Time To Overhaul Japan's Keiretsu Model

Life turns on a dime, including the economic life of Japan's giant corporations. A decade ago they bestrode the earth, gobbling up market share, terrifying competitors. Armed with a corporate culture that emphasized long-term planning, consensus management, cross-holdings of family companies, life-time employment, and close cooperation with the government, their very success cast doubt on the viability of U.S.-style, market-driven capitalism. Today, Japan's keiretsu are in deep trouble. Japan is ending a lost decade of economic growth with its core business model a wreck and no alternative in sight.

Take the case of the Mitsubishi Group, founded in 1870. It is one of several "Meiji startups" formed in the Meiji Restoration period by the government to modernize Japan after Admiral Perry sailed into Tokyo harbor. The Meiji government fashioned its strategy on the idea of wakon yosai, or "Japanese spirit, Western things." It was determined to adapt Western technology to the Japanese way of doing things. Granting state contracts and funding for shipping, the government helped Mitsubishi to become a complex, powerful group of industrial companies.

The keiretsu business model was simple and uniquely Japanese: companies owned shares in each other and gave business to each other. The Bank of Tokyo-Mitsubishi provided unlimited amounts of cheap capital to each company within the group. Profits were subordinated to expanding global market share.

But the forces of fast technological change and deflation are destroying the 130-year-old model. Falling real estate prices and bad loans prevent Mitsubishi's bank from providing cheap credit. Japan's recession and Asia's economic crisis have cut profits sharply. Companies are selling off stock in one another. Mitsubishi Motors is looking for a foreign partner. In short, the keiretsu organization is under pressure to disaggregate. Speed, flexibility, and cost cutting are the quintessential ingredients to corporate success today anywhere in the world. Even Hewlett-Packard finds it necessary to split in two in order to focus its businesses. But this kind of management flexibility does not come easily to Japan's keiretsu. Mitsubishi's one-time strengths are now its weakness. Its managers appear frozen in place, unable to restructure, searching for a solution.

It is folly to believe that Japan will give up its focus on national coherence to embrace American individualism. But the keiretsu will have to evolve into a much looser, more market-oriented form of organization. The success of Sony and Honda, founded after the war, suggests that Japan can change its business model. Neither belongs to a giant keiretsu. While they utilize "Western things," they retain their Japanese spirit. It is time for Japan to embark on a second wakon yosai.

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