Keiretsu
Translated literally, it means headless combine
Keiretsu is a Japanese word which, translated literally, means headless combine. It is the name given to a form of corporate structure in which a number of organisations link together, usually by taking small stakes in each other and usually as a result of having a close business relationship, often as suppliers to each other. The structure, frequently likened to a spider's web, was much admired in the 1990s as a way to defuse the traditionally adversarial relationship between buyer and supplier. If you own a bit of your supplier, reinforced sometimes by your supplier owning a bit of you, the theory says that you are more likely to reach a way of working that is of mutual benefit to you both than if your relationship is at arm's length.
American trade officials, however, disliked Japan's keiretsu because they saw them as a restraint of trade. Jeffrey Garten, once under-secretary of commerce in charge of international trade and then dean of Yale School of Management, said that a keiretsu restrains trade “because there is a very strong preference to do business only with someone in that family”.
Despite its government's disapproval, corporate America liked the idea. Jeffrey Dyer wrote in Harvard Business Review in 1996 that Chrysler had created “an American keiretsu”. The company's relationship with its suppliers, which were reduced in number from 2,500 in 1989 to 1,140 in 1996, had improved to such an extent, claimed Dyer, that “the two sides now strive together to find ways to lower the costs of making cars and to share the savings”.
Related items * Idea: InnovationOct 15th 2009
Related topics * Harvard Business Review * United States * Asia * East Asia * Japan
At about the same time Richard Branson, founder of the UK's Virgin group, wrote in The Economist: “At the centre of our keiretsu brand will be a global airline and city-centre megastores acting like flag-ships for the brand around the world.” In The New Yorker in 1997, Ken Auletta mapped out the intricate keiretsu that he claimed was being woven by six of the world's mightiest media, entertainment and software giants: Microsoft, Disney, Time Warner, News Corporation, TCI and GE/NBC. Meanwhile, closer to the original home of the keiretsu, the South Korean economic miracle was being fired by that country's chaebol, industrial groupings that had been modelled closely on the keiretsu.
The American variety, however, was fundamentally different from the Japanese model. In Japan the keiretsu were regulated by specific laws, and they were structured in such a way that cooperation between them was almost compulsory. But outside Japan, the word keiretsu became attached to any loose network of alliances between more than two organisations.
Moreover, American companies' reasons for linking together were slightly different from those of traditional Japanese groups such as Mitsubishi or Sumitomo. The Americans were joining forces, wrote Auletta, “to create a safety net of sorts, because technology is changing so rapidly that no one can be sure which technology or which business will be ascendant”. In the process, he predicted that the keiretsu would become “the next corporate order”.
The New, Improved Keiretsu by Katsuki Aoki and Thomas Taro Lennerfors
Some of Japan’s most dominant companies owe their success not only to technology and process expertise but also to an often-overlooked factor: During the past decade, they’ve been quietly turning their supplier relationships into a tool for innovating faster while radically cutting costs. Welcome to the new keiretsu—a modern version of the country’s traditional supply system.
During its heyday, in the 1980s, the traditional keiretsu system—an arrangement in which buyers formed close associations with suppliers—was the darling of business schools and the envy of manufacturers everywhere. Although there was some tentative movement in the West toward keiretsu-like supplier partnerships at the time, the rise of manufacturing in low-wage countries soon made cost the preeminent concern. Most Western companies today wouldn’t dream of investing in supplier relationships that would require significant care and feeding. Indeed, many people probably assume that keiretsu died when Japanese manufacturers initiated Western-style cost-cutting tactics.
But some Japanese automakers have revived and reinvented keiretsu. Toyota provides an instructive example. Its recent stumbles in quality notwithstanding (about which more below), our research suggests that Toyota has gained enormously from the new keiretsu. It now has supplier relationships that are more open, global, and cost-conscious than they ever were, yet it has deepened the trust, collaboration, and educational support that were the hallmarks of keiretsu in their earlier form. Having conducted interviews and gathered data during 39 visits to auto plants and 192 visits to parts makers in Japan and overseas, and analyzed two decades’ worth of auto-manufacturing data, we believe that Toyota’s current supply-chain system represents one of the company’s greatest advantages.
Through a detailed look at Toyota, we will describe how the new keiretsu depart from tradition and will explore numerous lessons for developed-world and emerging-market companies seeking to innovate rapidly while cutting costs.
The Old and New Keiretsu at Toyota
The traditional keiretsu consisted of obligational relationships based on trust and goodwill. (For the purposes of this article, we’ll focus on vertical keiretsu, those among a manufacturer and its suppliers, and we’ll ignore horizontal keiretsu, which involve cross-holdings among companies centered on a bank.) That’s in sharp contrast to Western-style arm’s-length supplier relationships, which are governed by as much contractual clarity as possible.
