Keiretsu OS Presentation - Final

KeiretsuGroup -6

Characteristics of Japanese• Confucian background• Nonkinship-based association• Openness to stranger - Adoption acceptable• Loyalty- The political authorities have control over the family• Strong sense of natioHuge family-owned corporations

Zaibatsu• Strong sense of natioHuge family-owned

corporations• Nature of Japanese network organizations

• Strong influence to Japan’s economy

• Example: Big 4 - Mitsui -

Mitsubishi -

Sumitomo - Yasuda

• Regionalism- Lack of trust for people who are not Japanese

• Perfectionism

• 1868 :Zaibatsu started during Meiji Restoration

• Before WWII :Ten largest Zaibatsu accounted for 53% of total paid in capital in the financial sector

• End of WWII : Big 4 controlled 25% of the paid in capital of all business in Japan.

• 1945 : Zaibatsu ended with the American occupation & “Keiretsu emerged”

Timeline

Structural comparison

• Close relationship between publically-owned companies

• Closely tied on various projects

• Firms do not necessarily need to own equity in each other

• “Not quite independent, but yet far from integrated”

Example of Headless Pyramid : Mitsubishi Corporation

Corporate StructureFinancial keiretsu

• Former zaibatsu (Big six): Mitsubishi, Mitsui, Sumitomo, etc.

• Extensive cross- or circular- shareholding.

• Give preference to each other in business relations

• Facilitate information creation and exchange, reducing transaction costs & risk, etc.

Vertical keiretsu:

• Based on repeated business and trust.

• Supplier (buyer) invest in product-specific equipment or R&D (less risky).

• Automobile (Toyota: JIT), consumer electronics

Distribution keiretsu

• Distribution network of consumer goods manufacturers with diverse related products

• Manufactures maintain network of wholesalers & retailers (nominally independent).

• (eg) Matsushita (consumer electronics), Shiseido (cosmetics), Toyota (sole dealership)

Enterprise keiretsu

• One core industrial enterprise and affiliated firms in some (non)-related industries (conglomerates).

• Internalize some external economies (to any single firm) within the group.

• (eg) subway company with department store at central terminal, amusement park at the other end.

Keiretsu system Effects & EnablersEffects

• High level of (vertical) integration & conglomerates.• High degree of non-market coordination

of decision making.• Facilitate (formal, informal) government

coordination among companies and sectors.

• Significant role of ‘trading company’ for the groups.• General trading companies (GTC, 綜合商社 ) established for the largest nine

keiretsu.• Assist the group companies in the foreign

markets (for export, import, FDI, etc). • Reduce the risks of exchange rate

fluctuation and seasonal variations in demand and price, provide export (import) credit & information, etc.

• Account for substantial portion of Japanese overseas investment.

Enablers

• 1. Relative low wage level.• 2. Low level of dividend payment to

shareholders.• 3. Mutual support within business group

(keiretsu).• 4. Relative high level of consumer prices.• 5. Low interest rate (government-led).• 6. High saving rate. • 7. Japan’s unique labor-management

relationship

Financial Structure0 Indirect corporate finance as main

source.• Bank-based finance.• Based on high saving (commercial banks,

postal).• Postal saving system under direct

government influence had large deposit funds.

• Banks tend to “over-loan” with low interest rate.• Long term loan by Industrial Development Bank. • Implicit guarantee by the gov’t & high saving rate.

• Limited role of capital market (stock, bond).• Large institutions (bank, business partner) were

major shareholder. <cf: pension fund, insurance in US.

• Allow long-term business perspectives, w/o concern for short-term performance or high dividend to shareholders.

• The Main Bank (主銀行 ) system (for large firms) – Main bank responsible for

monitoring the borrower as largest single lender – not the sole lender.

– The main bank own some shares (stocks) of the keiretsu firms (mostly).

– Lead restructuring of the firms when thery are in poor condition – by sending management

personnel.– Secure the company’s fee

business & deposits.

