A keiretsu business structure outlines a major difference in the way US and Japanese firms are structured. Keiretsu can be seen as a partnership between the government and businesses which creates a web on interlinking relationships between banks, suppliers, manufacturers, distributors and the government. They have also managed to become a topic of debate where some refer them to ‘government clad cartels’ and a ‘menace to trade’ while the others see them as ‘a model for change’ (Keiretsu, 2001)
Created around their own trading entities, keiretsu are integrated both vertically and horizontally which enable them to control every step in a chain in resource, industrial and service sector, serving as a competitive advantage against other firm structures. Horizontal Keiretsu are seen as relationships between trading corporations and banks, thus headed by the six major Japanese banks namely Mitsui, Fuyo, Mitsubishi, Sanwa, Sumitomo and Dai-Ichi Kangyo Bank Groups, also known as the “Big Six” (Keiretsu, 2001).
The purpose of vertical integration in keiretsu is to connect factors of production with the product and thus these are seen as relationships between relationships linking manufacturers with suppliers, retailers or even wholesalers. An example of such integration can be electronic producers and cars (Toyota, Nissan, Sony and Hitachi). Similarly at the distribution end, control is maintained to determine the type of the products in showrooms and their price. Both division of Keiretsu, vertical and horizontal are intricately woven together in order to self sustain themselves.
An example of one of the major players organized as an Keiretsu inter firm structure is Mitsubishi, which is organized around Bank of Tokyo- Mitsubishi Mitsubishi Corporation, Mitsubishi Chemical, Kirin Brewery, Mitsubishi Estate, Mitsubishi Electric, Mitsubishi Heavy Industries, Mitsubishi Motors, Nippon Oil, Nikon, Nippon Yusen, Mitsubishi Paper Mills Ltd and Mitsubishi Rayon Co. , Ltd. Toyota is also referred to as one of the largest vertically integrated Keiretsu firms.
The Japanese recession in the 1990’s had adverse effects on the Keiretsu as most of the banks, which served as the major holding company were badly hit due to bad portfolios and suffered major losses due to which either they had to merge with other banks or completely go out of business. For example the Mitsui Bank and Sumitomo Bank merged together to become Sumitomo Mitsui Banking Corporation which blurred lines between the Keiretsu firms and rose strong suspicions in the business community regarding the effectiveness of the Keiretsu firm structure as an effective business model.
Hence, while the Keiretsu firm structure exists, due to loosening alliances, it is not as centralized and since companies could no longer avail the privilege of an easy bail out, it led to growing corporate acquisitions and independent shareholders. The success of Keiretsu firms makes us wonder how they took the centre stage in the business world. What was their source of competitive advantage that they dominated over the American firms and why their business model is not effective today?