What do Sapporo Brewery, Nissan, Yamaha and Canon have in common? They're all united under one conglomerate. How about Sony, Fujifilm, Suntory Whiskey and Toshiba? Another conglomerate—this one builds carbon fiber components for Dodge and Boeing too. Eight dominate Japanese industry and a fair chunk of the world, and you use their products every day.
They're called keiretsu, monolithic conglomerates unlike any other. Unique to Japan, each keiretsu can have as many as 30 companies spread out across a huge range of industries. Food companies, paper mills, car companies, camera makers, movie studios, mining companies, real estate, pharmaceuticals, breweries, distilleries, ironworks, railways, shipping lines, retail stores, nuclear power plants, clothing makers, television broadcasters, computer parts, life insurance, construction, oil companies, video games, jet fighters and airliners, all loosely interwoven to benefit each other indefinitely. The U.S. sees keiretsu and keiretsu-like relationships within corporate Japan as obstacles to free trade between the countries.
This September, the Obama administration is mounting a final push for the Trans-Pacific Partnership to remove tariffs and non-tariff barriers from Asian markets. American diplomats are putting a lot of effort into cracking Japan's automotive and agricultural markets, in particular.
“Unlike Europe, Japan doesn't use formal quotas and tariffs to keep foreign competitors out; they use under-the-table agreements, commitments and understandings,” says Jim Lincoln, Mitsubishi chair in international business and finance at the University of California, Berkeley. “Japanese business is still done in a closed and networky way that favors insiders and keeps outside stakeholders at bay.”
But as often as American diplomats and international media characterize the Japanese market issue as one driven by keiretsu, the modern situation is that keiretsu as an organizational method is living out its final moments.
Keiretsu exist as a network of industries, with one- and two-way agreements to favor each other in business deals and share in shouldering temporary burdens that would otherwise cause instability for the group. How those relationships flow break them into two groups. There are vertically integrated keiretsu, such as the Toyota Group, in which a strong parent company shares manpower, contracts and shareholdings with smaller companies that exist mostly to supply the parent company or distribute its products. Deals within the Toyota Group keiretsu would be mostly between Toyota, the parent company, and another company, such as Daido Steel to Toyota, Idemitsu Kosan petroleum to Toyota, and so on. And in an economic slump, Toyota would transfer employees to other companies inside the keiretsu rather than lay them off or keep them on the payroll. Like all keiretsu, there is a bank as a member, although it has less pull in a vertical orientation.
Horizontal keiretsu revolve around the bank. Rather than a parent company cross-shareholding with the other companies, it's mostly the bank that owns pieces of the companies and the companies that hold pieces of it. These are the keiretsu where it's typical to have a huge spread of companies across many industries that have little or nothing to do with each other, such as the Fuyo Group and Sanwa Group mentioned at the beginning of the article. Horizontal keiretsu also share employees, like vertical keiretsu. Hitachi may transfer an engineer temporarily to another company who's building components Hitachi will use in an upcoming product, or it may transfer the employee there permanently. Executives also often transfer between groups, so Nissan's board may consist of former Yamaha, Sapporo and Canon executives, in addition to others, and former Nissan executives would sit on the boards of those companies as well. It could be the only career change for an employee; Japanese employees often work at one company for life.
Keiretsu descended from pre-World War II conglomerates called zaibatsu. “Before the war, the zaibatsu were structured in the same fashion as other centrally controlled groups around the world,” says Lincoln. Elsewhere in the world, large companies outright own subsidiary companies, in whole or in part, in a centrally organized fashion with the parent company at the head. For example, at the time General Motors owned and controlled Frigidaire, Delco Electronics and North American Aviation. “The U. S. occupation broke up the zaibatsu as part of a democratizing effort, however, and holding companies were illegal in Japan from then until 1995,” he says, “so the decentralized 'network' organization of the keiretsu derives from the unique historical experience of having lost the war.”
The Japanese groups are unique is that kinship has not been a major organizing principle, Lincoln says. Elsewhere, such as in the Korean chaebols and the Indian and Taiwanese conglomerates that wrap Asian business with family ties, kinship is the most important basis for group organization. Loyalty in a keiretsu is instead based solely on business. So, as Lincoln says, Nissan employees at a company outing would drink Sapporo beer, just as Mitsubishi employees would drink Kirin beer. Loyalty within a keiretsu is one of the last remnants of a crumbling system.
“After the bubble burst around 1992 and Japan’s economic fortunes soured, commentary on the horizontal groups turned negative,” Lincoln says. “They were blamed for the Japanese economy’s inability to restructure and resume stable growth. The propensity to share risks within the group—banks and major manufacturers bailing out troubled affiliates—was perceived to be a major drag on economic efficiency. 'Zombie' companies were kept alive when they should have been swept away.”
Ever since, keiretsu have been becoming more like other conglomerates. Some, like Toyota, outright converted their closest affiliates into majority-owned subsidies.
“The keiretsu are pale shadows of what they used to be,” says Lincoln. “Many Japanese will say they’re gone altogether. Companies in some countries—Germany in particular—have done much better than U.S. companies at getting their products in the hands of Japanese consumers. German cars are everywhere in Japan, while U.S. cars are extremely scarce. The Japanese say this is because U.S. companies don't try hard enough. (Americans') short-term orientation and high turnover of executives compel them to get out if they don't get good results early on. On the other hand, much of Japanese business activity still has the look and feel of keiretsu even if the groups per se are mostly gone.”
Back in 2011, when Japanese camera maker Olympus bought out medical equipment manufacturer Gyrus Group for $2.2 billion USD, nobody outside Olympus (and few inside) seemed to know where all the money went. According to a Reuters story at the time, a third of that sum was paid as an advisory fee to a third-party company; advisory fees are typically only 1 to 2 percent. What's more, according to a New York Times story, Olympus moved the “advisory fee” first to Axes America, a minor brokerage firm, which then moved it to a brand-new company founded in the Cayman Islands, which then transferred the money somewhere else. Axes America and the Cayman Islands company shut down soon after, and when Olympus' new chief executive Michael Woodford called for an investigation into why that much money was moved around so shadily, he was immediately and unanimously removed by Olympus' board of directors.
“The Olympus scandal was handled in a way that was right out of the old keiretsu playbook,” Lincoln says. “I think a lot of observers of the Japanese economy would agree that, while the groups per se no longer amount to much, keiretsu 'culture' still wields a lot of sway in Japan.”