Keiretsu

Definition

A Keiretsu is a business term originating in Japan that refers to a group of interconnected companies or enterprises that have significant cross-shareholding relationships.

What is keiretsu?

These companies collaborate closely with each other, often in the same industry or related industries, to support each other’s interests and maintain a competitive advantage. Keiretsu can take two primary forms:

1. Vertical keiretsu: In a vertical keiretsu, companies within the group are linked along the supply chain, from suppliers to manufacturers to distributors. This type of keiretsu ensures a stable and efficient flow of goods and services within the network.

2. Horizontal keiretsu: Horizontal Keiretsu consists of companies that operate in various industries but are connected through mutual shareholdings. These companies support each other in various ways, such as through financial assistance, business partnerships, or access to shared resources.

Keiretsu arrangements are often seen as a way to maintain stability and control in Japanese business culture. Members of a keiretsu may cooperate on various levels, including joint ventures, technology sharing, and mutual financial support. This interconnectedness can help companies navigate economic challenges and maintain their competitiveness. However, it can also lead to criticisms of anti-competitive behaviour and reduced transparency in business operations.

It’s worth noting that the concept of keiretsu has influenced business practices in other countries, although it may not be as prevalent as it is in Japan.

Example of keiretsu

Two major companies, Car Manufacturer A and Auto Parts Supplier B, form the core of a keiretsu in the automotive sector. They establish a close and long-term business relationship. They recognise the mutual benefits of collaboration and decide to work together to enhance efficiency and competitiveness.

As part of the keiretsu structure, Car Manufacturer A makes equity investments in Auto Parts Supplier B. This financial interdependence strengthens the ties between the two companies.

Auto Parts Supplier B shares its technological advancements and manufacturing know-how with Car Manufacturer A. This helps the automaker stay at the forefront of innovation and produce high-quality vehicles.

In this example, the keiretsu model facilitates a collaborative and interdependent relationship between a car manufacturer and an auto parts supplier, creating a more efficient and integrated business ecosystem within the automotive industry.