In the traditional keiretsu world, an original-equipment manufacturer (OEM) would draw on exclusive, decades-long relationships with key suppliers, in which it often owned significant shares. The OEM would buy individual parts (not systems) at prices that weren’t very competitive—they were usually based on what it had paid for parts for its most recent model.
However, as practiced by Toyota, the new keiretsu breaks from tradition in four ways: * Instead of buying exclusively from companies with which it has long-term relationships, Toyota also sources from the global market, including from megasuppliers whose streamlined operations allow them to offer very low prices. This gives it flexible sourcing and keeps costs down. * When setting target prices for long-term suppliers, Toyota looks at the prices offered by multiple global companies, another boon in containing costs. * Instead of buying individual parts, the automaker demands that suppliers provide integrated systems of components. This helps it develop high-quality products while reducing costs and development time. * Toyota encourages suppliers to enhance their ability to provide these integrated systems and to become involved in product development at the planning stage.
At the same time, Toyota hews to the traditional keiretsu model in important ways: * Despite the automaker’s tough demands, its relationships are still based on trust, cooperation, and educational support for suppliers. The level of mutual commitment and assistance is perhaps even greater than in the 1980s. * Contracts governing the relationships are ambiguous, consisting of general statements and nonbinding targets. For example, rather than insisting on specific prices or price reductions for each year of a contract, as U.S. automakers typically do, Toyota states its expectations of annual cost reductions over the life of a contract—and shares the benefits by allowing suppliers who achieve those reductions to maintain their prices for a certain period of time. Spelling out specifics, Japanese companies believe, would encourage partners to do only what they were instructed to, and nothing more. Toyota counts on its suppliers to go the extra mile—to learn about and meet customers’ demands, help develop innovative processes, find and correct errors, and do whatever it takes to meet deadlines.
After the Bubble
The new keiretsu grew out of a crisis that affected the Japanese auto industry as a whole. In the early 1990s Western car manufacturers initiated radical cost-cutting programs, fueling the growth of megasuppliers such as Magna, Johnson Controls, and Valeo. To stay ahead, Japanese automakers turned to megasuppliers as well.
Moreover, the bursting of the Japanese economic bubble created a period of stagnation that stretched into the country’s “lost decades.” With sales and profits falling, some automakers went in search of capital, opening themselves to investment by foreign companies such as Renault, Ford, and Daimler—which pushed for further cost-cutting.
Toyota’s Evolving Keiretsu
The keiretsu began to lose luster. Seen through a shareholder-value lens, they looked costly and old-fashioned. In 1999 Renault became Nissan’s major shareholder, and a Renault leader, Carlos Ghosn, became the Japanese company’s COO. He soon launched the Nissan Revival Plan, aimed at reducing costs by 20% over three years. Ghosn told the press that Nissan’s keiretsu had not functioned well, and Nissan later sold its holdings in most supplier companies. Japan’s supplier relationships appeared to be drifting steadily toward the Western model.
In 2000, with competitive pressures continuing to build and its leaders pressing for rapid global growth, Toyota initiated a radically new purchasing strategy it dubbed “Construction of Cost Competitiveness for the 21st Century,” or CCC21. (See “Lessons from Toyota’s Long Drive,” HBR July–August 2007.) The plan called for selecting suppliers on the basis of globally competitive target prices, with the goal of reducing costs by 30% over three years. It also addressed a competitive advantage the megasuppliers were developing—the ability to provide sophisticated component systems rather than just individual parts. Under CCC21, Toyota began requiring suppliers to enhance their capabilities for producing these value-added systems.
CCC21 enabled Toyota to meet its cost target, and the number of individually purchased parts declined. But it would be inaccurate to view CCC21 as an adoption of Western-style arm’s-length contracting. Over the past two decades Toyota’s suppliers’ association (kyohokai) has remained quite stable: From 1991 to 2011 fewer than 20 of about 200 companies withdrew. From 1991 to 2010 the average sales-dependence ratio (the revenue from Toyota-related business as a share of total revenue) of 44 of the company’s suppliers has remained about 80%, even as Toyota has expanded its sourcing pool.
Toyota has also helped many suppliers meet its changing needs. Instead of abandoning suppliers when others offer lower prices, it provides support for operational improvements, organizing “study groups” and dispatching engineers to help vendors improve efficiency and quality and bring prices down. When Toyota drops a supplier for a particular model because of price, it works to maintain the relationship, providing opportunities for the vendor to supply parts for other models, for example.
Even after the adoption of CCC21, Toyota’s arrangements with suppliers continued to be ambiguous rather than spelled-out, with an emphasis on goodwill and trust. This is particularly noticeable in collaborations involving innovative product design. Toyota executives told us that the company requires suppliers to have a deep understanding of its processes and manufacturing goals and believes knowledge of this type can’t be conveyed merely by providing design drawings.
