Keiretsu in the Modern World: Successes, Failures and Changes

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KEIRETSU IN THE MODERN WORLD: SUCCESSES, FAILURES AND CHANGES

A THESIS

Presented to

The Faculty of the Department of Economics and Business

The Colorado College

In Partial Fulfillment of the Requirements for the Degree

Bachelor of Arts

Amanda Barnstien

February 2016

Keiretsu in the Modern World: Successes, Failures and Changes

Amanda Barnstien

February 2016

International Political Economy

Abstract

This thesis examines the history and success of both horizontal and vertical keiretsu. The merits and shortcomings of both horizontal and vertical integration are presented followed by case studies and data highlighting the performance of horizontal and vertical keiretsu. Following this, the benefits and shortcomings of horizontal and vertical keiretsu as MNE’s are examined, accompanied by additional case studies. The success of these firms in comparison to MNE’s is presented to reach the conclusion that maintaining corporate links can be a hindrance to firm performance in the case of horizontal keiretsu but creates added value for many vertical keiretsu.

KEYWORDS: (Keiretsu, Horizontal Integration, Vertical Integration, MNE’s) JEL CODES: (Code, Code, Code)

ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS

Signature

Amanda Michelle Barnstien

ACKNOWLEDGMENTS

I would like to thank my advisors at Waseda University for providing me with resources and contact information in order to research this topic.

Additionally, I am highly indebted to the individuals I had the opportunity to meet in Japan and interview in regards to this subject.

TABLE OF CONTENTS

ABSTRACT ACKNOWLEDGEMENTS

INTRODUCTION…………………………………………………………………...1 KEIRETSU BACKGROUND………………………………………………………2 Breaking up the Zaibatsu……………………………………………………...3 Economic Turmoil and Keiretsu………………………………………………4 KEIRETSU STRUCTURAL OVERVIEW…………………………………………7 Why Keiretsu are not Myths…………………………………………………..9 Keiretsu Types: Vertical……………………………………………………...12 Keiretsu Types: Horizontal…………………………………………………...14 HOW KEIRETSU HAVE ADAPTED TO OPEN MARKETS…………………….16 THE SHORTCOMINGS OF KEIRETSU…………………………………………..17 SUMMARY OF KEIRETSU AGAINST GLOBAL COMPETITIORS………...….20

HORIZONTAL DIVERSIFICATION THEORY AND KEIRETSU………………20 Case Study: Fuyo Group and Marubeni……………………………………....22 Case Study: Mitsubishi Group……………………………………………...... 25 Comparisons and Merits of Horizontal Groupings…………………………...28

VERTICAL INTEGRATION THEORY AND THE SUPPLIER-BUYER FIRM RELATIONSHIP…………………………………………………………………....28 Case Study: Toshiba………………………………………………………….31 Case Study: Canon…………………………………………………………...33 Comparisons and Merits of Vertical Groupings……………………………..33

KEIRETSU NETWORKS FOR GLOBALIZING COMPANIES………………….34 How Mitsubishi has gained Success as a Keiretsu MNE……………………37 Using both Keiretsu ties and the Global Market…………………………….39 Performance of Keiretsu MNE’s……………………………………………40

DISCUSSION…………………………………………………………………….....41

APPENDIX………………………………………………………………………….45

REFERENCES……………………………………………………………………....62

Introduction

Every society has a common set of values that influence the way in which individual and group interactions are conducted. These values can be seen not only in a social context but economic interactions as well. The Japanese concept of ie and kaisha help to explain the role of group consciousness embedded in the pre-war corporate conglomerates of the zaibatsu and their successors the keiretsu. Ie is the concept of belonging to a family, but extends beyond just familial ties, to that of one’s work place (Nakane, 1972). The word kaisha further expresses this ideal of inclusion in a group as it means ‘my’ or ‘our’ company, the community to which one belongs primarily, and which is all-important in one’s life” (Nakane, 1972). These concepts regarding the importance of belonging to a group help explain the establishment and success of keiretsu, companies that rely on a group of corporations in order to generate its success. Keiretsu in effect bring together corporations into a larger group.

While this requires establishing an efficient system of organization, doing so well will cause individuals to become more attached to other group member firms and work towards strengthening the organization. This dynamic can be viewed in keiretsu, through member companies helping those in need and agreeing to trade with each other. Whether company networking still provides worthwhile benefits to Japanese member firms today is up for debate.

The two types of keiretsu, horizontal and vertical, fair differently in a world filled with international competitors. Horizontal keiretsu rely on the support of cross- shareholders for access to patient capital, allowing firms to focus on long-term profitability rather than quick profits. Overall, focusing on long-term profit results in less return and as horizontal keiretsu grow and must work with international partners, more of a focus needs to be placed on growing profit. The financial support keiretsu

firms provide one another will remain crucial during this transition. Eventually though, as firms begin to focus less on maintaining traditional relationships, the significance of company networks will fade.

Vertical keiretsu, in contrast, tend to benefit much more greatly from their linkages. This results from the central buyer firm using both global markets and loyal suppliers to get high quality inputs at reasonable prices. By working with suppliers directly, the buyer firm can cut costs and get inputs at globally competitive prices. In circumstances where this is not possible, the main firm can buy from the global market and still maintain relationships with supplier firms by using them in another part of production. As the ties of horizontal keiretsu grow less important over time, the ties established in vertical keiretsu have grown more profitable.

