2009
Introduction
Keiretsu is a confederation of large Japanese financial and industrial corporations formed through historical ties
and cross-shareholdings.

Keiretsu was introduced post World War-II

Each firm in a keiretsu retains operational independence while maintaining very close commercial relationships
with the other firms in the group.

Keiretsu is controlled by professional managers

Types of keiretsu

• Horizontal keiretsu
• Vertical keiretsu
Horizontal Keiretsu – Past
6 Major players

Post war
Pre war zaibatsu period(around
banks)
Wealthy clique

Mitsui Dai Ichi Kango

Mitsubishi Fuyo

Sumitomo Sanyo

Membership of Horizontal keiretsu is diversified

Horizontal Keiretsu – Present

4 Major players

Post war
Pre war zaibatsu period(around
banks)

Mitsui -
Sumitomo Dai Ichi Kango
Regulatory Changes
Economic Changes
Mitsubishi
Fuyo
(Sanwa)
Ownership and Control

Ties are
Disperse,
complex Reciprocal No Large
Dominated by powerful,
especially holdings – Individual
group holdings ownership
lending and rarely traded stakes
network
equity ties
Financing

Traditionally bank financed – Bank-centered nature

Lending ties reinforced by equity and board memberships

Socially and historically embedded

Personnel exchanges and memberships on the “presidents” council

Stable financial stakeholder network – Debt, equity, personnel ties

Advantages

Monitoring benefits
Access to stable Insulation from and reduction of
Risk reduction Mutual Assistance
financing market pressures information
asymmetries

Reciprocal
For short term Reciprocal Mutual
holding – Equity Personnel sharing
performance monitoring shareholding
Financing

Close
relationships to
bank – Readily
available debt
Disadvantages
Heightened
information
Higher borrowing cost Over investment Poor performance
asymmetry(between
insiders and outsiders)

Reduced incentive Disadvantage in

Premium in over Draw on financing
for efficiency and foreign
borrowing from main bank
responsiveness investment

Banks act as
Higher cost of
creditors, not
capital
shareholders

High debt costs

Future
Heavy discounting on diversified keiretsu firms

Performance implications of membership differ between more and less powerful firms

Pressure on weaker keiretsu firms to improve profitability

Powerful firms work on growth strategies

Transactional bias towards keiretsu imposes coordination/monitoring costs

Vertical Keiretsu
History
• Groups emerged during 1950’s as a
mean by which firm could expand
their production in the context of
scarce financing
• Significantly less research on these
firms
Characteristics
• Less diversified membership
• Core manufacturing firm and its key
supplier at the centre of the
network
• Asymmetric shareholding, with
supplier holding small positions in
primary firm
• It cement & facilitates product-
market transactions, have control
orientation
Ownership and Control in Vertical keiretsu
Pyramidal nature of
Equity holdings in affiliated shareholding (Core firm &
Larger stakes in affiliated
and non- affiliated suppliers lead supplier hold ownership
suppliers for stronger control
differ position in secondary
suppliers)

Core firm exert direct & Credible commitments to a

Dominance of group holding unilateral oversight, with long term contract, that
reduced outside extent of control being encourage supplier to work
shareholdings linked to transactional & toward higher quality or low
equity ties to member firms costs
Advantages of Vertical Keiretsu
Lower transaction cost because of relational capital (Cost saving equity link)

Close ties with supplier encourage coordination and communication

Engender a long term perspective which limit opportunism

Provides supplier with stable market, technical, managerial or financial assistance

Close contact with customers encourage innovation

Stable supplier network helps for international expansion

Strong control reduce corporate governance problems, thus better performance

Disadvantages of Vertical Keiretsu

Mid-level of
Tunneling of integration provided
profits – Parent firm by Vertical integration
Limited Limited
Core firms benefits at become less valuable
scope in innovation
benefits at expense of as firm seek either
terms of driven by the
the expense growth rate the flexibility of arm-
customers needs of the
of more and wages of length transactions or
base core firm
peripheral supplier attempt to internalize
ones core activities and
competencies
EVOLUTION OF KEIRETSU TIES
In the face of economic crisis and regulatory change throughout the nineties and into the 21st century

Decline in the role of bank financing and increased reliance on non-bank financing

These changes in part resulted from regulatory reform which increased access to non-bank financing.

