Japan's Ties That Bind


By Michael L. Gerlach

University of California -- 351pp -- $35

Managers of America's largest companies are preoccupied these days with tearing down their bureaucracies and sharpening their focus on products and customers. IBM, General Electric, and Xerox are among those that are restructuring, altering corporate cultures, or seeking new alliances to escape the trap of gigantism.

For clues to the future, they should take a look at Alliance Capitalism to see how Japan's giants maintain their relentless competitive drive. This academic examination of the Japanese keiretsu system by Michael L. Gerlach, a Japanese-speaking assistant professor of business at the University of California at Berkeley, is often tough reading. But it represents a breakthrough in Western efforts to understand what a keiretsu is and how it works.

The surprise for many readers will be that these vast interwoven alliances of companies--including the Mitsui, Mitsubishi, and Sumitomo groups--are not on their way to extinction, as some Japan experts have long asserted. Rather, Gerlach argues, the keiretsu are quite efficient in combining capital and technology to spur innovation. Moreover, their complex web of relations with shareholders, customers, suppliers, and employees has a way of keeping managers focused on competitiveness rather than on building bureaucracies. As a result, these highly adaptable organizations are actually increasing their clout, in a phenomenon that Gerlach calls "keiretsu-ization." He writes: "What may be happening is not a breaking down of bank-led groupings so much as an expansion of these groups across a broader spectrum of Japanese industry."

For all that has been written about keiretsu, few Americans seem to understand the animal. Think of it this way: Imagine that Citicorp owned 10% of all shares in General Motors, Westinghouse Electric, Boeing, IBM, Travelers, and 25 other major companies. Imagine, further, that each held shares in other members of the Citicorp group.

Consequently, all these companies would be takeover-proof. But the arrangement would go beyond cross-shareholding or overlapping boards of directors. The companies would be linked in what Gerlach calls a "multiplexity" of relations, doing business together and maintaining other formal and informal ties. Whereas a typical U.S. manager thinks of his relations with customers, suppliers, and shareholders as independent of each other, the Japanese don't, because the constituent groups overlap.

These organizations, then, reap the advantage of tremendous size even as their quasi-independent members remain focused on their business niches. "Re-

liance on intercorporate networks has in many ways helped to keep the Japanese firm smaller on average and more focused than its American counterpart, while providing many of the advantages brought about by vertical integration," Gerlach writes. The lesson for U.S. managers: Big organizations can thrive if each business unit has the right combination of independence and discipline.

To make his judgments, Gerlach has compiled a data base of 250 of the largest Japanese manufacturing companies and financial institutions and 250 of their U.S. counterparts. O.K., we could do without some of the regression analysis and coefficients. But the data offer some new hard facts for those interested in defining the special nature of Japanese capitalism: Japanese companies are 15 times more likely to borrow from their main bank than a U.S. company is. Shareholding for large Japanese companies is about twice as concentrated as it is in the U.S. and four times more stable. In fact, the keiretsu control one-quarter of all shares on the Tokyo Stock Exchange, making Tokyo much more dominated by major institutions than anyone on Wall Street can imagine.

Gerlach's book goes a long way toward explaining how Japan's bureaucrats were able to stage-manage a re-

vival in the Tokyo stock market in recent weeks. When the Nikkei stock average sank below 14,000, many Western pundits predicted total meltdown. They didn't understand how profoundly Japan's financial markets differ from those in the U.S. Japanese investors within a keiretsu buy and sell for different reasons than Western investors. They want to maintain their other business ties--"keep each other warm," as the Japanese saying goes. So when the time came for the Finance Ministry to engineer the Nikkei's revival, there weren't too many ears that needed to be whispered into. Relationship investing may be a fresh buzzword in the U.S., but the concept is at the heart of Japanese corporate governance.

More broadly, understanding the keiretsu is essential to understanding Japan's engagement with the rest of the world, since the trading companies affiliated with them handle fully two-thirds of Japan's imports. It is absurd to talk to Japanese government officials about creating an open market when their entire economy is dominated by groups of companies with preferential trading ties.

Moreover, this book shows that Japan's unique brand of capitalism is not evolving toward the Anglo-Saxon model, as many classical free-market economists have insisted. So business executives and financial mavens aren't the only ones who should pick up Alliance Capitalism. If Bill Clinton was frustrated after his recent meeting with Prime Minister Kiichi Miyazawa, he should pass a few copies around the White House.

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