Boost your business with Bartercard

Login

Keiretsu: What It Is, How It Works

What is Keiretsu?

Keiretsu is a Japanese term that refers to a business network consisting of various interconnected companies, including manufacturers, supply chain partners, distributors, and sometimes financial institutions. These companies collaborate closely, maintain strong relationships, and sometimes take small equity stakes in each other, while still operating independently. Translated literally, keiretsu means “headless combine.”

Key points:

  • Definition: Keiretsu is a Japanese business network made up of different companies, including manufacturers, supply chain partners, distributors, and occasionally financiers.
  • Collaboration: Companies within a keiretsu work together, maintain close relationships, and sometimes take small equity stakes in each other, while remaining operationally independent.
  • Historical Context: Keiretsu gained prominence after World War II, following the dissolution of the Japanese zaibatsu.
  • Horizontal Keiretsu: An alliance of different companies led by a bank that provides them with financing.
  • Vertical Keiretsu: A partnership among manufacturers, suppliers, and distributors aimed at reducing costs and increasing efficiency.

Understanding Keiretsu

The keiretsu system is an offshoot of the zaibatsu family business system that dominated Japan’s key industries starting with the Meiji era. With Japan’s defeat in World War II, the Allied administration moved in and used economic advisors familiar with the USA’s New Deal to reform the business environment. Zaibatsu faced allegations of monopolistic practices and under-the-table deals, reportedly engaging in political influence for contracts and employing unfair pricing strategies. Several zaibatsu were ordered dissolved and their assets seized while others were allowed to reorganise as keiretsu and help Japan’s post-war economic recovery.

Japanese corporate culture emphasises close interconnections between companies. Collaboration, rather than maintaining a distance from others, is perceived as mutually advantageous. Even today, decades since their inception, keiretsu continue to be significant components of the nation’s economy.

The influence of keiretsu extends beyond Japan, albeit in a more flexible manner. While Japanese companies prioritise cooperation, keiretsu within the country is regulated by specific laws. Outside Japan, the term often refers to informal partnerships involving more than two organisations.

Types of Keiretsu

The structure of the keiretsu system traditionally follows either a horizontal or vertical model.

Horizontal keiretsu

An alliance of diverse companies spanning various sectors, including a pivotal bank at its core. This central bank assumes the responsibility of providing financial services to other affiliated companies.

Horizontal keiretsu primarily aim to globalise the distribution of goods. Their objectives include scouting new international markets for their affiliated companies, facilitating the establishment of keiretsu entities abroad, and entering contracts with international suppliers providing materials for the Japanese industry.

Vertical keiretsu

Vertical keiretsu comprises a cluster of companies nested within the broader horizontal keiretsu framework. They build collaboration between manufacturers, suppliers, and distributors united by a shared objective to streamline operations and reduce expenses. 

Advantages and Disadvantages 

Collaborating closely under the keiretsu system offers numerous advantages. Within the keiretsu, companies can pool their expertise, fostering collective strength and improvement. Shared information among customers, suppliers, and employees enhances operational efficiency. This shared knowledge expedites investment decision-making, ensuring that suppliers, employees, and customers understand the intent and objectives behind these investments.

Establishing an alliance also mitigates competitive threats and fortifies resistance against external takeover attempts. Additionally, dealing with intra-keiretsu firms reduces costs, heightening efficiency along the supply chain.

However, several drawbacks exist. Critics highlight that a keiretsu’s size hampers swift adjustments to market shifts, while limited competition can breed inefficiencies. Another concern relates to easy access to capital. Close ties with a bank might prompt companies to pursue risky, debt-dependent strategies that outside lenders might be hesitant to finance.

How to Assemble Your Own Keiretsu

The keiretsu system presents an advantageous model for companies seeking to enhance their ties with suppliers, aiming for enduring advantages. In Western business practices, companies usually maintain supplier relationships that differ from the keiretsu system, often adopting an arm’s length approach. Despite the promises offered in a keiretsu, there are tenets to account for, such as the following.

Developing Short-Term and Long-Term Thinking

To foster enduring relationships with suppliers, it’s crucial that they maintain competitiveness in the current market landscape. Collaborating with them to enhance their competitive edge showcases your dedication to forging a lasting partnership, ensuring that the advantages of cost-saving strategies are mutually shared.

Familiarising with Suppliers

Understanding a supplier’s processes is fundamental before attempting any enhancements. Visiting their facilities and considering joint ventures for pivotal components rather than outsourcing all aspects facilitates a comprehensive grasp of their operations.

Building a Supplier’s Trust

Communicating the mutual benefits of the partnership is instrumental in establishing trust with suppliers. Emphasising how the relationship aids in their operational enhancement and competitiveness fosters a sense of mutual benefit and collaboration.

Balancing Explicit and Implicit Communication

Ties within a keiretsu need a proper balance of explicit and implicit tone in official communications. Focusing solely on explicit communication can breed mistrust, while relying on implicit communication might lead to misunderstandings.

Supplier Portfolio Review

Once you’ve identified your pool of suppliers, determine which ones warrant improvement. Consider which suppliers possess the highest potential for global competitiveness, rating them based on quality, cost, delivery, personnel, and development. Notably, suppliers demonstrating a willingness to learn and address the root causes of errors show the greatest potential for enhancement.

Personal Relationships

Nurture personal connections between your company and both the management and employees of your suppliers. Engage with your suppliers and explore avenues for collaboration, perhaps by shadowing them on the production floor. This kind of rapport encourages vendors to offer problem-solving suggestions willingly.

Chances to do Better

Some business operators may not be forgiving when a supplier lapses at some point in the operations. Instead of changing suppliers when the current one fouls up, provide them with chances to demonstrate improvements.

Suppliers Keyed In in Product Development

Engage your suppliers’ engineers within your development teams and encourage the implementation of process improvement initiatives in their factories. This approach enhances competitiveness throughout the supply chain. Make sure the suppliers joining the development process are bound by NDA to ensure secrecy. 

An Example of Keiretsu

One notable keiretsu often lauded for its structure and performance is the Mitsubishi Group.

A look at the company’s structure covers Mitsubishi Heavy Industries, Mitsubishi Corp, and the Mitsubishi-UFJ Financial Group (MUFG), also known as the “Three Great Houses.” Each Great House has its own array of Mitsubishi-branded companies that contribute to the Group’s growth with their own set of products and services, plus firms it had previously acquired.

For example, MUFG’s umbrella of finance companies includes the MUFG Bank, Mitsubishi UFJ Securities Holdings, and the Meiji-Yasuda Life Insurance Co, which handles life insurance policies for all employees.

Conclusion

The Keiretsu system, while not identical to traditional Western business models, offers invaluable insights into the power of interconnected business relationships. In Australia, embracing elements of this system can aid in fostering resilient supply lines, nurturing enduring supplier relationships, and amplifying collective strengths within the business landscape.

DISCLAIMER: This article is for informational purposes only. BARTERCARD does not endorse or disparage keiretsu as a business practice, and has no relationships with companies mentioned.

Search

Curious to know more about Bartercard?

Simply enter your email address below and we will send you some more information on how Bartercard can assist your business.

Start using Bartercard TODAY!

Access Bartercard for 1 month complimentary* to see if it is the right fit for your business growth.

Access Bartercard for 1 month complimentary* to see if it is the right fit for your business growth.

*Membership fee may apply. Transaction fees will still apply for any trades that occur within the first month. Monthly membership: $49 a month + T$10 + T$10 DRF.