Education, Toyota Style
Toyota aims to build up suppliers’ stores of “tacit knowledge” through long-term sharing of work experiences, including attempts to solve problems together through trial and error. This hands-on training, which is as much cultural as technical, encourages suppliers to be on the lookout for problems, anomalies, and opportunities throughout the development and production of parts. Whereas Western manufacturers sometimes check only documents when inspecting suppliers’ factories, Toyota always examines the physical workplaces and products—thus the expression genchi genbutsu (roughly, “actual workplaces and actual things”), which speaks to the importance of being present when problems arise.
Over the past decade or so Toyota has forged deeper collaborations with suppliers at earlier stages of development. For many years it handled much of its own interior-systems development. But in 2004, after three of its keiretsu firms—Toyoda Boshoku, Araco, and Takanichi—merged to create an organization that could supply complete interior components (a merger in which Toyota was said to have played a key role), the automaker brought the new company, Toyota Boshoku, into its product-development process at the planning stage.
Few manufacturers have been as open to suppliers’ ideas or as successful in incorporating them as Toyota. It expects systems suppliers to help improve product design by, for example, figuring out how to incorporate lighter materials without sacrificing strength. For the Corolla Fielder, a model sold in Japan, Toyota Boshoku and Toyota jointly developed a new interior system with one-touch fold-down rear seats. And consider Advics, a company formed from the brake divisions of Toyota and three of its suppliers for the purpose of developing complete brake systems. In 2001 Advics’s improvements in product design and purchasing achieved a 30% cost reduction in the antilock brake systems for the Noah and Voxy cars.
As part of its product-development process, Toyota provides physical spaces that facilitate cooperation with and among suppliers. Vendors may be invited to a meeting known as an obeya—literally, a big room—where they work with Toyota representatives from several departments, including design, engineering, production, quality, and purchasing. Obeya meetings help Toyota avoid a pitfall common in other companies: Even if purchasing managers accept a supplier’s proposed design change, the change might later be rejected by the manufacturer’s engineers. In Toyota’s system everyone is in the big room making decisions together.
Toyota has also used a residential-engineer program, in which experts from suppliers work alongside Toyota’s designers for periods ranging from about six months to three years. The program, which hammers home the principle of “right first time,” fosters communication at the earliest stages of development, reducing the need for adjustments later on. Together with the obeya meetings, it has helped cut product-development lead time from three years to as little as one year, depending on the product’s complexity. Developing the bB small wagon, for example, took only about a year; the model was launched in Japan in 2000, and a successor, the Scion xB, appeared in the U.S. a few years later.
Toyota has developed keiretsu-like relationships overseas. In 1992 it created the Toyota Supplier Support Center to help U.S. vendors learn the Toyota Production System. In 1997 it established the Toyota Europe Association of Manufacturers, a group of about 70 companies that join together in study groups. And Toyota Europe’s Supplier Parts Tracking Team, containing specialists from purchasing, quality, design, production, and other functions, visits suppliers to help introduce the manufacturing of new parts.
Overseas, the company tends to be more explicit in its communications than it is in Japan, providing clearer rules and more-detailed specs. Still, key aspects of the new keiretsu appear to translate, including genchi genbutsu. When we visited Toyota facilities in the U.S. and UK, along with the plants of Aisin, Denso, and other suppliers, managers told us they prize engineers who grasp the “actual workplaces” mind-set, because those engineers drive implementation of the Toyota Production System.
Toyota’s supplier relationships are closer to the old keiretsu than those of the other Japanese Big Three automakers are, but Nissan and Honda have retained features of the traditional practice too. Having moved toward Western-style supplier relationships under Carlos Ghosn, Nissan shifted its stance again in 2004, announcing a new purchasing policy that represented a reevaluation of keiretsu. It has increased its investment in one large supplier and continues to rely on goodwill and trust in its dealings with many vendors. One example of its recent keiretsu-like practices is a program in which its engineers and those of its suppliers take up process-improvement projects in the suppliers’ factories. Honda, too, relies on trust and goodwill rather than explicit contractual terms and has organized supplier-development activities. However, in 2010 it announced a very un-keiretsu-like reduction in suppliers—in some categories, cutting the number almost in half.
A Tenacious Practice
The new keiretsu are far from perfect. Suppliers striving for high quality sometimes find it hard to deliver the simpler, cheaper parts needed in emerging markets. That’s why Honda recently announced an open purchasing policy under which it uses more parts from megasuppliers and from local suppliers in emerging countries. It could be argued that Nissan’s recent success in China—it has surpassed both Toyota and Honda in sales growth there—comes from its emphasis on openness in purchasing; if a supplier relationship is too close, the OEM has difficulty opening up to new suppliers. And obligational contracts can be burdensome for suppliers and their employees: Japanese parts makers sometimes require workers to labor through the night to meet the OEMs’ demands.