Keiretsu Background

The keiretsu known today have a long history, most notably starting during the

Meiji Era, through organizations known as zaibatsu. Zaibatsu, commonly defined as a

“group of diversified businesses owned by a single family or extended family,”

(Morikawa, 1992, p.xvii) were a way of doing business unique to Japan, given the scale of these businesses and their influence. Many zaibatsu companies grew after business groups, including Mitsui, Mitsubishi, Yasuda, Ōkura and Fujita, had amassed great wealth and established large enterprises in a variety of industries

(Morikawa, 1992, p.xviii). These business groups were created as a result of the wealth that a family member could generate as a political merchant. Political merchants acted as traders and financers of the Meiji Era, and “used their ties to powerful political figures to obtain government favors, enabling them to earn substantial profits in return for providing goods or services to the state” (Morikawa,

1992 p.3). Their personal wealth allowed families to establish ownership of several

enterprises without having to rely on outside investors (Morikawa, 1992). Mining was another profitable industry, which allowed both Sumitomo and Furukawa to create zaibatsu of their own (Morikawa, 1992.). While political merchants originally exchanged land taxes, collected in rice, into money, over time those connected with zaibatsu became even more tightly associated with the government. Zaibatsu soon were in charge of handling national tax revenues, supplying goods and services required by the regime, and shipping operations (shipping zaibatsu received subsidies in return) (Morikawa, 1992). By the end of the Meiji Era, the influence of zaibatsu both on the Japanese economy and government was significant.

Following the Meiji Era, from 1930 to the end of WWII, zaibatsu reached the height of their power (Porter & Sakakibara, 2004). The organization of zaibatsu grew more complex, as a central holding company now “held shares in and exerted significant operating control over an array of industrial, financial and trading subsidiaries” (Porter and Sakakibara, 2004, p.28). This organization included banks as member firms but holding companies still maintained financial control over the zaibatsu (Porter & Sakakibara, 2004). Without any antitrust regulation prior to the

1920’s, zaibatsu companies dominated their respective industries (Porter &

Sakakibara, 2004). During times of war, the success of zaibatsu was a primary concern, as the government received the materials and equipment needed for war through these companies.

Breaking up the Zaibatsu

In the Post World War II era, the Allied forces viewed the zaibatsu’s close connection to government and lack of antitrust laws as undemocratic and preventing competition (Porter & Sakakibara, 2004). The writers of the Antimonopoly Law of

1947 aimed to break up zaibatsu but the law was relaxed once control was returned to

Japanese officials (Porter & Sakakibara, 2004). Although zaibatsu were broken up, encouraging competition was not a goal of Japanese government officials, who maintained control over large sectors of the economy and relied on major banks for capital (Porter & Sakakibara, 2004). By the end of the occupation period in 1952, three former zaibatsu, Mitsui, Mitsubishi and Sumitomo, reemerged into a looser structure, while three new groups, Fuji, Dai-Ichi and Sanwa emerged.

These new corporate groups, formed around a main bank providing financial resources and a general trading company responsible for member firm transactions, became known as keiretsu (Porter & Sakakibara, 2004). While keiretsu-style business groups are common in developing countries, Japanese keiretsu links are much looser than those in emerging economies, as keiretsu links are “through equity cross- ownership and personal exchange” rather than family ties (Porter & Sakakibara,

2004). Firms would turn to a single bank to organize their finances (Porter &

Sakakibara, 2004). Banks lobbied to prevent the formation of bond markets up until the 1970’s, which in turn made the main banks the only source of capital (Porter &

Sakakibara, 2004). This coupled with the belief of the government, the ruling party and large Japanese firms that weak antitrust laws would encourage economic development (Porter & Sakakibara, 2004) led to the prominence of keiretsu.

Economic Turmoil and Keiretsu

The economic instability Japan faced in the 1980s and 1990s caused many to wonder about the benefits of the keiretsu system. The beginning of this period of macroeconomic instability can be traced back to 1985 and the enactment of the Plaza Accord, an agreement between the United States and Japan that aimed at

“reducing the value of the dollar-yen exchange rate” (Matsuura, et al, 2003, p. 1001).

For the United States, reducing the value of the dollar relative to the yen would result

in improved competitiveness for United States exports, but this policy did not prove to be so beneficial for Japan, given the resulting large and rapid appreciation of the yen.

The Plaza Accord set into motion the beginnings of economic disruption but the world stock market crash resulted in further financial volatility. After the stock markets had experienced a steady increase in the first half of 1987, concern that an asset bubble was growing emerged (Bernhardt and Eckblad, 2013). Negative news reports and the disclosure by the United States government of trade deficits larger than expected resulted in market volatility and a drop in the dollar value. The following Monday, stock markets around Asia and the world plummeted, with New

Zealand’s stock market falling a staggering 60 percent (Berhardt and Eckblad, 2013).

For Japan, this resulted in the Bank of Japan lowering the discount rate to 2.5 percent by June 1989, which would set the stage for the growth of Japan’s bubble economy around this time period (Matsuuda et al., 2003).

While both the stock market crash and yen appreciation had an impact on

Japanese finances, the Structural Impediments Initiative (SII) was also enacted in

1987 under United States pressure. This required Japan to “maintain and promote competition in its domestic markets with transparent administrative guidance which did not discriminate between domestic and non-domestic firms” (Matsuura et al.,

2003). US officials worked to enact policies that not only improved the US’s trade deficit at the cost of Japanese financial stability but also forced a change in the corporate structure itself.

While Japan experienced pressure by the United States to liberalize its markets, it also began to face the results of the Plaza Accord and 1987 market crash.

The Plaza Accord resulted in rapid yen appreciation, as much as a 40 percent real

value increase in two years, but this appreciation came with only a small reduction in the volume of exports without an increase in imports (Matsuura et al., 2003). This resulted in “a substantial increase in the dollar value of the current account surplus”

(Matsuura et al., 2003 p. 1001). The stock market crash and the resulting low interest rates in Japan prompted a boom in the stock and land markets as lending to financial and property firms increased quickly. In June 1989, the interest rates began to climb again, causing a decrease in asset prices. Decreases in consumption followed the decline in financial wealth, resulting in a recession from 1991 to 1993 with modest recovery from November 1993 to 1997 (Matsuura et al., 2003). With the GPD per capita growth rate from 1991 to 2000 averaging only .5 percent GDP compared to the

2.6 percent the United States experienced at the same time (Hayashi and Prescott,

2006), it became clear that Japan was no longer catching up to other industrialized countries but was starting to lag behind once again.

