Keiretsu

Conceptual Overview

Keiretsu grew over decades by creating specialized firms with strong ties and relationships with other firms in the group. These groups of firms are sometimes connected by family relationships. The groups are classified as horizontal or vertical.

The major horizontal keiretsu include Mitsui, Mitsubishi, Sumitomo, DKB, Fuyo, and Sanwa. The firms in the horizontal keiretsu have cross-shareholding linkages and interlocking directorships that create a network of firms from a wide variety of industries. Cross-shareholding is the practice of one firm holding stock in another and vice versa, thus giving them mutual interests in the success of each firm. Interlocking directorships refers to the fact that executives of firm A are on the Board of Directors of firm B and executives of firm B are on the Board of firm A. However, no single firm controls the others, each firm may also have a network of subsidiaries, and those subsidiaries may have their own subsidiaries. The result is a very large network of associated companies. The horizontal keiretsu are similar to what we identify as conglomerates in the United States.

The vertical keiretsu are created by extensive vertical integration, both backward incorporating suppliers and forward through distribution. In other words, the company controls the inputs to production (raw materials, for example) by owning its suppliers, and the distribution channels by owning wholesalers or retailers of the products. These vertical keiretsu include Toyota, Hitachi, and Matsushita. A key difference between the two forms is that the vertical keiretsu typically are related to the primary industry of the leading company, for example automobiles for Toyota and consumer electronics for Matsushita (Panasonic). In the vertical keiretsu, in addition to equity (stockholder) connections, the companies are connected via technology transfer, financial assistance, and human resource assistance. Firms in a keiretsu grow independently but also understand that intragroup competition should be avoided. At the core of each keiretsu is a bank to provide financial resources and a general trading company to serve as an agent for transactions of member firms.