Keiretsu: Why Foreign Companies Struggle in Japan

In Japan, if you’re working with one company, you’re working with many others. Should one company fall on harder times, then all the others contribute to make up for lost sales—acting very much like a family. We call these units “Keiretsu”, and they run the Japanese economy.

Join David and Timothy as they dissect what so many foreign companies fail to realize.

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Transcript:

Timothy: Hi, everyone! Welcome back to Brand 2020. In this series, we examine Japan’s attempt to brand itself, to project that brand image, outside of Japan and also inside to people who just live here. My guest today is David Russell, who is an author about many different facets of how Japan works. David, welcome again!

David: Thank you, Tim. Glad to be back.

Timothy: Today, I want to explore a little bit about Keiretsu, the Japanese conglomerates that in the past really molded and controlled how the Japanese economy worked. It’s a little bit of a dead horse but it’s an issue that you examined a long time ago and quite a bit of depth.

David: Yes, I did! As a matter of fact, it was my very first published book. That goes back a long time, maybe 25 years ago, I did a book called Keiretsu and it won all sorts of awards, because at that time the Keiretsu issue was a huge issue in US-Japan trade relations.

Timothy: Structural impediments talks, right? People tried to figure out why is this place so hard to crack. How come we’ve been knocking on the door; we’re doing all of the things that the Japanese say we should do; we set up shop there; we hire people we invest money and it just doesn’t seem to work. So, just to start from the beginning what actually is a Keiretsu?

David: That’s a good question, Tim, because Keiretsu are not well understood. Even in Japan they’re not well understood. Overseas, they’re widely misunderstood: they have been misunderstood for decades. In general, a Keiretsu is a group of independent companies: they share a single corporate governance structure in the sense that they have a meeting of the presidents of each of the top companies. Maybe ,once a month all the presidents will get together in what is called a Shacho-Kai; and they have very often cross-shareholdings, not the way they used to, but they traditionally have shareholdings of each other’s shares; the big horizontal Keiretsu always have a bank in the middle of this group, and so they’re very connected through economic connections, as well as interlocking directorships, or their personal relationships between the companies. That means that it’s more than just a sort of happenstance collection of companies: it becomes a real corporate group.

Timothy: It’s a unique feature of the Japanese corporate economy, isn’t it? Or was it one time?

David: We like to think it’s unique: it’s not as unique as we would wish it.

Timothy: But, it’s not quite a monopoly either, right? It’s more like a vertical integration…

David: It depends, there are different kinds of Keiretsu. First of all, they’re horizontal Keiretsu, which I just mentioned. Horizontal Keiretsu used to be six big ones, they all had a bank at the centre and then there would be trading companies and mining companies, metal companies, and various companies in the groups around the bank: they look like a giant solar system. Then, there are vertical Keiretsu, who are individual members of those horizontal Keiretsu that were involved in manufacturing. Think of the auto companies, steel, camera companies, the electronics companies; underneath each one of those major companies in the horizontal Keiretsu, there would be a manufacturing, a vertical keiretsu, that could go down anywhere from five thousand to thirty thousand companies. So, each of those vertical Keiretsu was part of a big horizontal Keiretsu and we’re talking about a huge chunk of the Japanese economy.

Timothy: Where did this start? I mean, it seems to be something that feels very Japanese. You and I, we’ve talked about this endlessly for many years, the US government has kind of struggled with how to deal with it. Eventually, it became out of favor, it was basically outlawed and now we have a different situation. Where did this this concept or this kind of design actually emanate from?

David: Well, it’s fascinating. In one sense, the Keiretsu who were created by the US government, most people don’t look at it that way, but the fact is if you go back in history, the Keiretsu evolved from the old Zaibatsu. Without going to a long historical explanation, the Zaibatsu were 19th century conglomerations of businesses that all were started, owned, by one family: they were family oriented. Where did that idea come from? They just copied it from the US and Europe: they wanted to have Rockefeller style businesses and Morgan and Carnegie style businesses in Japan. The government liked that idea because it looked like a good way to catch up with the West. So, the government was not in the antitrust business in the 1960: “okay, you want to put together a bunch of companies, you want money, we will loan you money; build up an industrial combine, that’s great. We think that’s terrific, we’ll look more and more like the Western countries, we’re trying to catch up”. Long story short, these Zaibatsu grew and grew, and they grew more powerful to the point where in World War 2, they completely controlled Japanese industry. And again, the government helped them too taking over all industries. They had many politicians in their pocket and this became a big point of contention within the government and within other parties in Japan that were not happy with the Zaibatsu, including the military. Long story short, the war ends, they were out. When MacArthur and SCAP come over here, what happens? They see the Zaibatsu as one of the key factors leading up to the war. The fault of the Zaibatsu, really one of the key players that supported the military in their imperialistic drive overseas. So, by definition the Zaibatsu are bad and we have to get rid of them.

