Keiretsu

Keiretsu is a Japanese word and roughly means “series” or “chain”. It refers to a group of companies that remain legally independent but work closely together. They hold small stakes in one another, prefer to buy from each other, and often share the same main bank. Unlike a conglomerate, there is no parent company giving orders to all the others. The bond arises through contracts, trust, and relationships built up over decades. You can think of it like a circle of friends, where everyone lives their own life but always helps each other first.

Why Japan does business differently

After the Second World War, Japan’s large family conglomerates, the zaibatsu, were broken up by the occupying powers. Out of their fragments, the keiretsu grew together in the 1950s. They were an important reason for Japan’s economic miracle. Companies could plan for the long term because neither customers nor credit would suddenly disappear on short notice.

A second effect concerns the stock market. When allied companies permanently hold shares in one another, these stakes are effectively taken out of the market. This makes hostile takeovers almost impossible. It protects against outside pressure, but it also makes companies sluggish. Critics say that for this reason Japan’s companies paid too little attention to returns for decades.

This is exactly why the topic is relevant again today. For some years now, Japan’s financial regulator and the government have been pushing to reduce these cross-shareholdings. Many corporations are now selling off their old partner stakes. Foreign investors see this as a major reason for the strong performance of the Tokyo stock exchange.

Capital, banks, and supply chains as the binding force

There are two basic forms. A horizontal keiretsu brings together companies from completely different industries around a large bank. Mitsubishi is the best-known example: it includes a bank, a carmaker, a machinery manufacturer, a trading company, and a brewery all within the same network. Executives regularly meet in gatherings that hold no formal power but carry a great deal of influence.

A vertical keiretsu is structured differently. Here a manufacturer stands at the center, with its suppliers grouped around it. Toyota is considered the textbook example, with hundreds of firms arranged in several tiers. First-tier suppliers deliver directly, while the second tier supplies the first. Toyota holds stakes in many of these companies and sends its own engineers to provide support.

The advantage of this closeness is speed. When a supplier knows that the order will still be coming in ten years, it invests in specialized machinery. This is what made the famous just-in-time production possible, in which parts arrive only a few hours before they are installed. The downside shows up in crises: if a single specialized supplier fails, the entire chain grinds to a halt. That is exactly what happened after the 2011 earthquake and during the chip crisis.

From Toyota to start-up networks in Silicon Valley

In business news, the term usually comes up in connection with Japanese industrial conglomerates. When Toyota, Denso, and Aisin jointly set up a chip plant, that is keiretsu logic at work. Analysts also speak of keiretsu-like alliances in semiconductors and batteries, because here old supply relationships determine market share.

The term has also made its way into Silicon Valley. There, networks of start-ups that are all in the same venture capitalist’s portfolio and win each other as customers are sometimes called a keiretsu. A common mistake here is to equate keiretsu with cartel. A cartel colludes on prices against customers and is illegal. A keiretsu mainly governs who does lasting business with whom.