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

Petr Matous, Yasuyuki Todo 16 June 2015

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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that this so-called ‘keiretsu’ model of group-oriented manufacturing within established trading cliques had become outdated in a globalised economy in which firms were forced to compete for limited demand by lowering production costs through more efficient procurement (Lincoln and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.

References

Aoki, M (1990), Information, incentives and bargaining in the Japanese economy: A microtheory of the Japanese Economy, Cambridge, Cambridge University Press.

Cooper, R and T Yoshikawa (1994), "Inter-organizational cost management systems: The case of the Tokyo-Yokohama-Kamakura supplier chain", International Journal of Production Economics 37(1): 51-62.

Corswant, F v and P Fredriksson (2002) "Sourcing trends in the car industry", International Journal of Operations & Production Management 22(7): 741-758.

Handfield, R B and C Bechtel (2002) "The role of trust and relationship structure in improving supply chain responsiveness", Industrial Marketing Management 31(4): 367-382.

Hoetker, G, A Swaminathan and W Mitchell (2007) "Modularity and the impact of buyer–supplier relationships on the survival of suppliers", Management Science 53(2): 178-191.

Holmstrom, B and J Roberts (1998) "The boundaries of the firm revisited", Journal of Economic Perspectives 12(4): 73-94.

Lamming, R (2000) "Japanese supply chain relationships in recession", Long Range Planning 33(6): 757-778.

Lincoln, J and M Gerlach (2004) Japan's network economy: Structure, persistence, and change, Cambridge, Cambridge University Press.

Matous, P and Y Todo (2014) "The effects of endogenous interdependencies on trade network formation across space among major Japanese firms", RIETI Discussion Paper Series 14-E-020: 1-28.

Matous, P and Y Todo (2015) "'Dissolve the keiretsu or die': A longitudinal study of disintermediation in the Japanese automobile industry", RIETI Discussion Paper Series 15-E-039: 1-24.

METI (2011) Summary of the white paper on manufacturing industries (Monodzukuri), Tokyo, Ministry of Economy, Trade and Industry.

Novak, S and S D Eppinger (2001) "Sourcing by design: Product complexity and the supply chain", Management Science 47(1): 189-204.

Rogan, M and O Sorenson (2014) "Picking a (poor) partner: A relational perspective on acquisitions", Administrative Science Quarterly.

Shirouzu, N (2015) "Daihatsu dismantling 'Toyota Way' as market changes", Japan Times, 16 January 2015.

Shirouzu, N and M Shiraki (2014) "Regulators' sweep threatens auto parts business model: Japanese firms colluding to rake in huge profits with price fixing", Japan Times, August 25, 2014.

Wada, K (1992) "The development of tiered inter-firm relationships in the automobile industry: A case study of Toyota Motor Corporation", Japanese Yearbook on Business History 8: 23-47.

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Topics:  Competition policy Industrial organisation

Tags:  keiretsu, Japan, cartel, manufacturing, Automotive industry, globalisation, business groups

Associate Dean, Faculty of Engineering and IT, University of Sydney

Professor in the Faculty of Political Science and Economics, Waseda University

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