The main bank system similarly fell under distress during the financial bubble of the 1980s and the aftermath of the 1990s. With the increased competition among financial institutions, banks responded “with offers of easy monitoring that relied on the collateral value of the company rather than the prospects of the firm” (Matsuura et al., 2003, p. 1006). This in effect weakened the monitoring function of the main bank and caused the bank to be at greater risk. The weakened monitoring function of the bank combined with the decrease of asset prices during the recession resulted in main banks accumulating large amounts of bad loans. Some banks with large debts filed for bankruptcy or accepted public funding from the government. The huge sums of bad loans made in the bubble period, and the resulting distress for banks, led to a weakening in bank-firm relations. According to The Economic Survey of Japan, main banks started exercising greater caution when lending and became “unwilling to

provide rescue loans to distressed firms” (Matsuura et al., 2003, p. 1006). The economic recession highlights how United States pressure to change the Japanese economy resulted in financial instability.

Keiretsu Structural Overview

The keiretsu structure is typically divided into two categories: horizontal and vertical. However, both types rely on their network ties and a single keiretsu firm can have characteristics of both. While vertical keiretsu focus on the supplier chain, horizontal ones are the type most commonly thought of, in which a main bank and trading company are central features (Twomey, 2009). Equity ties are a main focus of horizontal keiretsu, with financial institutions owning 71% of outstanding shares of

Japanese firms in 1990 (McGuire & Dow, 2003). The importance of equity shares has decreased overtime though, as the proportion of shares owned by financial institutions is lower in 2015 for both Marubeni and Mitsubishi, at 34.38% and 43.92% respectively (Figures 4 and 7). Globally, the proportion of shares owned by individuals has decreased since the 1960’s (Okumura 2000). For Japan, the concentration of shares is “in the hands of corporations” while in the United States and elsewhere it is concentrated “in the hands of certain institutions” (Okuma 2000 p.

36). This difference, coupled with board interlocking membership, gives Japanese shareholders more access to information, allowing them to act as quasi-insiders

(McGuire & Dow, 2003). However as more foreign investors support keiretsu firms, these relationships change. Shareholders in Japan “rely on the less formal input made possible by their multiple ties with other shareholders and the firm” to have a significant influence on decision making (McGuire & Dow, 2003 p.375). While these cross-share holdings may result in keiretsu companies preferring to exploit their internal market rather than explore new opportunities, this system also provides

capital market stability (McGuire & Dow, 2003). Shareholders are able to influence decision making for the company and therefore remain invested in seeing the company develops even through financial difficulties.

Additionally, bank ties also provide horizontal keiretsu companies with stability. By relying on bank debt for financial needs, the company can have access to stable financing while reducing long-term debt (McGuire & Dow, 2003). Banking ties, together with equity holdings, allows the central bank to have greater information and transparency to monitor a firm (McGuire & Dow, 2003). This in effect lowers the agency costs between the owners of capital and managers (Matsuura et al., 2003). The dual position of the banks as part owners of the keiretsu and provider of capital

“provide additional avenues for input into firm decisions and additional means of intervention if necessary” (McGuire & Dow, 2003 p.376). In effect, the various network ties work to create support for keiretsu firms and facilitate discussion over what a firm should do in times of crisis. Supplier systems are a key component of vertical keiretsu, prominent in machine manufacturing industries. In this hierarchical structure of subcontractors, “Customer (purchaser) firms make finished products by assembling various parts, and suppliers deliver parts to customer firms within the context of a long-term business relationship” (Matsuura et al., 2003, p.1009). A firm can be considered both a part of the horizontal keiretsu and vertical keiretsu if it performs a role in both the supplier system and the horizontal keiretsu network.

Despite the costs associated with maintaining these networks, their use provides real benefits for firms. The closeness of cross-shareholding allows firms to have easy access to finance and greater financial flexibility (McGuire & Dow, 2003).

Japanese firms do not face the pressure to return investment quickly because the companies and banks own each other (Macharzina, 2000). This “access to ‘patient

capital’ took pressure off managers to achieve short-term profitability and allowed them to concentrate on market share” (Macharzina, 2000 p. 103). This reduces risk and shields keiretsu from market volatility, as their shareholding arrangements remain stable (McGuire & Dow, 2003). Bank officials’ willingness to work with financially troubled firms by providing managerial assistance, purchasing inventory and extending payment terms lessen risks even further (McGuire & Dow 2003). In the automotive industry, Michael Dertouzos, Robert Solow and Richard Lester credit the better performance of Japanese firms compared to American ones to the subcontracting system (as cited in Matsuura et al., 2003). Maintaining a continuous relationship with suppliers allows the customer company to have a greater amount of information about the quality of the supplier products and the ability of the supplier to meet quality and delivery standards, resulting in a reduction of production and transaction costs (Matsuura et al., 2003). The Economic Planning Agency argues that the close relationship between the supplier companies and the purchasing companies allows exchange of information and encourage technology transfer between parties, making the system even more efficient (although the system began to change in the

1990s) (as cited in Matsuura et al., 2003). Therefore, while keiretsu organizations may appear to be exclusive and hierarchical, the structure itself does provide benefits to member firms and can allow for exchange of information that create more efficiency overall.

