Keiretsu: Why Foreign Companies Struggle in Japan - YouTube

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!

Thank you, Tim. Glad to be back.

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.

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.

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?

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.

It's a unique feature of the Japanese corporate economy, isn't it? Or

was it one time?

We like to think it's unique: it's not as unique as we would

wish it.

But, it's not quite a monopoly either, right?

It's more like a vertical integration...

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.

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?

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.

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?

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 Chiyda 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.

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.

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.

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.

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.

Never in human history has that kind of economic miracle happened with a defeated

nation coming back on and coming out with a roar.

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.

So, the Keiretsu had a big hand in that, but it seems like recently..

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.

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.

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.

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.

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".

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?

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.

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!