Nevertheless, the essence of keiretsu has proved durable, and the ability to avoid the hidden costs of Western-style supplier relationships is an important reason. A chief source of those costs is obfuscation of the root causes of supply-chain problems, as manufacturers and suppliers alike maneuver to avoid blame. Keiretsu relationships allow OEMs and suppliers to work together to detect a problem’s causes. And it’s cost-effective for OEMs to provide educational support to suppliers, because that ultimately brings down the suppliers’ costs and lowers the prices they charge. Suppliers’ high levels of dedication, innovativeness, and expertise all contribute to the manufacturer’s competitiveness. (See the sidebar “Why Are Keiretsu So Durable?”)
Why Are Keiretsu So Durable?
After Toyota’s recovery from the 1991 crisis, profits rose steadily. The ratio of consolidated operating profit to net sales climbed from 5.1% in 1991 to 8.5% in 2003 to 9.3% in 2007. However, the company was hit by the 2008 global recession and the 2011 earthquake and tsunami, and by 2011 the ratio had declined to 2.5%.
In the midst of the economic downturn came the 2009–2010 unintended-acceleration crisis, during which Toyota recalled 9 million vehicles worldwide. (A U.S. government report concluded that the problems resulted from accelerator pedals that got stuck or ones that got caught under floor mats.) As a result, Toyota took steps to improve its responsiveness to customer complaints and to speed its corporate decisions. In 2010 it revised its quality standards for parts, reportedly drawing on suggestions from suppliers. It also asked suppliers to strengthen their quality management starting at the design stage and conducted joint activities with them to that end. Although U.S. sales volume slipped from 2009 to 2011, it recovered in 2012. According to J.D. Power’s U.S. Vehicle Dependability Study, from 2009 to 2013 the number of problems per 100 vehicles declined 13% for Toyota, 44% for Lexus, and 39% for Scion, suggesting that overall quality has improved—owing in part to suppliers’ contributions.
Engineering Your Own Keiretsu
Despite the flaws, the new keiretsu provide a useful template for companies seeking to enrich their relationships with suppliers for long-term benefit. Indeed, although the arm’s-length approach is still dominant in the West, there has been some renewal of interest in keiretsu-style relationships, with a few manufacturers creating hybrid purchasing programs that involve keiretsu-like associations.
In certain industries in Europe, suppliers develop deep loyalties to manufacturers and participate in improving their supply chains. For example, the Swedish bus and truck maker Scania holds workshops to help suppliers learn the Scania Production System, which includes continuous improvement and lean production. Scania’s purchasing system shares other features with keiretsu: Suppliers identify with the hub company, which, in turn, works to make them more globally competitive (although it doesn’t hold shares in them).
IKEA, too, takes a long view of its supplier relationships, working to build committed partnerships based on mutual advantage. It delegates extensive tasks to vendors and collaborates with them in the interest of efficiency and cost containment. For example, it worked with a number of longtime suppliers to develop the technology for printing veneer patterns on the fiberboard tables in its Lack furniture series.
Companies looking to engineer their own forms of the new keiretsu should keep certain guidelines in mind: * Learn to think short-term and long-term at the same time. Tell suppliers that you envision lasting relationships, but only if they are cost-competitive today—and work with them to achieve that. Encourage them to regard you as a long-term partner by, for example, not only informing them of your cost-reduction expectations but also showing how the benefits will be shared. * Know your suppliers. If you don’t understand their processes, you can’t contribute to improving them. Instead of outsourcing all components, establish joint ventures for key parts. Visit suppliers’ workplaces. * Develop trust with your suppliers. Make it clear that the relationship will help them improve their operations and become more competitive. Be the customer they want to work with. * Balance explicit and implicit communication. Too much explicitness can lead to mistrust; too much implicitness can result in misunderstanding. * Establish a portfolio of suppliers and identify those most worth improving (you can’t improve them all). Which ones have the potential to be globally competitive? Assign grades according to capabilities such as quality, cost, delivery, people, and development. A supplier’s ability to learn is key to your future competitiveness. Suppliers that demonstrate a willingness to understand the root causes of mistakes are the most likely to improve. * Build personal relationships between your company and your suppliers, not only at the management level but also among employees. Meet your suppliers. Create joint study groups. Have your managers work with suppliers’ engineers on the shop floor. These steps will lead to faster problem solving and an atmosphere in which vendors are comfortable making suggestions. * If suppliers underperform, see what can be done to change the situation. Think in terms of development rather than switching. Give them opportunities to show how they could improve. * Involve suppliers in developing new products—invite their engineers to serve on your development teams—and conduct process-improvement activities in their factories. This will increase your competitiveness across the supply chain.
