An interconnected network of companies characterized by strong alliances and cross-shareholding that originated from Japan

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What is Keiretsu?

Keiretsu is an interconnected network of companies characterized by strong alliances and cross-shareholding that originated from Japan and dominated the economy during the last half of the 20th century, particularly after World War II. The keiretsu still exists in the 21st century, undergoing radical changes since its formation.

Keiretsu Model - How It Works Diagram
Fig. 1: Keirutsu Model – Toyota (Source)

Keiretsu is best described as an intricate business network with a long-term transactional relationship. The business network is largely composed of banks, manufacturers, supply chain partners, and distributors who work closely together for the success of the whole group.

The companies in the keiretsu group own small amounts of each other’s shares to strengthen their alliance. The bank is usually at the center of each keiretsu and acts as the financier of the alliance. The financing and cross-shareholding insulate member companies from stock market volatility and takeover attempts from non-alliance firms. The core bank thus enables the members of the keiretsu to focus on long-term projects that are desirable to each company’s sustainable growth and profitability.

Origins of the Keiretsu

The keiretsu originated in Japan during the post-World War II period. The creation of keiretsu came after the collapse of family-controlled vertical monopoly groups called the zaibatsu. The zaibatsu flourished during the Meiji government, where they received government support, such as lucrative government contracts and subsidies. The big four zaibatsus were Mitsui, Mitsubishi, Sumitomo, and Yasuda.

After the defeat of Japan in World War II, the United States realized that they needed an economically stronger Japan to be present in the East. Hence, they decided to stop the process of dissolving the zaibatsu. Some disbanded zaibatsus were re-established. The zaibatsu alliances were grouped around big banks and were permitted to hold shares in each other.

However, the influence of families under zaibatsu later disappeared, and the new companies that emerged no longer depended on holding companies; instead, they became independent entities. The new conglomerates changed their identity and were now called keiretsu.

Top Keiretsu Groups in Japan

The six largest keiretsu groups in Japan are the following:

  • Mitsubishi
  • Mitsui
  • Sumitomo
  • Sanwa
  • Fuyo
  • Daiichi-Kangin

Below is a table showing the companies under the biggest keiretsu groups. These groups are large, as they include other smaller companies. The highlighted names are the top companies in each keiretsu.

Table of Japan's Biggest Keiretsu Groups

Types of Keiretsu

Keiretsu are categorized into two types – horizontal and vertical keiretsu. A description of each is provided below:

Horizontal Keiretsu

A horizontal keiretsu consists of large independent companies that are in different industry sectors making up the group. There is usually no holding company leading a horizontal keiretsu. However, there are large companies with an influence that directs activities of the keiretsu.

Normally, there is a bank and a trading company in the group that exert influence in terms of decision making and overall direction of the grouping. In addition, a horizontal keiretsu will include an insurance company and a large manufacturer. The financier, trading company, insurance company, and large manufacturer are the fulcrum of the group and provide an identity for the keiretsu. The Mitsubishi keiretsu is one example of a horizontal keiretsu with the above features.

In a horizontal keiretsu, the bank plays a key role in the grouping. The bank is the chief financier of the keiretsu, as it facilitates the largest advances to companies in the grouping. However, members in the group are free to get funding from other banks and the lead bank acts as the guarantor for loans extended by outside banks.

The relationship between the companies and the bank is usually cordial given the cross-shareholding that exists between them. The trading company plays a crucial role, which includes coordinating trade within the group, as well as among other keiretsu, independent organizations, and foreign entities.

As highlighted above, Mitsubishi is a horizontal keiretsu, where at the center is The Bank of Tokyo Mitsubishi. Other influential companies include Mitsubishi Motors, Mitsubishi Trust and Banking, Meiji Mutual Life Insurance Company, and Mitsubishi Shoji is the trading company.

Vertical Keiretsu

A vertical keiretsu takes on a steeper structure compared to horizontal keiretsu. It is led by one large entity that defines the whole grouping through its products, influence, and the dependence of the other members on the large lead company. The other members are smaller and are usually suppliers of the large firm. Vertical keiretsu are common in the automotive industry, electronics, broadcasting, advertising, and other industries.

Vertical keiretsus are characterized by a pyramidal structure in which there are a few tiers of suppliers involved. The first-tier suppliers are companies that supply items directly to the leading firm. The second-tier suppliers are suppliers of products to the first-tier firms and the tiers go down as far as is needed.

It is quite possible that the leading firm may not be aware that there are other smaller firms in the hierarchy of the keiretsu. At the same time, it is also likely that some lower-tier firms may not be aware that they are in the same keiretsu with the leading firm. A vertical keiretsu can be notoriously big with many smaller firms in the hierarchy.

Pros of Keiretsu

An alliance built on long-term close business relationships ensures a stable and reliable supply chain to ensure business continuity and protecting proprietary technology.

  • Keiretsu members share business best practices and improve risk management by reducing unknown variables.
  • Reduction in costs of procurement through sourcing products from within the keiretsu increases efficiency within the supply chain. This efficiency gave birth to the just-in-time stock management system, which is a very efficient method.
  • Keiretsu holds each other’s shares through cross-shareholding, which prevents the threat of hostile takeovers.
  • The sharing of information within the keiretsu has the potential to increase efficiency.

Cons of Keiretsu

The Keiretsu system reduces competition within the keiretsu, which can lead to inefficient processes and service delivery.

  • There is a risk of companies within the keiretsu to borrow beyond their means and undertake risky strategies since capital is readily available from the lead bank.
  • Because of the bigger size of the keiretsu, it is likely to be unable to respond swiftly to changes in the market, culture, and technology.
  • The keiretsu system can result in closed markets and monopolistic tendencies.

Additional Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

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