Industrial Relations SystemLifetime employment system

• Applied only for regular workers of large enterprises. • <cf: irregular (temporary) workers, SME workers

• Possible negative effects: overstaffing during downturn, less-qualified staffs• Possible positive effects: lower turnover, less resistance to technological change/reassignment, invest in firm-specific

skill, high worker loyalty, etc.• Rational arrangement in a rapidly growing economy.• When high-quality new workers are in short supply

• Somewhat flexible in applications• Adjustment can be made within group companies.

Seniority-based wages.• Paid below their marginal labor productivity earlier in their career, reap rewards later in their career. • Several adaptations • Promotion based on performances (highly competitive)

Company-based trade union• Interests of workers tied to the performance of the firm.• Strikes benefit the competitor, • labor saving technological change enhancing productivity good for workers in LR.

Worker participation & enterprise familism (high loyalty).• QC circle, proposal system, etc. (Toyota system).• Small intra-firm income gap & diverse fringe benefits to workers.

Role of the State: Industrial Policy

•Symbiotic relationship bet. gov’t & business community.History of gov’t nurturing of enterprises.

•in particular, MITI(通産省), MOF(大藏省) & their decision-making power on economic policy

•<cf: weak Parliament

High prestige of professional bureaucracy

•Deliberation Councils (facilitate information sharing).•High level of bureaucrats assume top position in enterprises upon early retirement

(Amakudari). Close interaction in policy-making process bet. bureaucracy &

business leaders.

•Private sector is assumed to have insufficient vision, coordination, risk-bearing abilities.

•Gov’t provide information, pool resources, coordinate. •to alleviate bottlenecks, to avert overproduction, to anticipate market shifts, to

develop new technology, etc. •Shift industrial structure along dynamic comparative advantage.•One component was promoting export & restricting import (neo-mercantalism).

Focus of the economic policy on supply management (industrial

policy).

•Control over low-interest funds.•Special depreciation and tax benefits.•Provide marketing information and assistance in the foreign market (JETRO)•Tariff and non-tariff barriers against imports.•Administrative guidance: some type of cartel.

Policy tools

Keiretsu Business SystemsBenefits• Specialization• Strong, loyal relationships- stability &

insurance• Mutual assistance • Reciprocal Monitoring• Reduction of information asymmetry• Access to stable f inancing- banking t ies• Insulation from market pressures

Drawbacks• Ties are very complex• “Bad deal” partnerships• Over-investment• Poor performance incentives• Heightened information asymmetry

(between f irm insiders & outsiders)• Reduced eff iciency & responsiveness to

shareholders• Diff icult to attract investment outside

Keiretsu t ies

Japanese Culture OverseasEffective• New technologies & business methods• Professionalism appreciated• Encourages coordination and cooperation• Stable capital, supplier & distribution

networks• Sets high standards of quality and

perfectionism

Ineffective• Management- extreme and cold• Arm’s length foreign investment• Weakening keiretsu ties• Counter-productive to efficiency, innovation &

market responsiveness• Employees & US suppliers are not as loyal• Labor methods are not able to adjust to rapid

economy changes

Keiretsu tiesTraditional

• Strong bank ties, reciprocal shareholdings

• Buyer-Supplier ties

• Internal board and personnel

• Domestic ownership

Present• Deeply embedded• Multiple personal ties = powerful, ownership

networks• Highly hierarchical• Multidivisional table of organization• Pyramidal nature of shareholdings• Varying degrees affi l iation• State of economy can affect the strength of

keiretsu• Japan’s economy is dominated by six major

horizontal Keiretsu:• Mitsui, Mitsubishi, Sumitomo (pre-war

zaibatsu)• Dai Ichi Kango, Fuyo, Sanyo (post-war

Future

• Diminished bank debt, reduced cross-holdings, increased reliance on non-bank financing

• Reduced ties (mainly vertical keiretsu) ready access to reliable, quality suppliers

• More “North American” style board structure

• “Arms Length” foreign

equity investment

Weaknesses

0 The limited competition within the keiretsu may lead to an inefficient company because a keiretsu company knows they can easily access capital.

0 It forces the other companies in the keiretsu to bear the burden of the weak company.

0 When manufacturers and suppliers link together in the keiretsu their relationships impede their ability to search internationally for the lowest priced input and supplies.

0 Exclusive dealers are restricted or prohibited from selling the products of other manufacturers

0 Sometimes borrowers and banks lead to an environment in which a bank keeps its mouth shut and its fingers crossed, increasing the likelihood that a bad situation will get worse.