Why Keiretsu are not Myths

Before discussing the benefits and disadvantages of both the horizontal and vertical keiretsu structures, it is useful to examine the merits and faults surrounding the argument that keiretsu do not exist at all. In The Fable of the Keiretsu, Yoshiro

Miwa and J. Ramsey point out that a lack of membership list, myth of the main bank,

and inability to agree on a standard to define keiretsu support the argument that keiretsu do not exist. While there is merit to some of their arguments, others are without much support. For example, Miwa and Ramsey state, “there is no membership list [of keiretsu firms] because there are not now and never have been keiretsu groupings…Accusations of keiretsu membership are as easy to make and hard to disprove as are those about communist sympathies” (p. 11). They cite an example from the late 1980’s, in which an FTC official investigated Toyota Motors, asking how much of their trade went on between member firms. The Toyota Motors executive could not respond, because they did not even know which of their business partners was a part of the Mitsui group. While this is one example of membership being unclear, Miwa and Ramsey fail to present any more to support their argument that membership lists do not exist because there are no keiretsu. One example cannot be used to generalize the whole of Japanese corporations. As James Lincoln notes,

“Where are the interviews with executives, officials, and suppliers whose personal observations and experiences might have constituted hollowness of the keiretsu myth?

Such case materials may be found in the abundance in the literature that supports the keiretsu idea” (Lincoln, 2008, p.195). Providing one counterexample alone does not discount the extensive academic work supporting the idea of keiretsu membership.

Similarly, their argument surrounding the main bank fails to consider the very nature of keiretsu and firms’ willingness to work together. In regards to rescuing firms, the basics of Miwa and Ramsey’s argument follow logically: “A bank that commits itself to rescuing defaulting borrowers would attract the highest-risk firms.

As a result, banks would seem to do best if they refused ever to become a main bank”

(p. 64). Perrow provides evidence that that “the main bank model is an extreme simplification that molds reality to the stark and simplistic dyadic agency-theoretic

perspectives of corporate finance economies” (as cited in Lincoln, Gerlach, &

Ahmadjian, 1996, p.72). In reality, it is not the main bank alone that acts when a member firm is in trouble. The bank acts together “in concert with a coalition (read keiretsu) of industrial firms, trading companies and other corporate actors” (Lincoln ,

2008, p.194). The examples of Mitsubishi group stepping forward to assist Akai

Electric and Sumitomo group bailing out Mazda prove that these bailouts do occur, together with the support of the entire group. Miwa and Ramsey also hold that there is no incentive for banks to monitor firms, as the firms would try to hide when they are failing. However, banks dispatch directors that in fact perform a monitoring function, because “their loyalties to the bank persist, and they continue to function as communication and control channels between the bank and the firm” (Lincoln, 2008, p. 195). Maintaining a strong group identity enables keiretsu to act together in the interest of other firms and uphold group loyalty.

The argument surrounding the issue of defining keiretsu holds the most merit and highlights the flaws in the listing systems generally used. They begin by discussing the lists of keiretsu generated by the Research on Keiretsu (ROK), which they assert made up their lists of keiretsu affiliation by “[grouping the source of their loans]”, neglecting information about “cross-shareholdings, personnel exchanges, long-term commercial ties or any other characteristic routinely attributed to keiretsu”

(Miwa & Ramsey, 2006, p.15). The other main source of keiretsu listings published by Dodwell Marketing Consultants “does not explain how it chooses its groups.

Seemingly, it starts with the luncheon invitation lists,” the monthly lunch meeting of firms presidents that began in the 1960s. “To those lists, it adds firms in which lunch group invitees appear prominently along the ten largest shareholders” (Miwa &

Ramsey, 2006, p.18). While Dodwell Marketing Consultants and ROK have different

methods for determining their lists, a meager 48-65 percent of ROK listed firms appear on the Dodwell list and only 48-55 percent of firms on the Dodwell list are also on the ROK list (Miwa & Ramsey, 2006). While this is without a doubt disappointing and leads to a sense of confusion over what defines a keiretsu, “the authors fail to mention a number of studies that do not rely on such directory listings but infer keiretsu membership from concrete data on Japanese companies’ actual business and governance ties” (Lincoln, 2008, p.195). Keiretsu association can be measured through shacho-kai membership, in which a firm has a seat on the president council of one of the big size groups, or through ad hoc transactions that have less formality, including “selection of keiretsu group firms as trading partners, amount of borrowing from group banks, the extent of share-holding by group banks and corporations, the selection of board members from the management of big six firms”

(Lincoln et al., 2006, p.75). Similarly, looking through a source like the Japan

Company Handbook can help determine a firm’s affiliation, based on the lists of firms’ major shareholders (Miyashita, 1994). With so many details to be considered, it can be easy to classify one particular firm incorrectly, but in general the larger firms affiliations are known and accepted. The focus of classifying firms distracts from the larger importance of keiretsu and what the networks provide.

Keiretsu Types: Vertical

Not only do keiretsu structures exist, but they can also both be beneficial and a hindrance to member firms. Vertical keiretsu, the pyramidal buyer-supplier system, streamlines production. Buyer firms within the keiretsu know the quality of the parts that they are buying based on past experience of working with suppliers. The buyer firm, often times referred to as the parent company, does not need to waste resources creating the materials it needs to buy. Rather, a subsidiary firm can specialize in this

process, which allows the parent firm to focus its management on other important things. Oftentimes, there are occasions in which a firm splits from the parent firm to become its own entity, which “make a parent company slim and made it desirable to purchase from suppliers” (Abe, 1997, p.305). Even if a supplier firm was not a spinoff from the parent company, these firms still maintain loyalty to the group. This allows vertical keiretsu to avoid “hidden costs of Western-style supplier agreements, including a pervasive unwillingness among both manufacturers and suppliers to identify the root causes of supply-chain problems for fear of appearing to be at fault”

(Aoki, 2013. Vertical keiretsu benefit from their close relationships to one another.

This heightened ability to communicate can result in better quality of supply and willingness to work together to solve issues along the supply chain.