Increasingly the locus of competition is between supply chains rather than between individual companies. Western manufacturers that want to move toward improved supplier relationships must remember the keys to keiretsu-like partnerships: support, cooperation, trust, and goodwill. Those elements are critical even in a hypercompetitive, cost-obsessed environment, because they reduce the hidden costs of arm’s-length relationships.

Keiretsu
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Keiretsu
A keiretsu (系列?, lit. system, series, grouping of enterprises, order of succession) is a set of companies with interlocking business relationships and shareholdings. It is a type of informal business group. The keiretsu maintained dominance over the Japanese economy for the greater half of the 20th century.[1]
The member companies own small portions of the shares in each other's companies, centered on a core bank; this system helps insulate each company from stock market fluctuations and takeover attempts, thus enabling long-term planning in innovative projects. It is a key element of the automotive industry in Japan.
Contents
* 1 History * 1.1 Collapse of the zaibatsu * 2 Types of keiretsu * 2.1 Horizontal keiretsu * 2.2 Vertical keiretsu * 3 Nature of the keiretsu * 3.1 In Japan * 3.2 Outside Japan * 4 Contrarian view * 5 See also * 6 References * 7 Additional reading
History
The corporate governance of Japan dates back to the 19th century, much of which was propelled by the formation of the Meiji Restoration in 1866 by the Japanese government, the same time when the world entered the Industrial Revolution. These formations were termed zaibatsu.[2] Prior to the war, Japan remained dominated by four major zaibatsu: Mitsubishi, Sumitomo, Yasuda and Mitsui. They focused on steel, banking, international trading and various other key sectors in the economy, all of which was controlled by a holding company. Apart from this, they remained in close connection to influential banks that provided funding to their various projects.[3]
The prototypical keiretsu appeared in Japan during the "economic miracle" following World War II. Before Japan's surrender, Japanese industry was controlled by large family-controlled vertical monopolies called zaibatsu. Under this system, large industrial corporations paved the way for banks and trading companies to sit on top of the organizational pyramid controlling all financial operations and distribution of goods.
Collapse of the zaibatsu

Seizure of the zaibatsu families assets, 1946
The zaibatsu had been viewed with some ambivalence by the Japanese military, which nationalized a significant portion of their production capability during World War II. Remaining assets were also highly damaged by the destruction of the war.
Under the American occupation after the surrender of Japan, a partially successful attempt was made to dissolve the zaibatsu. Many of the economic advisors accompanying the SCAP administration had experience with the New Deal program under President Franklin Delano Roosevelt, and were highly suspicious of monopolies and restrictive business practices, which they felt to be both inefficient, and to be a form of corporativism (and thus inherently antidemocratic).
During the occupation of Japan, 16 zaibatsu were targeted for complete dissolution, and 26 more for reorganization after dissolution. Among the zaibatsu targeted for dissolution in 1947 were Asano, Furukawa, Nakajima, Nissan, Nomura, and Okura. Their controlling families' assets were seized, holding companies eliminated, and interlocking directorships, essential to the old system of intercompany coordination, were outlawed. Matsushita (which later took the name Panasonic), while not a zaibatsu, was originally also targeted for dissolution, but was saved by a petition signed by 15,000 of its unionized workers and their families.[4]
However, complete dissolution of the zaibatsu was never achieved, mostly because the United States government rescinded the orders in an effort to reindustrialize Japan as a bulwark against Communism in Asia.[5] Zaibatsu as a whole were widely considered to be beneficial to the Japanese economy and government, and the opinions of the Japanese public, the zaibatsu workers and management, and the entrenched bureaucracy regarding plans for zaibatsu dissolution ranged from unenthusiastic to disapproving. Additionally, the changing politics of the Occupation during the reverse course served as a crippling, if not terminal, roadblock to zaibatsu elimination.
Even until today, banks and trading companies have been at the top of the pyramid, having access and control over a portion of each company's part of the keiretsu. Shareholders succeeded over the family control of the cartel. This was made possible with relaxing of Japanese laws whereby holding companies could become stockholding companies.
Types of keiretsu
Cartels and groupings of various kinds are common in Japan.
The two types of keiretsu, horizontal and vertical, can be further categorized as: * Kigyō shūdan (企業集団 "horizontally diversified business groups"?) * Seisan keiretsu (生産系列 "vertical manufacturing networks"?) * Ryūtsū keiretsu (流通系列 "vertical distribution networks"?)
Horizontal keiretsu
The primary aspect of a horizontal keiretsu (also known as financial keiretsu) is that it is set up around a Japanese bank. The bank assists these companies with a range of financial services. The leading horizontal Japanese keiretsu, also referred to as the “Big Six”, include: Fuyo, Sanwa, Sumitomo, Mitsubishi, Mitsui, and Dai-Ichi Kangyo bank groups. Horizontal keiretsu may also have vertical relationships, called branches.
