Saturday, October 15, 2011

Keiretsu Networks


Keiretsu, Governance, and Learning: Case Studies in Change from the Japanese Automotive Industry by Christina L. Ahmadjian, Columbia University and James R. Lincoln, University of California, Berkeley.

The American Keiretsu: A Strategic Weapon for Global Competitiveness by David N. Burt, Michael F. Doyle.

Keiretsu: Inside the Hidden Japanese Conglomerates by Kenichi Miyashita, David Russell.

Keiretsu is a Japanese term reflecting a corporate grouping that takes the form of a tight-knit grouping, alliance or network that operates to underpin each other's mutual success. A web of relationships that links government, banks, manufacturers, suppliers and distributors, a Keiretsu system represents a close partnership between government and businesses.

Are they "closed market" cartels which deny access to foreign competition? These corporate alliances have been hotly debated. They may be a self-regulating protective system which excludes outsiders. That thrives on cooperation rather than cut and thrust, least cost bargaining betwen buyers and suppliers, alternatively this model of supplier alliances may be welcomed as a new, beneficial model.

Doing so as conglomerates and multi-nationals, Keiretsu operate globally and are integrated both vertically and horizontally. Keiretsu feature "a supporting bank," partner shareholding in other partners, seconded staff, willingness to share data and integration of computer systems, for example for JIT replenishment. Each keiretsu is capable of controlling nearly every step of the supply chain in a variety of industrial, resource and service sectors. Thus in this market we can see that outsiders seeking to enter a marketplaced dominated by Keiretsu may have greater difficultly entering and estalishing themselves.

Including the "Big Six" - Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi Kangyo Bank Groups, horizontal keiretsu are headed by major Japanese banks. Vertical keiretsu are industrial groups connecting manufacturers and part suppliers or manufacturers, wholesalers and retailers. These verticle keiretsu include car and electronics producers (Toyota, Nissan, Honda--Matsushita, Hitachi, Toshiba, Sony)) and their "captive" subcontractors. Controlling much of Japanese retailing, determining what products will appear in stores and showrooms and at what price is distribution keiretsu, a subgroup of vertical keiretsu.

Maybe such alliances are cartels. Having done so for a very long time, they may be organisations that value working together.

Are they a model for change or indicative of inward reliance of 'people you know and trust" - so we only do business (in our client-server, buyer-seller relationship) with those in the keiretsu that we know? Particularly when in a more highly competitive market that demands sharper cost leadership and technologically supported flexibility - some partners cannot adapt and so hold back the keiretsu this may be so. They would not be supported by other players. On an open competitive market these partners would simply wind up the business and leave the market place.

The features that characterise a "keiretsu" are:
·    stable shareholding
·    members holding shares in other members
·    seconded directors
·    common banker
·    only trading e.g. supply chain activities- with members of the keiretsu
·    membes of the network controlling each link in the economic chain of the industrial sector.
·    the control may be global and vertically and horizontally integrated e.g. Japanese banks including : Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi Kangyo Bank Groups (hoizontal keiretsu) .
·    Vertical keiretsu networks comprise manufacturers and part suppliers, wholesalers and retailers e.g. car and electronics producers with their subcontractors.
·    in a sense the suppliers are "captive", trusted, long term suppliers who are in a subordinate position to their main buyers.
·    Distribution keiretsu (vertical) may determine the products that will be sold in stores and showrooms -- and set the price.

As an organisational and coordinative, whilst protective and mutually supportive, with these descriptions we can see that a "keiretsu" may lead to unfair controls over free market buying and selling, unfair controls that are reminiscent of Adam Smiths "smoke filled rooms" where sellers meet to control which goods may appear in the market and at what price.

To develop long-term mutually cooperative relationships yet we are encouraged to more towards strategic supplier alliances and partnerships. It is argued that these thrust of the bazaar where we constantly look for new suppliers and seek to pin them down for the best quality at the lowest price are better than the cut.

While enjoying a level of control over supply akin to that of vertical integration, the “keiretsu” structuring of assembler-supplier relations historically enabled Japanese auto assemblers to remain lean and flexible. Yet there is much talk currently of breakdown in keiretsu networks. Some recent developments in Japanese parts supply keiretsu. Keiretsu relationships are drifting from “hybrid” or “network” (i.e., keiretsu) governance modes toward the extremes of arms-length contracting and top-down administration. These changes are best understood through a combination of transaction cost and learning perspectives on alliance. The shift in purchase - supply relationships can be traced to changes in the nature of parts transactions and keiretsu governance structures and are consistent with transaction cost economics. Providing additional explanation of the sources of change and the specific governance choices being made is a learning perspective on alliance complements and extends transaction cost theory. There are cases that document a drift in Toyota’s keiretsu supply network toward hierarchical form in the management of parts supply transactions. By taking a controlling interest Toyota has effectively internalized its transactions with Daihatsu. Toyota’s strategy toward long-term partner Denso, on the other hand, was very different. Toyota built from the ground up an in-house capability in electronic components. Thus (particularly at the high end) buying less from and scaling down its dependence on Denso. A third case considers a general trend in the Japanese auto industry toward greater standardization of parts. The need for keiretsu-style governance has declined with the routinization of quality, reliability, and speed in supply management. Which have prompted Japanese firms to question received business practice, the withering of keiretsu obligations is also traceable to globalization and the continuing weakness of the Japanese economy.

The cultural hurdle to establishing keiretsu networks in countries other than Japan is that it involves a lot of trust amongst companies, which is something that may be lacking in other countries. The antitrust division of the U.S. Department of Justice would not think of such arrangements as safe because they involve one company to trust another and this is something that is difficult to achieve and could have legal battles and consequences. The European Union`s position on such arrangements may be more optimistic because being a union it depends on people trusting eachother.  The examples of firms that have a keiretsu network working with effectiveness are mainly those companies within Japan, such as Toyota.