Even though vertical keiretsu come with their strengths, some argue that the benefits to the parent firm are decreasing and the parent firm can often take advantage of its suppliers. Mori argues that the lessening wage gap between the large company and the smaller firms results in a decreased cost advantage to managers of larger firms

(1994). This decrease in the wage gap coupled with the time needed to maintain clear communication channels between subgroups and parents firms will result in a high cost. More companies have to cross “keiretsu lines to stay in business, and the parent firms will learn to put up with it. The vertical keiretsu will still exist, but they will become less rigid, more dynamic” (Miyashita, 1994 p.202). In order to avoid going out of business, smaller firms have a need to look for opportunities outside of their keiretsu. After the Plaza Accord, many firms needed to cut costs due to the sudden and rapid decrease in yen value (Miyashita 1994). Parent companies relied on small business subcontractors and middle-tier contractors to do this for them rather than cutting costs at the higher level, which caused many suppliers to go out of business.

With imports being suddenly more attractive, it even costs less to buy keiretsu products abroad, reimport them to Japan and sell them domestically (Miyashita 1994), putting the keiretsu in an even more vulnerable position domestically. Since 2000, many vertical keiretsu have broken up, leaving only Toyota and Honda as the two vertical keiretsu in the automotive industry and nine other manufacturers “partially in the hands of foreign capital, which reduces their connections with Japanese banking establishments” (Daidj, 2009, p.81). Vertical keiretsu face the issues of relying on their subcontractors too much during times of crisis, rather than working at the higher levels to fix the problems that are prevalent throughout the structure.

Keiretsu Types: Horizontal

Horizontal keiretsu, in which member firms have equal status and are connected to the main bank, hold different benefits from those of vertical keiretsu and face other challenges. Grouping and organization provide a number of benefits to individual firms. Group coordination can minimize risk and increase profitability. The findings of Nakatani suggest grouping results in higher profits due to “enhanced efficiency, not inefficient monopoly/monopsony rents” (as cited in Lincoln et al.,

1996, p.69). Additionally, coordination between member firms can “produce economies of scale which can result in considerable cost savings” (Kensy, 2001, p.222). Being a part of a horizontal keiretsu allows a smaller company to have opportunities it would not have otherwise. For example, many member firms have a larger voice in the business community than they would otherwise (Miyashita, 1994).

Additionally, individual firms may receive financial and marketing support from the keiretsu group. For example, Nissan Cars received help during the 1950s and 1960s as a result of being a part of the Fuyo group. In the 1950s and 1960s, the trading firm

Marubeni sold and promoted Nissan cars abroad until Nissan grew large enough to be

self-sustaining (Marubeni employee, personal communication, June 2015)1. Having a keiretsu group allowed Nissan to grow with support and overcome any trouble along the way. The group membership acts as insurance; in return for helping other firms in need, firm managers can rest assured knowing that they have a “safety net that insulates each of them from the never-too-distant spectre of business adversity”

(Lincoln et al., 1996, p.70). A group of firms has a greater capacity to handle risks than an individual one, which “results in enhanced competitiveness, particularly in a global context” (Kensy, 2001, p.224). The keiretsu that Kensy examined have more stability in profit, growth rates, dividend payout ratios and lower debt to equity than non-keiretsu firms. Maintaining group ties can help member firms successfully grow and even more easily survive through rough patches.

Recently, big banks are only slightly more likely to lend within the group than outside it, but there is still a sense of security from being a part of a horizontal keiretsu. Part of this without a doubt comes from firms creating a clique “whose reciprocal commitments stem from long association and strong collective identity”

(Lincoln et al., 1996 p.83). This sense of identity is not just limited to the intra-firm relationships. The symbolic signs of group identity, including belonging on a president’s club, permanent credit relationships, shared foreign organizations and joint corporate images, promote a “heightened brand awareness and a coordinated public image, which also positively enhances the commercial success of its members” as the work by Hazama suggests (as cited in Kensy, 2001 p.228). Forming a group that has a strong sense of connectivity provides enhanced efficiency, the ability for small firms to become more influential, risk management and access to marketing under a successful brand name.

1 All subjects interviewed by the author will be kept anonymous.

How Keiretsu have Adapted to Open Markets

While the predecessor to keiretsu was created under a closed market system, keiretsu, as with other corporate models, have adapted to the new environment of internationalization in order to be successful on a global scale. In the 1970s, Japanese

Overseas Enterprise Departments were formed and “internal global communications and trade networks were extended, which resulted in a wide network of foreign subsidiaries, branches, representations and offices” (Kensy, 2001, p.213). Following this increase in foreign direct investment, keiretsu began to reorganize in the 1980s

“in the form of multinational enterprises” (Kensey, 2001, p.215). The large keiretsu

(mainly former zaibatsu) used their economies of scale to gain more influence globally while newer keiretsu, such as those in the electronics industry, worked towards gaining the lead in the newly forming high-tech markets (Kensy, 2001). With less risk due to their group ties, less pressure to maximize profits and “a low level of receiverships among their foreign companies” (Kensy, 2001, p.214) keiretsu could very well adapt to become a powerful force against global competitors. The strategy of the 1970s based on foreign direct investment shifted towards “more indirect forms such as joint ventures, strategic alliances of informal cooperation within the network of independent firms” (Kensy, 2001, p.216). If horizontal keiretsu firms can continue to adapt their strategies accordingly, their success will be guaranteed.

The main bank provides member firms with the ability to access financial resources with the reduction of risks. The main bank can “economize on the costs associated with open market transactions and provide financial capital to group members at a lower cost” due to its deep familiarity with member firms (Hundley,

1998 p.929). Nakatani and Young assert that membership provides the guarantee of

“cheap, almost unlimited financial resources” (as cited in Kensy, 2001, p.225) that

can be used for expansion purposes, especially useful as firms begin to compete globally. Smaller firms can get ahead thanks to the main bank as well, as the bank can bundle their requests for capital with others and then finance them directly or through the global capital market. Coordinating the differing credit and investment requirements of firms within the keiretsu “reduces total risk and frees up more financial resources for the nucleus bank, which then can provide a powerful safety cushion or risk-management tool during periods of crisis” (Kensy, 2001, p.225). Risk capital can be provided to firms “at a minimal cost at any given point in time (i.e. not just opportune and favorable moments)” (Kensy, 2001, p.225), although how often banks do this after the 1980s and 1990s is debatable. The main bank’s familiarity with its member firms results in the bank officials’ ability to provide financial support, both during times of hardship and times of expansion. Although the role of the main bank continues to change, “the general principle will hold also for the future. The financing function will still be mainly internal though maybe centralized at the bank”

(Kensy, 2001, p.225). Even as the main bank begins to support keiretsu firms less and less directly, member firms can still work together to assure success.

