Keiretsu

Keiretsu, which means "conglomerate," refers to an alliance of diverse businesses that establish a robust corporate structure through cross-shareholdings, benefiting all participants. Its objective is to provide a stable and reliable supply chain infrastructure, ensuring the sustainable, continuous, and protected exchange of licensed technology among its members.

Additionally, Keiretsu offers a perpetual source of financing for the business needs of its participants. By reducing competition among the member companies, it fosters growth and development. However, it is important to note that Keiretsu can also give rise to monopolistic tendencies within the member businesses. There are two types of Keiretsu: horizontal and vertical. In each type, companies hold small shares in one another.

• Keiretsu refers to a conglomerate formed by a group of companies, including a bank, trading company, and others, who buy each other's shares to maximize profits and stabilize their market share.
• Keiretsu helps companies within the group to mitigate cutthroat competition, hostile takeovers, and market volatility, promoting sustainable business practices.
• Keiretsu can be categorized into two types: vertical and horizontal. Mitsubishi, a global conglomerate, exemplifies the horizontal structure.
• While Zaibatsu and chaebol, both vertical structures, belong to Japan and South Korea, conglomerates can have vertical and horizontal structures.

The Keiretsu system is a network of interconnected companies that acquire each other's shares, with banks playing a central role. It originated after Japan's defeat in World War II at the hands of the Americans. However, recognizing the need for a strong partner in the Eastern hemisphere, the United States allowed the existing zaibatsu system to continue, which later evolved into conglomerates.

Keiretsu is often established to facilitate the exchange of best practices, enhance risk management by reducing uncertainties, and provide businesses with a stable source of financing. Japanese companies tend to acquire significant shares in each other to deter hostile takeover bids, allowing for the cultivation of close relationships among conglomerate members. This arrangement ensures a steady supply chain, consistent investment flow, and protection of proprietary technology and prevents sensitive information from being disclosed to rivals.

However, while conglomerates provide stability and security to their members, they can also pose challenges for companies. They may even invite sanctions in certain countries, as explained in the following section.

Keiretsu is divided into two forms: horizontal and vertical.

1. Horizontal

A Japanese conglomerate of this type is characterized by the following:

• Collection of independent firms operating across various sectors.
• Absence of a holding or parent company.
• Larger companies retain control over their activities.
• Trading companies oversee the trading aspect.
• Banking institutions serve as the capital backbone of the Keiretsu.
• Inclusion of a significant manufacturing company.
• Banks play a major role in providing substantial funding.
• Trading companies also contribute to trade coordination within and outside the group.

2. Vertical

This type of conglomerate exhibits the following characteristics:

• A hierarchical structure with a dominant holding company at the top.
• Other members are typically smaller in size and capacity, acting as suppliers to the larger firm.
• Resembles a pyramid structure with lower-tier suppliers involved.
• First-tier suppliers directly supply commodities to the holding company.
• Second-tier suppliers provide products to the first tier.
• Subsequent tiers extend as necessary.
• Smaller firms may not be aware of the main holding company.
• The main holding company may not be aware of the smaller companies.
• Vertical keiretsu networks can potentially be extensive, comprising numerous smaller companies within the pyramid.

Let's examine the Mitsubishi Group as a prominent example of a horizontal conglomerate to illustrate the concept further. It encompasses companies from diverse sectors that hold shares in one another. The composition of this conglomerate is as follows:

• The Bank of Tokyo Mitsubishi serves as the central entity.
• Mitsubishi Motors
• Meiji Mutual Life Insurance Company
• Mitsubishi Trust and Banking
• Mitsubishi Shoji is another constituent of the conglomerate.

Additionally, Mitsubishi Shoji is recognized as a trading company within the group.

Let's examine the advantages and disadvantages of the conglomerate system. However, it's worth noting that while conglomerates can provide certain benefits, they also come with drawbacks:

Advantages

• Conglomerates can offer stability and security to their member companies.
• They provide a reliable supply chain, ensuring consistent product availability.
• Conglomerates facilitate the sharing of best practices and knowledge among members.
• They can provide a stable source of financing for business needs.
• Conglomerates foster close relationships and cooperation among companies within the network.

Disadvantages

• Manufacturers within conglomerates may be less responsive to customer demands, resulting in potential delays or reduced customer satisfaction.
• Economic changes may not prompt immediate and appropriate actions from companies within the conglomerate.
• Companies may be resistant to changing their work culture or adapting to new technologies, hindering innovation and growth.
• In the absence of competition, markets within the conglomerate system may become closed, potentially leading to reduced choices and limited consumer benefits.
• Customers may experience difficulties and challenges, including diminished services and limited options.
• Every economic and supply chain aspect may be controlled and manipulated within the conglomerate, potentially impacting fair market practices.
• The conglomerate structure can create monopolistic market conditions, which may attract legal sanctions in foreign jurisdictions.

Let us look at the differences between Keiretsu, Zaibatsu, and Chaebol in the table below:

This article has been a guide to Keiretsu and its meaning. Here, we compare it with Zaibatsu and Chaebol, and explain its examples, advantages, & disadvantages. You may also find some useful articles here -

• Conglomerate Discount
• Bank Holding Company
• Holding Company