Why stock price remains stable despite unrelated diversification?

0 Cross shareholding0 Long term stock holdings.0 Rapid Information sharing0 Reduce information asymmetry.0 Risk sharing0 Because approximately three-fourths of their shares are held by

other corporations (which are parent companies), short-term pressures are minimal

0 Monitoring by closely connected set of financial stake holders.

Summing-upProduction-oriented system.

0 Most Japanese people enjoyed the benefits over time.0 Through sustained economic growth.

0 Consumers bore costs due to this “Japanese” system.These institutional features emerged to foster

economic growth under certain conditions (Japan faced in 1950s-1970s).0 Insufficient economic/business information, imperfect capital

market, risky domestic environment (hostile labor relation), etc. 0 Reduce transactions cost, uncertainty & risk, or ensure long-term

relations, or facilitate information flows, etc. 0 “Japanese” response to the above conditions.

0 Not easily copied by other countries.0 Changed substantially since 1980s in Japan.

Toyota - Keiretsu• Horizontal Linkages

– Dominate the industrial businesses

– Example: Partnerships between Toyota & Honda

• Vertical Linkages– Organized

between a major industrial firm & its buyers & suppliers

– Example: Toyota & Bridgestone

HorizontalHonda

Verti

cal

• Toyota is the leading company in so-called vertical Keiretsu

• Toyota Motor performs only:– Design– Final assembly functions

• Toyota linked with hundreds of independent subcontractors and parts suppliers

• Informal relationship but durable networkCompany Field

Toyota Loom Works Engines

Aichi Steel Works Steels

Toyota Machine Works Machine tools

Toyota Auto Body Vehicle assembly

Toyota Gosei Resin & Rubber Parts

Toyota Boshoku Air Filters

Toyota Central R&D Laboratories

Research & Development

Toyota Tsucho Corporation Wholesaling

Towa Real Estate Real estate

Nippondenso Electronics

Aisin Auto Parts

Example of Keiretsu : Toyota

Toyota - Strength of Japanese industry has been formed by "Keiretsu "(closed) model

Technological black box is maintained by the capital ties

Technological black box is maintained by the capital ties

A Comparison of keiretsu and Chaebols

Cha

Indian perspectiveTop 5 non government business houses 0 Tata0 Birla 0 Reliance0 Thapar 0 Singhania

Features Tata

Ownership and control Tata sons, family owned

Structure Unrelated horizontally diversified

Finance Centralization of fund

Government influence Directive Principles of State Policy

Culture Family culture

Tata Group

Tata sons

Tata Power

Tata steel

TCS

Tata Motor

1. Capital concentration is the key to most of the business houses

2. Big Business Houses grow on the strength of the internal resources and profits generated by them

3. The House appears to be wanting to produce as many varieties of goods as possible

4. Industry specialisation to harness economies of scale and adoption of new technologies to cut down costs of production do not appear to be a strong point

5. Group is associated with steel, motors, power generation, IT, hotels, paints, cosmetics, toiletries and garments besides trading in a variety of consumer goods

6. Because of diversity and less specialization in industry forces houses to largely depends on imported technologies

AD Birla

group

Hindalco

Ultra tech

Grasim

Idea

Single line structure

Other two types of structure

0 The direct interest of the Tata House can be placed at three per cent only in the risk capital of the TISCO

0 But management should be deriving economic and financial advantage in a variety of other forms than merely seeking to earn high dividends on their investments

Factors which played main role in rapid expansion of business houses

0 Participation of financial institutions in equity capital; 0 Intra-House corporate investments; 0 New joint sector enterprises wherein state level institutions join with

House companies and 0 Financial and technical collaborations with TNCsSome key characteristics of business houses0 Out of the top 204 companies only 17 did not appear to have large House

association0 In terms of House association, the number of companies of the Birlas and

the Tatas was the highest0 The members of the Boards of Directors seem to have a very marginal stake0 The managements enjoy the authority to purchase raw materials, hire

services, fix sales norms, make agreements, enter into collaborations, operate finances and have a vast discretionary powerin company's day-to-day operations.

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