The Shortcomings of Keiretsu

Even though horizontal keiretsu can pull resources together to reduce risk, increase efficiency and gain access to greater financial resources, they are still met with increasing challenges. Citing Frankel, Saxonhouse states, “With the growth of equity financing and with the increasing equalization in the terms of access to capital between keiretsu and non-keiretsu one of the main props of the keiretsu system is coming undone” (p. 38) and as a result keiretsu disaffiliation will be a part of Japan’s future. Aras similarly argues that the increase of foreign direct investment threatens the shareholding and ties of keiretsu, causing them to be less centralized and

integrated, resulting in a diminution of keiretsu (Daidj, 2009, p.97). Some of the main problems horizontal keiretsu face includes poor export performance, issues of efficiency and the limiting effect of group membership.

Generally speaking, keiretsu have lower export ratios than non-keiretsu. A study by Hundley found that companies that belonged to one of six major financial keiretsu had lower export ratios than similar firms without keiretsu affiliation, supporting the argument that non-Japanese companies should not “look to keiretsu- type alliances as an organizational strategy that will lead to competitive advantage in global markets” (Hundley, 1998, p.927). Hundley argues that keiretsu firms face less competitive business environments, most likely due to the support of their group ties, which results in a lack of efficiency that would make keiretsu less competitive in export markets (Hundley, 1998). In order for firms that produce products to become influential globally, high performance of exports is crucial. The inability for keiretsu firms to do so is a clear weakness.

Even though keiretsu firms can share information and therefore increase efficiency, a lack of experience in dealing with competition in addition to maintaining the group structure can consume resources quickly, resulting in an overall decrease in efficiency. Keiretsu firms grew out of protected markets, as many Japanese government officials, especially during the Post-Occupation period, believed that competition would result in less economic growth. While this allowed keiretsu to become more powerful, “the experience of other countries is that the protected markets, far from nurturing world class exporters, lead to inefficient producers who perform poorly in international markets” (Porter, 2004, p.927). The decision making process in keiretsu firms, and in many Japanese firms in general, can take an increased amount of time due to the bottom-up approval process. As one Marubeni

worker states, “Say my assistant makes a plan and I approve it. It then goes to my boss to get approved, and then another, and another. That’s the problem with Japanese companies…It’s a very consensus society” (Marubeni employee, personal communication, June 2015). For keiretsu firms currently in collaboration with other firm members, this approval process becomes exponentially longer.

Finally, the fading desire to keep the tradition of keiretsu alive coupled with the restraint of group membership makes the keiretsu networks increasingly less appealing. Lincoln argues that it is quite possible “that groups not only pool risks to safeguard one another’s survival prospects, but that they also act on norms of equity and common welfare to cap the success of their strongest members” (Lincoln et al.,

1996, p.71). Other research suggests that powerful firms in the keiretsu have more access to information, in which case smaller firms would be at a disadvantage (Kim,

Hoskisson, &William, 2004, p.618).

Additionally, once strong network ties have become much looser because even though in many cases the keiretsu firms have some priority when a company must team up with another, if a foreign or outsider firm presents a better deal, a keiretsu firm will decide to work with them instead (Marubeni employee, personal communication, June 2015). Similarly, keiretsu firms will negotiate with other banks if the offer from their main bank is not attractive enough. In an interview one Waseda professor notes that the threat of firms being taken over if they fail to change from their reliance on their inner circle is now more important than maintaining tradition

(Waseda professor, personal communication, July 2015). Even though business groups tend to be more successful in more closed markets, business groups also tend to add value that does not exist in the current market. “It follows, then, that as market- supporting institutions evolve and market imperfections decline, the advantages of

business groups may dissipate over time” (Kim, Kim, & Hoskisson, 2010, p.1156).

Therefore, as the Japanese market has become more open, the role of keiretsu has come into greater question.

Summary of Keiretsu Against Global Competitors

Despite the flaws of both vertical and horizontal keiretsu, the economies of scale these groups provide can be especially important in competing internationally.

As the case of the Toyota group proves, a keiretsu can be successful as a result of its linkages, but depending on ties alone is no longer enough. Firms need to be able to incorporate both the benefits of group networking, such as greater efficiency in production, with openness to working with other firms as well. Maintaining a balance between the two may not come easily, but if done successfully can help to lower costs for individual firms. Research both supporting the keiretsu organizational system and disputing it is endless. However, it is without a doubt that in the past many firms have grown in size and influence with the help of their keiretsu ties. Currently, both horizontal and vertical keiretsu have a global influence, but maintaining old practices and failing to adapt to global changes will result in a poorer performance. In the case of horizontal keiretsu, this may mean sacrificing group ties in order to enhance profits. Vertical keiretsu, in contrast, can more easily maintain their buyer-supplier firm relationships while obtaining globally competitive prices.