Traditional Keiretsu Evolution of Keiretsu Ties

Type of Tie Type of Tie

Bank ties and reciprocal shareholding Diminished bank debt

Reduced cross-holding

Buyer–supplier ties Reduced buyer–supplier ties (vertical keiretsu)

Board and personnel exchanges Diminished exchanges of board and personnel

EVOLUTION OF KEIRETSU TIES
• The collapse of stable, reciprocal shareholdings typical of keiretsu ownership
structures, notably horizontal keiretsu, has occurred.
Changes in Ownership • Dissolution of ties has not been universal across all firms, with profitable firms
Structure: more prone than distressed enterprises to unwind.
• Equity holdings among group-affiliated firms has shown greater stability than
those of independent firms

• Traditional buyer-supplier connections that have bonded keiretsu firms,

particularly vertical firms, are eroding.
Change in product–market • Vertical linkages' advantages have been decreased by easy access to
relationships dependable, high-quality suppliers.
• Increasing importance of technological skills → firms internalize important
functions
EVOLUTION OF KEIRETSU TIES
CHANGES IN INFORMAL TIES

Personnel ties which characterize vertical and horizontal groupings have also changed.

In examining the significance and importance of informal links, regulatory change that encourages a "North American
style" board structure must also be examined.

Prior to board reform in 2002, insiders appointed from among long-standing and well-regarded staff dominated Japanese
boards.

The Company Code was amended in 2002 to allow corporations to adopt a committee system based on a board of
directors and three committees (nominating, audit, and pay) similar to that used in the United States.

Although only a small number of firms have officially adopted this system, there was a growing role of outside board
members and a reduction in board size.

Addition of outside board members has proceeded without regard to strengthening their independence

Changes in board features may be significant—on the one hand, boards are adopting US-style processes, while on the
other hand, the addition of outside directors may give further inter-firm links that extend beyond traditional keiretsu limits.
The continued role of keiretsu in the Japanese
economy
To understand the role of Keiretsus in the Japanese economy, we must first understand the Japanese
people and society. The Japanese society is a harshly collectivistic society, focusing on making everyone fit a
mold as an ideal citizen. The existence of Keiretsus are deeply intertwined with the financial health of the
country, they rose to prominence with the bubble era; bringing a focus on minimizing the amount of money
that was tied up in the production system, rather investing in R&D breakthroughs. They started losing
steam throughout the lost decade and have not been able to regain their prominence in an increasingly
globalized world
Due to the Keiretsus’ resource dependence and risk sharing nature, they are only feasible in times of
market growth. Lot of the governance decisions can be explained to shareholders by the statement “A rising
tide raises all boats”; such statements hold no value today
Therefore Keiretsus’ will evolve to serve and support new network infrastructure that is seen rising
throughout the Japanese economy.
That being said, vertical Keiretsus will exist for extremely complex products, and a few extremely dominant
horizontal Keiretsus will continue to live on. Though both will possibly be husks of their former selves
Keiretsu Membership
Instrumental OR Ceremonial ?
Dodwell Reference Miwa and Ramseyer
1. Debt/ Equity ties Non- Existent distinction among
2. Membership on President’s council Keiretsu and Non-Keiretsu firms
Conflicts Results ?

Sampling done at different times Haphazard Classifications

The way forward
In a more globalized world, it may seem that there is no place for keiretsus; but that may
just not be the case. Toyota’s operational innovations were only possible due to the
existence of the deep relationship between corporations and their suppliers or other
stakeholders.
Keiretsus have also brought on other operational innovations such as Just In Time (JIT). JIT
focused on minimizing set up times and investments. Both the minimizations are only
possible due to the great relationships Japanese corporations have. Due to their
relationships, the corporations do not need to make heavy upfront investments, which in
turn allows them to focus on improving set up times.
While the corporate governance structure will have to be changed, the consequences of
keiretsus will still live on
Thank you