VoxEU Column

From collusion to competition? Japanese business groups in the 21st century

Complex Systems Research Group in the Faculty of Engineering and IT, University of Sydney

For Petr MATOUS's full bio,

TODO Yasuyuki
Faculty Fellow, RIETI

Japanese business groups, or keiretsu - cartels of companies with interlocking interests - have contributed much to the success of Japanese manufacturing in the 20th century. This column explores the future of this form of corporate governance, amid increasing calls for their dissolution. An examination of trade networks in the automotive industry shows that automakers no longer exhibit a preference for dealing with keiretsu partners. Globalisation, procurement scandals, and advances in modularisation have helped to erode the benefits of these long-term relationships.

Strong business groups used to be praised for the success of Japanese manufacturers, but prominent Japanese business leaders now are calling for their dissolution. Toyota Motor Corporation was the first automaker to organise its first-tier suppliers into an official association, choosing not to trade directly with firms outside of this group. Such industrial production in business groups was commended for effective information sharing, quality control, and effective logistics. With the support of the Japanese government, this model spread to other Japanese manufacturers. (Wada 1992, Cooper and Yoshikawa 1994, Holmstrom and Roberts 1998, Lamming 2000, Handfield and Bechtel 2002).

After Japan slipped into a recession two decades ago, some commentators predicted that local business groups would become even stronger in the harsher economic environment because of their role in diffusing risk. Others opined that this so-called 'keiretsu' model of group-oriented manufacturing within established trading cliques had become outdated in a globalised economy in which firms were forced to compete for limited demand by lowering production costs through more efficient procurement (Lincoln and Gerlach 2004). In the past, the relatively high prices demanded by keiretsu suppliers were acceptable to assemblers, on the grounds that it helped them to guarantee the quality of their products (Aoki 1990). However, this might not be the case anymore. A former vice president of the Toyota Motor Corporation recently has been public in his criticism of keiretsu suppliers for abusing their guaranteed and exclusive relationships with the automaker to resell parts that were sourced cheaply from firms outside of the group at high prices (Shirouzu 2015). Moreover, reports of price fixing among interlinked suppliers have also emerged (Shirouzu and Shiraki 2014).

Our analysis of trade network evolution between 2006 and 2011 among the 100 largest players in the Japanese automotive industry suggests that these anecdotes are a part of a larger trend (Matous and Todo 2015). In contrast with other sectors of the Japanese economy (Matous and Todo 2014), Japanese automakers currently do not display any preference toward doing business with partners from the same trading cliques. In the wake of procurement scandals faced by the industry in recent years, Japanese assemblers and pre-assemblers are accessing diverse groups of suppliers, giving them the option to shift business if necessary. Such supply chain management changes likely were facilitated by technical advances in modularisation in the automobile industry, which allow for a direct substitution of parts from different suppliers (Corswant and Fredriksson 2002). Strong long-term relationships add less value when dealing with new substitutable modular components as compared to parts which require cooperation with suppliers for adaptation of every specific model (Novak and Eppinger 2001, Hoetker, Swaminathan et al 2007).

Quality control and safety assurance may become more challenging in the new fluid environment of constantly reconfiguring production networks. This may prove particularly demanding for Japanese automakers with underweight procurement departments and may become a concern for policy makers. A white paper by the Ministry of Economy, Trade and Industry (METI) of Japan, which was published soon after the Great East Japan Earthquake in 2011, reported that manufacturing procurement in Japan has acquired a "diamond structure" characterised by a concentration of supply links on certain key original producers of parts and materials (METI 2011). The implication of the new macro structure, which emerged out of the new automakers' strategies, is that if any of the hub suppliers suffers damage, negative temporary shocks can spread through the whole economy. The potential 'contagion' caused by a negative supply shock will no longer be contained within business group boundaries, as may have been the case in the past.

While these new risks are real and need to be addressed, there is an increasing amount of evidence on the pitfalls of doing business exclusively with familiar others (Rogan and Sorenson 2014). Automakers - the globally most competitive players in the Japanese economy - apparently have realised that.

Acknowledgements: Thanks to James McDaid for his comments on this article.

This article first appeared on www.VoxEU.org on June 16, 2015. Reproduced with permission.

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June 24, 2015

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