The linkage of these corporate groups through ownership of long-term equity and production activities, leads to emergence of vertical keiretsu.
Vertical keiretsu
Vertical keiretsu (also known as industrial keiretsu) are used to link suppliers, manufacturers, and distributors of one industry. One or more subcompanies are created to benefit the parent company (for example, Toyota or Honda). Banks have less influence on distribution keiretsu. This vertical model is further divided into levels called tiers. The second tier constitutes major suppliers, followed by smaller manufacturers, who make up the third and fourth tiers. The lower the tier, the greater the risk of economic disruption; moreover, due to low position in the keiretsu hierarchy, profit margins are low.[6]
Nature of the keiretsu
At the epicenter, the "big six" keiretsu is a bank and a trading company (sogo shosha). Japanese banks are allowed to have equity in other firms with a quota of less than 5% of the total number of shares issued by the company (Anti-Monopoly Law Reform of 1977). Banks play a crucial role in the smooth functioning of this organization. They assess the investment projects and provide loans when required. The trading companies (sogo sosha) deal in imports and exports of an assorted range of commodities throughout the world. Each major company has its own "President's Club", enabling interaction of core members to better help decide their strategies.[3]
The Japanese keiretsu took various preventive measures to avoid takeovers from foreign companies. One of them was "interlocking" or "cross-holding" of shares. This method was established by Article 280 of Commerce Law. By doing so, each company held a stake in the other's company. This helped reduce the pressure on management to achieve short-term goals at the expense of long-term growth. Besides that, interlocking of shares serves as a tool for monitoring and disciplining the group's firms. The level of group orientation or strength between the member companies is determined by the "interlocking shares ratio" (the ratio of shares owned by other group firms to total shares issued) and the "intragroup loans ratio" (the ratio of loans received from financial institutions in the group to total loans received).
Industries such as banking, insurance, steel, trading, manufacturing, electric, gas and chemicals are all part of the horizontal keiretsu web. The member companies follow the "One-Set Policy" whereby the groups avoid direct competition between member firms.
The One-Set Policy:[7] Industry | Mitsui | Mitsubishi | Sumitomo | Fuyo | Sanwa | DKB | Banking | Sakura Bank | Bank of Tokyo-Mitsubishi Bank | Sumitomo Bank | Fuji Bank | Sanwa Bank | Dai-Ichi Kangyo Bank | Trust Banking | Mitsui Trust & Banking | Mitsubishi Trust & Banking | Sumitomo Trust & Banking | Yasuda Trust & Banking | Toyo Trust & Banking | | Life Insurance | Mitsui Mutual Life | Meiji Mutual Life | Sumitomo Mutual Life | Yasuda Mutual Life | | Fukoku Mutual life, Asahi Mutual life | Marine & Fire Insurance | Mitsui Marine & Fire | Tokio Marine & Fire | Sumitomo Marine & Fire | Yasuda Marine & fire | | Nissan Marine & Fire, Taisei Marine & Fire | Trading Company | Mitsui Bussan | Mitsubishi Shoji | Sumitomo Corporation | Marubeni | Nissho Iwai | Itochu | Steel | Japan Steel Works | Mitsubishi Steel Manufacturing | Sumitomo Metal Industries | JFE Steel Corporation | Nakayama Steel Works, Nisshin Steel | Kawasaki Steel, Kobe Steel | Chemicals | Mitsui Toatsu Chemicals | Mitsubishi Gas Chemicals | Sumitomo Chemicals | Kureha Chemical Industries | Sekisui Chemicals | Asahi Chemical Industries | Shipping | Mitsui O.S.K. Lines ("MOL") | Nippon Yusen Kaisha ("NYK Line") | Kawasaki Kishen Kaisha ("K Line") | | | |
In the 1920s, government officials maintained close relations with the zaibatsu, and the roots of their influence still hold strong. The keiretsu have great influence on Japanese industrial and economic policy. The preferential buying habits of the keiretsu kept foreign investors and foreign goods out of their markets, which America criticized as "barriers to free trade". This enabled the keiretsu to enjoy monopoly privileges over the Japanese market, thus maintaining high prices for their goods, as they had full dominance over the price and distribution of products and services throughout the supply side. It is believed that due to this practice, Japan in the late 1980s imported far less than what they should have ($40 billion less as per a report by the Brookings Institution).
