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 business group. The keiretsu maintained dominance over the Japanese economy for the greater half of the 20th century, but are beginning to lose their grip. [ 1 ]

Contents

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 zaibatsus. 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 ]

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, of the zaibatsu workers and management, and of 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. [ 6 ]

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. [ 7 ]

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 ]

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: [ 8 ]