Keiretsu – Meaning, Types, Advantages, Disadvantages, and More

Keiretsu is a Japanese term describing a specific type of corporate structure of firms. In this, many companies in the supply chain network or from other sectors are linked to each other in some or other way. It could be by buying small stakes in each other or association as supplier/seller, etc. Thus, every company has some sort of a close business relationship with another company in the network. In Japanese, the literal meaning of this word is a ‘headless combine.’ And thus, Keiretsu is an informal alliance or loose conglomeration of various companies that are associated or interconnected with each other in some way.

The primary objective behind such a type of corporate structure is to encourage mutual gains, something that is not possible under the traditional relationship of a company and its supplier.  The network of companies may include supply chain firms, financial organizations, and distributors.

We can say that it is an informal business group that is closely aligned, and thus, works together to ensure mutual gain for all the companies in the network. A point to note is that though such companies may own a stake in each other, they are usually operationally independent.

History of Keiretsu

Keiretsu’s got popular in Japan after World War II. Such companies were the primary driving force behind the Japanese economy in the latter half of the 20th century. Such groups are still in existence, but they are now less popular than they were earlier.

Keiretsu rose to popularity after the collapse of the zaibatsu model, which is family-controlled vertical monopoly groups. Basically, the structure of some of the zaibatsu’s was changed to form Keiretsu. After the disappearance of the family holdings from these companies, the member companies became independent entities.  

Types of Keiretsu’s

The Keiretsu has two types of structures:

Horizontal Keiretsu

Such a type of Keiretsu is the network of firms that belong to different industries. Generally, there is no one company that leads the group. But, the group does include some big companies that influence the operations of the group.

For instance, the group will include a bank and a trading company that will influence the group’s decision-making. Moreover, such groups may also have an insurance firm and a big manufacturing firm. The bank is usually the key financier in the group. But, the member companies are free to get funds from other financial institutions. In such a case, the network bank would act as a guarantor for the loans. The trading company in the group helps to coordinate the business inside the group, as well as with outside companies.

Such types of groups help member companies to find new markets, establish in other countries, find suppliers and distributors in other countries, and more.

One good example of such type of a company structure is the Mitsubishi keiretsu. In this, the Bank of Tokyo Mitsubishi is the main company. Other influential companies in the group are Meiji Mutual Life Insurance Company, Mitsubishi Shoji (trading company), Mitsubishi Motors, and Mitsubishi Trust and Banking.

Vertical Keiretsu

In such a group, one big company leads the group. The smaller companies in the group are usually the suppliers to the leading company. Such types of groups are common in the automobile, advertising, and electronics industry.

This type of group usually has a pyramidal structure and includes a few tiers of suppliers. The first tier of suppliers is those that supply materials directly to the leading company. And, the second tier consists of those that supply materials direct to the first-tier companies.

In such types of groups, it is possible that all companies are not aware of other companies in the group. Such types of groups can be very big and include several smaller companies.

Toyota is a very good example of such a type of group. The automaker depends on its suppliers and manufacturers for the supply of parts and raw materials. Toyota plays the role of the anchor company. It is possible that other smaller firms may not exist without Toyota.

Keiretsu

Advantages and Disadvantages of Keiretsu

Following are the advantages of this type of corporate structure:

  • The member companies share best business practices, and this helps to reduce the risk.
  • Since most of the raw material comes from within the group, it helps to reduce costs. Moreover, it increases efficiency because of better coordination between the member companies.
  • The member companies hold a stake in each other through cross-shareholding. This prevents companies from hostile takeovers attempts.
  • The information sharing within the group helps to boost the efficiency of the member companies. The invention of the just-in-time inventory system is a good example of this type of sharing.

Following are the disadvantages of this type of corporate structure:

  • Such a group lowers the competition between the member companies. And, this may result in complacency and inefficiency.
  • It is also possible that firms within the group take on more funds than they need. Also, they may take up risky activities. This is because funds are easily available to the member companies.
  • Since such groups are big, they may be unable to swiftly respond to the market changes.
  • Such types of groups may lead to monopoly.

Final Words

A keiretsu type of structure could be very useful in the present day also. It helps to deepen the relationships with the suppliers. Though such type of structure is less popular outside Japan, many companies are adopting some elements of this corporate structure.

For example, Scania, which is a Swedish bus and truck maker, works to better its relationships with its suppliers. The firm does this by arranging workshops for the suppliers, helping them better their processes, and make them more competitive. Similar is the example of IKEA. It also works hard to gain the trust and confidence of the suppliers.

Continue reading – Keiretsu vs Chaebol.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

Leave a Comment