Timothy: Right, but they lost a little bit of their energy didn’t they? Halfway through they got rid of some of the larger ones and then the Korean War heated up?

David: What happened is the band of the Zaibatsu, in fact during the war years, had already become so much out of favor with the military that they we’re already changing their names. So, for example the big Zaibatsu banks no longer used their real names: Mitsubishi Bank became Chiyoda Bank, things like that. These policies continued the General Headquarters, the occupation forces, literally banned the use of the Zaibatsu names: they squashed all the big Zaibatsu companies. Some of the biggest ones were the trading companies. A good example: Mitsubishi Shoji, still in existence. What happened is that it was like hitting a giant blob of mercury, they broke up Mitsubishi Trading into a hundred and seventy different companies. Within a few years, all those little pieces of Mercury started coming together, like The Terminator, growing again. All of a sudden the blob got bigger and bigger. By 1952, the year the occupation basically packed up and went home, there were only four companies of the old Mitsubishi group. Of those four companies, basically within a year they merged and they called themselves Mitsubishi Shoji: right back where they started. So, yes the occupation did a terrific job for a very short time in trying to break up the Zaibatsu and they passed all sorts of laws saying “we should not have too much economic concentration”. The year after the occupation goes home, they’re passing new laws trying to promote economic concentration in various industries.

Timothy: Well, Japan was still pretty much on its knees at that point: they needed an engine to kind of get things going. The Korean War was kind of in a full swing a lot of material was going out of Japan.

David: You remember those days clearly, but there was a lot of concern in Washington that, after the Communist revolution in China, Asia was ripe to go red. People were terrified and they needed Japan as a bulwark against communism spreading. So, we’ve already got a good foothold in Japan: we basically control their government, we wrote their constitution, let’s make sure that Japan never slips into the communist arenas. So, what do we do? We start unwinding some of those overly zealous antitrust laws that we had in the anti-monopoly laws; maybe we just went a little overboard on it. So, gradually, well not so gradually really, they started to unwind a lot of what MacArthur’s people had done in 1947. By 1951, it was already starting to come apart and the Japanese got the message very clearly: what you’re telling us not too explicitly is it’s okay to reform the Zaibatsu. That’s just what they did: the groups came back together, they brought out their old names. Once the occupation packed up and went home, they said “hey, you know, we’re a company that did trading in the old days as Mitsubishi Shoji. Now, we’re gonna call ourselves Mitsubishi Shoji. Come on, let’s get back together”. All the other companies in the group say “”hey, we can use our old names. The group’s using its old name; the bank is using its old name. It’s the same old guys, let’s all get back together again.

Timothy: We are an independent country once again, we can create the laws, we can make the rules: let’s get back, let’s get business done.

David: So, in that sense the American occupation, by it’s less a fair attitude in that sense, or late in 1951 1950, they allowed the Keiretsu to encourage the cadence to grow. The growth of the Keiretsu was a key factor in the growth of the Japanese economy– really one of the things that accelerated economic growth. Right after the war, Japan’s major business was exporting silk and cotton and importing as much cash as they could get their hands on. Within a decade they’re exporting cars, cameras, electronics, how did all that happen in such a short period of time? A lot of it is because of the power of the Keiretsu unification.

Timothy: Never in human history has that kind of economic miracle happened with a defeated nation coming back on and coming out with a roar.

David: It’s an amazing story, it really is an amazing story. It’s been studied again and again, and I think we never get tired of it. They’re always more wrinkles yet to be brought out.

Timothy: So, the Keiretsu had a big hand in that, but it seems like recently…

David: Things have changed a lot. The next step in the story, what you were talking about before about the Keiretsu keeping out foreign competition, that was understood even back in the 50s: they were talking about that. As late as 1970, we have someone like Miyazawa Kiichi, who later on became prime minister, at that time he was the MITI Minister (Minister of International Trade and Industry), he gets up in front of the Diet and says we need a “Keiretsufication” of industry: we basically need to pull the wagons into a circle and keep the foreigners out. We don’t want foreign intervention here, we don’t want people buying up Japanese companies. Because in 1960s 1970s, US companies are starting to get some muscle, they’re starting to run and they have some cash and they want to start buying companies around the world, and we don’t want any M&A here in Japan. If we’re gonna have M&A, we’ll do it ourselves, we don’t need foreigners. So the word was “let’s use the Keiretsu to keep people out”. So, in that sense yes, the Keiretsu were exactly what they were being charged as by the US Government ten years later.

Timothy: You see a little bit of an echo of that even now when we’re studying a lot of different things about contemporary Japan: immigration for example, labor law policies, the treatment of women and and bringing them into the workforce. It seems like there’s an overlay here that is about being Japan and protecting Japan, promoting the Japanese spirit in spite of the constant invitations of foreigners to participate too.