Horizontal Diversification Theory and Keiretsu

Although there is much greater literature in regards to the theoretical benefits and drawbacks of vertical integration, there has been some work in regards to horizontal diversification as well. This is generally defined as “corporate expansion into more than one industry across businesses not necessarily related to each other”

(Pozzi and Vassilopoulos 2007, section 11.2.2). Work by Williamson suggests that

economies of scale and scope combined with similarities in technology may result in firms expanding in order to forgo transaction costs of contracts with firms in the market place (as cited in Pozzi and Vassilopoulos). Generally, this occurs throughout related industries but can also occur in dissimilar ones. Financially though, horizontal diversification comes at a cost to shareholders. According to work by Jensen and

Meckling, internally expanding a firm “causes a divergence of interest between firm managers and shareholders greater than potential profits” (as cited in Pozzi and

Vassilopoulos) resulting in an agency cost for shareholders. In contrast, mixing equity portfolios provides the benefits of horizontal diversification, including reducing risk and investing in new opportunities, without the costs for shareholders. This discussion of horizontal diversification is similar to keiretsu in that corporate expansion is involved. However, keiretsu firms are separate, rather than one firm diversifying across industries. In cases when one corporation gets too large, a keiretsu parent company can create a spinoff, resulting in specialization for the spinoff. The networks can be used to overcome the issue of divergence of interest between shareholders and managers due to the cross-shareholdings of companies. Additionally, while expanding can be risky for an individual company, an expanding network provides more stability for firms and increases the possibility of future business partners. However, just as in a large corporation expanding, keiretsu firms can face the issue of high agency cost due to the extensive management needed and the exchange of directors among firms.

Furthermore, the need to protect the group can come at high costs for successful firms and always working with in-group members over other competitors is not advantageous. While keiretsu groupings accomplish similar goals to horizontal diversification, the network helps eliminate some of the issues associated with this tactic but other challenges remain present.

In the case studies presented in this section, much of the data comes from the

13th edition of the Industrial Groupings in Japan, produced in March 1999. Although how this source defines its groupings has been debated, it remains useful in order to examine the effects of keiretsu ties on performance, rather than the validity of data set itself. Given the slowing down of the Japanese economy in recent years, much less attention has been given to keiretsu currently than in the 1990’s and earlier. However, with the 8 major industrial groups making up only .055% of companies in Japan, yet employing 6% of employed persons (Table 1) and generating 17% of annual sales in

1997 as shown in Figure 1, it is clear that these groups have held significant power.

As a result, how these companies manage or fail to adapt to changes in the global economic world are of interest.

Case Study: Fuyo Group and Marubeni

One of the keiretsu organizations with a zaibatsu history, the Fuyo Group is an interesting assortment of firms given their relatively loose ties. The Fuyo Group has connections with Fuji Bank (now Mizuho Bank after a merger) and includes “Asano zaibatsu companies (NKK, Nippon Cement) and Mori zaibatsu firms (Fuji Bank,

Yasuda Trust and Banking, Yasuda Mutual Life Insurance and Yasuda Fire and

Marine Insurance) (“The Fuyo Group,”, 1999, p.81). These connections with other former zaibatsu companies reflect the loose ties of the Fuyo Group. Even amongst the president’s council, which includes 28 member companies, “ties are relatively loose if compared with those of Mitsubishi and Sumitomo. This is one of the features of the group, in the sense that group members are able to act freely considering their own requirements” (“The Fuyo Group,” 1999, p.81). Table 2 provides a list of the Fuyo

Group Council members by industry, and gives just one example of how keiretsu encompasses horizontal diversification. The Fuyo Group industries include diverse

fields like financial, food, textiles and transportation. The connections across such a multitude of industries can be found in many other keiretsu networks.

Table 3, with data also from the Industrial Groupings in Japan Handbook, has a breakdown of Revenues and Annual Income or Sales, Net Profit, Paid-up capital and the number of Employees per sector of Fuyo Group firms for the 1998 fiscal year.

Trading and Commerce make up the greatest portion of Revenue for the Fuyo Group as a whole with a total of 36.8%, followed by Finance and Insurance at 16.3% and

Construction at 13%. Employees are spread out somewhat more evenly amongst the sectors, but land transportation holds the greatest portion at 18.4%, followed by finance and insurance at 15.4% and construction at 11.6%. Out of 28 fields represented in this table, nine have negative net profits, with another four having no data. However, in looking at individual firms listed in the handbook, there are a few firms with high negative net profits, which undoubtedly impact the sector totals. For example, companies with large revenues tend to have negative net profits, such as the

Fuji Bank with revenues of 2.54 trillion yen but a net profit of -518,701 billion yen.

Similarly, Marubeni Trading Corp., has annual sales of 13 trillion yen but a net profit of -30.7 billion yen (“The Fuyo Group”, 1999). Given the relative importance of the bank and trading company, these negative profits could be reflective of troubles within the Fuyo Group as a whole.

Marubeni, the trading corporation of the Fuyo Group, “encompasses an exceptionally wide range of fields, spanning from foodstuffs, textile products, and other fields related to daily life to fields that help form the foundation for society and the economy…With this diverse business portfolio, Marubeni will create new value to further contribute to social and economic development,” according to the Marubeni

Annual Report of 2014. Additionally, the report states that the “Total volume of sales

transactions increased 27.7% to ¥157.5 billion; and profit for the year attributable to the owners of the parents was up 62.1% to ¥210.9 billion” (Marubeni Annual Report,

2014, p.12) from the previous year. While this reflects positive gains that Marubeni might attribute to its diversification, in 2015, Marubeni experienced a decrease in both its return on equity and earnings per share (Figures 2 and 3). So while the annual report of 2014 seems generally positive, this could be a result of framing (ex. both percentages of profits and losses were lumped together in pie charts, making it unclear whether a sector experienced losses).