In such a work environment, the probability of an employee to remain working in the same company for his entire working life was very high. Moreover, this framework allowed rapid co-operative development (sharing vital information, reduction in cost of R&D and higher quality products) of the keiretsu.[3]
In Japan
During the occupation of Japan, under the Supreme Commander of the Allied Powers, General Douglas MacArthur, a partially successful attempt was made to dissolve the zaibatsu in the late 1940s. Sixteen zaibatsu were targeted for complete dissolution, and 26 more for reorganization after dissolution. However, the companies formed from the dismantling of the zaibatsu were later reintegrated. The dispersed corporations were reinterlinked through share purchases to form horizontally integrated alliances across many industries. Where possible, keiretsu companies would also supply one another, making the alliances vertically integrated, as well. In this period, official government policy promoted the creation of robust trade corporations that could withstand heavy pressures from intensified trade competition.[8]
The major keiretsu were each centered around one bank, which lent money to the keiretsu member companies and held equity positions in the companies. Each bank had great control over the companies in the keiretsu and acted as a monitoring and emergency bail-out entity. One effect of this structure was to minimize the presence of hostile takeovers in Japan, because no entities could challenge the power of the banks.
Although the divisions between them have blurred in recent years, there have been nine major postwar keiretsu:[7] Name | Bank | Major group companies | Mitsubishi | Mitsubishi Bank (until 1996)
Bank of Tokyo-Mitsubishi (1996–2005)
Bank of Tokyo-Mitsubishi UFJ (2006– )
Mitsubishi Trust and Banking | Financial: Mitsubishi Corporation, Tokio Marine and Fire Insurance, Mitsubishi Estate, Meiji Mutual Fund
Construction: Pacific Consultants International
Food: Kirin Brewery
Electronics: Mitsubishi Electric, Mitsubishi Precision
Trading and Commerce: Mitsubishi Shoji
Cars: Mitsubishi Motors, Mitsubishi Heavy Industries, Mitsubishi Fuso Truck and Bus Corporation
Petroleum: Nippon Oil, Mitsubishi Oil, Mitsubishi Nuclear Fuel
Precision Machinery: Nikon
Chemicals: Mitsubishi Chemical, Mitsubishi Gas Chemical, Mitsubishi Rayon Co., Ltd., Mitsubishi Materials Corp., Mitsubishi Plastics Industries, Asahi Glass, Nippon Synthetic Chemical Industries (Nippon Gosei)
Paper: Mitsubishi Paper Mills Ltd.
Iron and Steel: Mitsubishi Steel
Shipping: Nippon Yusen Kaisha - "NYK" | Mitsui | Mitsui Bank (until 1990)
Sakura Bank (1990–2001)
Sumitomo Mitsui Bank (2001– )
Sony Financial,
Sony Bank | Financial: Mitsui Real Estate, Mitsukoshi, Mitsui Mutual Life, Mitsui Marine & Fire
Food: Nippon Flour Mills, Mitsui Sugar, Suntory
Chemicals: Fuji Photo Film, Mitsui Toatsu Chemicals, Mitsui Petrochemical Industries, Toagosei Chemical Industries, Denki Kagaku Kogyo, Daicel Chemical Industries, Mitsui Pharmaceuticals, Mitsui Toatsu Fertilizers, Mitsui Toatsu Dyes, Toray
Trading and Commerce: Mitsui Bussan
Petroleum: General Sekiyu, Kyokuto Petroleum Industries
Electronics: Sony Corporation, Yaussa Corporation, Ibiden Company, Toshiba
Iron and Steel: Japan Steel Works
Gaming: Sony Computer Entertainment
Entertainment: Sony Pictures Entertainment, Sony Music Entertainment other Sony subsidiaries, and Media Nusantara Citra
Shipping: Mitsui O.S.K. Lines ("MOL") | Sumitomo | Sumitomo Bank (until 2001)
Sumitomo Mitsui Bank (2001– ), Sumitomo Trust and Banking | Financial: Sumitomo Corporation, Sumitomo Corporation of America, Sumitomo Mitsui Financial Group, Sumitomo Trust & Banking, Sumitomo Life Insurance Co., Sumitomo Real Estate, Mitsui Sumitomo Insurance Co., Ltd., Sumitomo Realty & Development Co., Ltd., Presidio Ventures, Construction: Sumitomo Mitsui Construction Co., Ltd., Sumitomo Densetsu, Sumitomo Osaka Cement Co., Ltd.,
Food: Asahi Breweries
Rail: The Sumitomo Warehouse Co., Ltd., Hanshin Railway, Keihan Railway, Nankai Railway
Trading and Commerce: Sumitomo Corporation
Cars: Mazda
Precise machinery: Sumitomo Heavy Industries, Ltd.,
Electronics: NEC, Sumitomo Electric Industries, Ltd.,
Iron and Steel: Sumitomo Metal Industries, Ltd., Mezon Stainless Steel Fzco., Sumitomo Light Metal Industries, Ltd.,
Chemicals: Sumitomo Chemicals, Nippon Sheet Glass Co., Ltd., Sumitomo Bakelite Co., Ltd., Sumitomo Rubber Industries, Ltd., Dainippon Sumitomo Pharma,
Mining: Sumitomo Metal Mining Co., Ltd.