David: Well, that’s a much bigger issue, but yes. Absolutely, there’s always been a sense of cultural protectionism which has bled over into economic protectionism and that’s been as long as Japan has known there’s an outside world. I don’t think it’s ever going to go away, it’s an island country: it’s perfectly natural for them to feel like we’re a small country, we have no resources, we need to protect ourselves any way we can. There’s a very strong sense of cultural identity that you don’t find in, for example, a country in the middle of Europe that’s bordered by 20 other nations. They’re floating alone in the Pacific and yes there’s a very strong cultural identity that they want to protect.

Timothy: So from Zaibatsu to Keiretsu, it’s not a clear step but a lot of the main corporations here still bear their names. Not Suntory, not Sony because those were created in the recent past, but Mitsui, Okura, a lot of these basically were formerly houses family-owned that have kind of transitioned in their huge conglomerates and participate in the Japanese economy in a huge way.

David: Even in the old Zaibatsu, groups still exist, there’s still a Mitsubishi Group. One of the big differences that I should have mentioned earlier in the transition from the Zaibatsu to the Keiretsu is that the Zaibatsu were originally, in the 19th century, family-owned and family run. In the 20th century, they were family-owned but they were run by professional managers, which is a big change and that was carried over into the Keiretsu. What they said was “we’re not going to be family-owned and we’re not going to be run by family members; there’s not going to be a handing down from father to son”. So, what happens is these companies are now managed by professional managers and that’s the system that we have today. But, they still have, even as independent managers of independent companies, this sense of group identity. Group sharing is much easier than competing. Many years ago I talked to a representative from, I think, Mitsubishi Motors who was saying “we never have to worry about our sales figures, because any time our sales look like they’re a little low everyone in the group will buy our cars. We go to the bank and tell the bank “we’re a little short this year” and they tell everybody in the group, buy some cars, order some of cars from the car company”.

Timothy: In kind of understanding this for many foreigners, they describe trying to be comfortable in acculturating themselves to Japanese society like going through an onion: you keep going through these layers and there are some layers that are just kind of impenetrable, but you can still live, you can still have a business. But, I get this sense that you’re dodging the issue about Keiretsu, and where they’ve gone and how they’ve evolved now. So, kind of what’s the story now? What’s your take
on the Keiretsu?

David: Well, they have changed a lot, there’s no question. The basic structures remain in place, but there have been so many changes in Japanese business, you know very well. In the last 20 years, business landscape has changed. Of the original big 6 Keiretsu (the big six Keiretsu were basically Zaibatsu oriented, Mitsubishi, Mitsui and the Sumitomo families that ran the Zaibatsu) and later the Keiretsu. What happened well, Mitsui and Sumitomo back at the beginning of the century merged. Two ancient rivals merged to form one major bank, one of the big mega banks now. What did they do? Obviously, Sumitomo was a very, what should we say, strictly run group. Sumitomo almost had its its challenges, but Sumitomo was a very well organized, very tightly run group. And you know, back in the bubble days, Sumitomo bank was run by a very strong, some would say draconian, kind of of chairmen and the bank had total control over the Sumitomo Group. The group members still maintained their group name, their company names, it’s Sumitomo this or that, very strict thing. But, they merged with Mitsui, just the bank merged with Mitsui, and of course Sumitomo being Sumitomo, all the other related companies in the group they have to merge as well. So, what’s happening is two Keiretsu who are like two giant galaxies coming together and slowly becoming one giant organization. That’s a big change. DKB, Dai-Ichi Kangyo Bank, used to be one of the major Keiretsu and Sanwa Bank used to be one of the major Keiretsu. What happened was Sanwa became part of what’s now Mitsubishi UFJ and DKB became part of what is now Mizuho, and so the whole landscape is changing. If these big Keiretsu are centered on a bank and the banks now merge with a rival bank, what do you do? So, things have changed dramatically and I think they’re going to continue to change. Another big change is because of the economic problems Japan faced in the 1990s, the banks were not able to continue this long-term massive cross-shareholding. They needed to sell shares to raise money and so one of the key glues that held together these Keiretsu was the bank owns our shares, we’ve got to own the banks shares. The banks start saying “you know, we don’t need that many of your shares; we’re gonna dump about 50% of our holding”. That’s a radical change and so as the whole shift of the Keiretsu becoming a little bit less strict, a little bit less by the book. “We’re still friends, we’re more like a club now, and we’re a little less like Tywin Lannister is running the organization. Things have become a little looser now, but there are still Keiretsu connections . Coming back to your other point, yes when foreigners come over here they very often don’t understand that and they don’t understand the historical connections behind these companies. If I want to do business with Kirin beer, what do I need to know about Mitsubishi? Nothing? I think that’s a huge mistake, Why should I know that Nikon belongs to such in such a corporate group: it makes no difference. I’m only doing business with Nikon, well that’s again a big mistake.

Timothy: Students of contemporary Japanese politics and industry, like David and I, are always wondering and interested in how things are today, where they came from. The Keirestu system is one of those that you need to understand to figure out how things are working today. A lot of these issues, we’re going to continue to explore here on Brand 2020. Stay tuned!