Sedat Onat
- Oct 12, 2023
- 4 min read

Keiretsu - The Backbone of Japanese Industrial Transformation

Keiretsu is the backbone of Japan's unique business environment, fostering a culture of deep-rooted partnership and collaboration." - Kazuo Inamori, Founder of Kyocera Corporation.

What is Keiretsu?

In the words of Toshio Yamazaki, "Keiretsu is not only a business model in the business world, but also a culture of solidarity and commitment.

Keiretsu is a business of closely-knit companies based in the Japanese Zaibatsu Family network. Keiretsu is part of Japan's industrial transformation. Keiretsu members usually consist of different companies operating under the same parent company or in the same industry.

Keiretsu Types

Horizontal Keiretsu (Financial Keiretsu): It is a financial-oriented structure with a bank at the top of the pyramid.
Vertical Keiretsu (Industrial Keiretsu): It is a production-oriented structure with the main producer at the top of the pyramid.

History of Keiretsu

Pre-World War II Zaibatsu large family-controlled business empires called Disbanded by the American occupation administration just after World War II

The companies in question came together again after the war and decided that Zaibatsu was more democratic and less centralized. They reunited under their Keiretsu structure, which was a version of

Keiretsu's Contributions to Purchasing Processes

Keiretsu's biggest contribution is to optimize purchasing processes. Within the Japanese supply chain, thanks to close relationships between members,

Trust,
Speed,
Lower cost,
Preventing new players from foreign countries from joining the domestic market,

Benefits such as are provided.

Good Practice Examples

Toyota: Adopting the Vertical Keiretsu structure, Toyota cooperates closely with its suppliers.
Mitsubishi: Having horizontal Keiretsu structures, Mitsubishi creates sectoral synergy among its subsidiaries in various sectors.
Nissan: Although it had a horizontal Keretsu structure before the Alliance it established with Renault, it left this structure after the Renault & Nissan Alliance led by Carlos Ghosn.

Benefits of Keiretsu

Risk Distribution: Keiretsu distributes risks thanks to close relationships between companies, minimizing the negativities that each company may face individually.
Supply Chain Optimization: Close cooperation between Keiretsu members enables supply processes to be carried out faster and more effectively. This provides the opportunity to reduce costs and increase efficiency.
Information Sharing: Thanks to a constant flow of information between Keiretsu member companies, a conducive environment for innovation and continuous improvement is created.
Market Access: Keiretsu member companies provide easier access to other member companies' markets and customer bases.
Cost Advantages: Through joint procurement and other cooperation activities, Keiretsu members can achieve cost advantages.
Long-Term Relationships: The Keiretsu structure encourages the establishment of long-term relationships among members. This is a great opportunity for business continuity and stability.
Financial Support: Some Keiretsu structures also include financial institutions. This helps member companies cope with liquidity problems by providing financing and credit opportunities.
Global Network: A global network that some Keiretsu companies have provides opportunities such as access to international markets and global supply chain management for other members.
Technological Progress: Easier sharing of technological knowledge and capabilities among Keiretsu members creates opportunities for technological advancement and product development.
Flexibility: The keiretsu model offers the ability to react quickly to changes in market conditions. Flexibility is especially important for Just in Time (JIT) processes and reducing the Bullwhip Effect.

Risks of Keiretsu

Overdependence: Keiretsu members are closely tied to each other, and this can cause the problems experienced by one member to spread to other members.
Loss of Flexibility: Due to the long-term and tight relationships required by Keiretsu, companies may have difficulty switching to external suppliers, which may limit their flexibility.
Cartel Formation and Reduction of Competition: Keiretsu structures may lead to the formation of cartels or decreased competition within the market.
Increase in Bureaucracy: The need for coordination and information sharing between companies can increase bureaucracy and slow down decision-making processes.
Loss of Privacy: Relatively more transparent information sharing among keiretsu members may increase the risk of loss of privacy.
Limiting Innovation: Some Keiretsu structures may be closed to outside innovation, which can limit or slow companies' innovation.
Financial Risks: Keiretsu's financial structures may cause the financial distress experienced by a large member to spread to other members.
Difficulty in Adapting to Market Changes: The keiretsu model can sometimes have difficulty adapting to rapidly changing market conditions.
Dispute and Conflicts of Interest: The interests of different companies within the keiretsu may conflict, resulting in internal tensions.
Difficulty in Accessing Foreign Markets: Companies with a keiretsu structure may have difficulty accessing foreign markets because they focus on the domestic market.

Difference Between Keiretsu and Friendshoring

My Articles on Keiretsu

Resources

Photos

Cover Photo: https://www.bu.edu/rbfl/2021/05/24/a-historical-perspective-on-the-japanese-keiretsu/

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