Forestry: Sumitomo Forestry Co., Ltd.
Infrastructure: Nippon Koei | Fuyo | Fuji Bank (until 2000)
Mizuho Bank (2000– )
Yasuda Trust and Banking
Yamaichi Securities | Financial: Yasuda Mutual Life, Yasuda Marine & Fire
Food: Nisshin Flour Milling, Sapporo Breweries
Precision Machinery: Canon, Hitachi, Ricoh
Trading and Commerce: Marubeni
Chemicals: Showa Denko, NOF Corporation, Kureha Chemical Industries, Nippon Sanso, Hitachi Chemical, Asahi Kasei
Rail: Tobu Railway
Vehicles: Yamaha, Nissan
Retail: Matsuya | Dai-Ichi Kangyo (DKB) | Dai-Ichi Kangyo Bank (until 2000)
Mizuho Bank (2000– )
Kankaku Securities
Orient Group | Financial: Fukoku Mutual Life, Asahi Mutual Life, Nissan Marine & Fire, Taisei Marine & Fire
Electronics: Fujitsu, Hitachi, Fuji Electric, Yaskawa Electric, Nippon Columbia
Cars: Isuzu, Kawasaki Heavy Industries
Power Generation: Tokyo Electric Power
Petroleum: Showa Shell Sekiyu
Precision Machinery: Asahi Optical
Trading and Commerce: Seibu, Itochu,
Iron and Steel: Kawasaki Steel, Japan Metals, Kobe Steel
Chemicals: Denki Kagaku Kogyo-Mitsui Group, Nippon Zeon, Asahi Denka Kogyo, Sankyo Co., Lion Corporation, Kyowa Hakko Kogyo, Asahi Chemical Industries,
Shipping: Kawasaki Kishen Kaisha - K-Line | Sanwa ("Midorikai") | Sanwa Bank (until 2002)
UFJ Bank (2002–2006)
Bank of Tokyo-Mitsubishi UFJ (2006– )
Toyo Trust and Banking | Food: Itoham Foods, Suntory
Rail: Hankyu Railway, Keisei Railway
Steel: Kobe Steel, Nakayama Steel Works, Nisshin Steel
Precision Machinery: Konica Minolta, Hoya Corporation
Petroleum: Cosmo Oil
Electronics: Hitachi, Iwatsu Electric, Sharp Corporation, Nitto Denko, Kyocera
Trading and Commerce: Takashiama, Orix, Nissho Iwai
Chemicals: Ube Industries, Tokuyama Corp, Hitachi Chemical, Sekisui Chemical, Kansai Paint, Tanabe Seiyaku, Fujisawa Pharmaceutical, Daiso Co., Teijin, Unitika Fukusure
Cars: Hitachi Zosen Corporation
Retail: Takashimaya
Cinema: Toho
Shin-Maywa | Tokai
(Toyota Group) | Tokai Bank
Chuo Trust | Food: Kagome
Cars: Daihatsu, Suzuki Motor, Toyota
Steel: Daido Steel
Precision Machinery: Ricoh
Petroleum: Idemitsu Kosan
Electronics: Ushio Industries
Trading and Commerce: Matsuzakaya | IBJ | Industrial Bank of Japan, New Japan Securities
Wako Securities
IBJ Securities | Cars: Fuji Heavy Industries (Subaru)
Precision Machinery: Ikegai, Riken
Chemicals: Nippon Soda, Chisso Corporation, Nissan Chemical Industries, Tosoh Corporation, Hodogaya Chemical, Plas-Tech, Taihei Chemical, Japan Organo, Kuraray |
Toyota is considered the biggest of the vertically integrated keiretsu groups.[9] The banks at the top are not as large as normally required, so it is actually considered to be more horizontally integrated than other keiretsu.
The Japanese recession in the 1990s had profound effects on the keiretsu. Many of the largest banks were hit hard by bad loan portfolios and forced to merge or go out of business. This had the effect of blurring the lines between the individual keiretsu: Sumitomo Bank and Mitsui Bank, for instance, became Sumitomo Mitsui Banking Corporation in 2001, while Sanwa Bank (the banker for the Hankyu-Toho Group) became part of Bank of Tokyo-Mitsubishi UFJ.
Generally, these causes gave rise to a strong notion in the business community that the old keiretsu system was not an effective business model, and led to an overall loosening of keiretsu alliances. While they still exist, they are not as centralized or integrated as they were before the 1990s. This, in turn, has led to a growing corporate acquisition industry in Japan, as companies are no longer able to be easily "bailed out" by their banks, as well as rising derivative litigation by more independent shareholders.