Keiretsu

Definition

Keiretsu is a Japanese term that refers to a network or group of interconnected businesses that maintain close relationships and cooperatively support each other. Typically, these business alliances consist of corporations from various industries, linked together through cross-shareholdings and strategic partnerships. Keiretsu fosters loyalty, risk distribution, and boosts the collective competitiveness of the companies involved.

Phonetic

The phonetic pronunciation of “Keiretsu” is: kā-ˈrāt-sü.

Key Takeaways

1. Keiretsu is a Japanese term that refers to a network of interrelated companies that collaborate and support each other, often through cross-shareholding relationships. This business structure is prevalent in Japan and has its roots in the pre-World War II period.
2. There are two main types of Keiretsu: horizontal and vertical. Horizontal Keiretsu consists of a group of companies across various industries that are linked through a central bank, while a vertical Keiretsu is a supply chain hierarchy in which companies are connected through their supply and distribution networks.
3. The Keiretsu structure promotes long-term stability and growth by emphasizing loyalty and partnership among members. It mitigates risks by sharing resources and information, leading to collaborative decision-making and reduced competition within the group. However, critics argue that this system can sometimes lead to inefficiencies and hinder innovation due to its insular nature.

Importance

Keiretsu is an important term in business and finance as it refers to a unique, interlocking network of Japanese companies joined through cross-shareholding relationships, which can create strong alliances and provide stability amidst economic fluctuations. These strategic partnerships often consist of mutually beneficial arrangements between diverse entities, such as manufacturers, suppliers, and financial institutions. As a result, keiretsu fosters long-term relationships, encourages cooperation, and enables member companies to share resources, knowledge, and technology. This close-knit business structure is critical to understanding the Japanese economy, as it contributes significantly to supply chain management, competitive advantage, and the development of large conglomerates.

Explanation

Keiretsu serves as a purposeful and strategic alliance among various independent businesses in Japan that aims to achieve long-term stability, growth, and mutual support. In a Keiretsu arrangement, the interrelated companies hold shares in each other, fostering a high degree of cooperation and economic interdependence. This horizontal integration allows member firms to pool resources, share research and development, and jointly invest in new ventures, giving them an edge over competitors. As a result, the member companies of a Keiretsu benefit from economies of scale, improved efficiency, and risk diversification across a range of industries. In addition to promoting industrial collaboration, Keiretsu also have a unique financing structure involving close relationships with financial institutions, usually a major bank or an insurance company. The bank or insurance company provides funds to the Keiretsu’s member firms to finance their growth and manage business risks, operating as a financial backbone in times of economic downturns or financial crises. This reliance on a stable and lasting relationship with a financial institution offers a degree of certainty in the lending and borrowing process, enabling businesses to expand with confidence. Keiretsu arrangements contribute to the resilience of many Japanese companies, allowing them to withstand economic fluctuations and maintain their competitive positions in the global market.

Examples

1. Mitsubishi Keiretsu: The Mitsubishi Group is one of the most famous Keiretsus in Japan. It is composed of multiple companies operating in diverse industries such as banking, insurance, automotive, chemicals, heavy industries, and more. Mitsubishi Corporation, Mitsubishi UFJ Financial Group, Mitsubishi Heavy Industries, and Mitsubishi Motors are some of the well-known firms within this Keiretsu. These companies are interconnected through financial support, strategic partnerships, and cross-shareholding, which enables them to maintain market stability and control. 2. Sumitomo Keiretsu: Sumitomo is another prominent Keiretsu in Japan with its roots traced back to the Edo period. The Sumitomo Group consists of various major companies in sectors such as finance, insurance, construction, metal production, and electronics. Key members of the Sumitomo Keiretsu include Sumitomo Corporation, Sumitomo Mitsui Banking Corporation, Sumitomo Realty & Development, and Sumitomo Chemical. These firms closely collaborate with each other and maintain shareholding relationships, which helps them to mitigate risks and strengthen their overall market positions. 3. Fuyo Keiretsu: The Fuyo Group is a Keiretsu formed around the banks that emerged after the dissolution of the Yasuda Zaibatsu, a large Japanese conglomerate in the early 20th century. Fuyo Keiretsu revolves around Mizuho Financial Group, one of the largest financial institutions in Japan, and includes companies across various industries such as electronics, automotive, and chemicals. Some notable firms within the Fuyo Keiretsu are Canon Inc., Nissan Motor Co., Toshiba Corporation, and Hitachi Ltd. These companies work in close association, sharing resources, technologies, and financial support to enhance growth and maintain market influence.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Vertical Integration
• Horizontal Integration
• Interlocking Shareholdings
• Japanese Conglomerate
• Zaibatsu

Sources for More Information

• Investopedia
• Encyclopedia Britannica
• Wikipedia
• Harvard Business Reivew