In the interview conducted with a Marubeni employee, the subject confirmed that unlike Mitsui and Mitsubishi, the Fuyo group ties are weaker. Unlike Mitsubishi, which has the advantage of a recognizable logo and brand name, Marubeni lacks such advantages and as a result has to find other ways to promote business. In connection with this, he stated that about 70% of business is done with outsider firms and most of

Marubeni’s affiliates are foreign (Marubeni employee, personal communication, June

2015). On the company website, 100 major group companies are listed as in Japan, with another 178 major group companies listed in other regions. Of the major groups listed in Japan, 13% alone are in the food production sector, compared to only 5% in all other regions. The number of companies in the domestic food production reflects the importance of Marubeni in Japan. However, given the size of the small size of the

Japan food market in comparison to a global scale, these companies in the domestic food production sector will not provide as great of a benefit as strong international partners can. Mergentonline lists Marubeni as having 188,528 shareholders as of

March, 31 2015. Of the shares held by institutions, the top 25 institution holders are all foreign, including such institutions as J.P. Morgan Chase and CO. and Bank of

America (Table 4). Japanese group affiliation, while still important, is no longer

sufficient to compete on a global market. Furthermore, the Marubeni website lists foreign corporations and foreigners as owning 27.38% of their 1.74 billion shares

(Figure 4). Japanese financial institutions and domestic corporations still maintain a large portion of Marubeni’s ownership, but as the influence of individuals and firms outside of the keiretsu network grows, keiretsu firms will no longer be able to rely on patient capital. As a result, the need to turn a profit can result in the weakening of network ties that are unprofitable.

While Marubeni has become increasingly distant from its group affiliation, the ties still remain present in small forms: “For example, when we have a party they only serve Sapporo beer. Also our building elevators are all Hitachi. They have small ties. I don't think if Sapporo beer went bad Marubeni would try to help. Maybe the bank

[would give financial assistance]” (Marubeni employee, personal communication,

June 2015). The speaker also stated a need for Marubeni to reduce its debt and increase equity, which is in line with the figures listed on the Marubeni Corporation website. Overall, the company vision to diversify in order to increase social and economic development reflects the concept of horizontal diversification. Lacking strong group support, this diversification could be seen as an attempt to gain influence in multiple fields, as member firms in a strongly connected keiretsu cluster have access to.

Case Study: Mitsubishi Group

Like the Fuyo Group, the Mitsubishi Group is an organization with a zaibatsu history, founded in 1870 by Tsukomo Shokai as a fishing company. The company name was later changed to Mitsubishi Shokai in 1873 and the three-mark diamond became the official company symbol. While the American occupation required the dismantling of this zaibatsu, Mitsubishi Shokai was reformed within two years after

the Peace Treaty came into effect and the group could once again use its brand name and signature logo (“The Mitsubishi Group,” 1999). This grouping is Japan’s most powerful. Each company “is managed independently, operating on an equal footing with no single organization controlling all of the companies,” but group ties are still tight through “crossholding of shares, exchange of directors, intra-group financing and the intra-group transactions” (“The Mitsubishi Group,” 1999, p.39). With average cross shareholdings ratios of 27.3%, Mitsubishi has higher cross shareholdings than both the Sumitomo and Mitsui groups, reflecting the closeness of these keiretsu ties.

The leadership of The Bank of Toyko-Mitsubishi, Mitsubishi Corp., and Mitsubishi

Heavy Industries coupled with member firms with directors from other firms adds to the close-knit ties (“The Mitsubishi Group,” 1999). Table 5 presents the Mitsubishi

Group Council members listed in the Industrial Groupings of Japan Handbook while

Table 6 lists revenues or annual income or sales, net profits, paid-up capital and the number of employees in each sector for the 1998 fiscal year. Like the Fuyo Group finance and insurance, trading and commerce and construction are the three major sources of revenue for the Mitsubishi group, coming in at 13.9%, 23.3% and 35% respectively. Only in the finance and insurance sector is the proportion of employees significantly higher than the other sectors, making up 19.7% of the total. Six of the sectors have a negative net profit listed in comparison to the Fuyo Group’s higher number of nine. One possible explanation for this could have to do with the different degrees of closeness the groups practice.

Much like Marubeni, Mitsubishi Corporation functions as the group trading company and has faced recent challenges, as their projected decrease in net income reflects (Figure 5). The corporation cites the resource field as a source of some of this issue, but states that the non-resource field will help to decrease the negative impacts

of this currently less profitable field (Figure 6). This interaction, in which a successful field acts to support a struggling one, is reflective of typical keiretsu ties. The interview with one Mitsubishi employee acknowledges the role of group ties, stating,

“[Mitsubishi is] closely related within the same group and mainly contact[s] within the group first, but the business itself depends on the competitiveness with other non- group companies” (Mitsubishi employee, personal communication, July 13, 2015).

This statement reflects both the importance of group ties as well as finding a balance of working with other competitors. This desire to find a balance between in-group and foreign companies is reflected in Mitsubishi Corporation’s global network. While the company website lists that there are only 29 offices and subsidiaries in Japan, compared to the 108 offices, 42 subsidiary headquarters and 41 branches in the global network, many of their global partners listed online, including United States

Mitsubishi International Corporation and France Mitsubishi France S.A.S., share the

Mitsubishi brand name. Like Marubeni though, the top 25 institutions holders of

Mitsubishi Corp. are foreign (Table 7), showing that strong group ties are no longer the only important influence for Japanese corporations. Foreign corporations also own

30.73% of Mitsubishi’s 1.6 billion shares (Figure 7). This once again reflects a shift in importance away from network ties. The employee also states that Mitsubishi “is very flexible and easily changes depending on market needs” (Mitsubishi employee, personal communication, July 13, 2015) in the face of increasing globalization. While the ability to react to markets quickly is often not associated with keiretsu, given the wait time for companies to consult with other directors and shareholders, it reflects a desire to adapt to rapidly changing markets. Additionally, the portion of shareholders has grown to include more foreign individuals, who are likely to favor flexibility over sticking to a long-term plan. Finding a balance between the flexibility that foreign

shareholders desire and long-term success that keiretsu networks strive towards will enable Mitsubishi to be more competitive.

Comparisons and Merit of Horizontal Groupings

The cases of Marubeni in the Fuyo Group and Mitsubishi are interesting to examine in regards to the merit of horizontal diversification. The company goals of

Marubeni to diversify may be a result of its weaker affiliation with the Fuyo Group.

However, the recent scandals Marubeni has faced and the risky investment on

Gavilon, a poorly performing U.S. grain merchant, reflects the risks associated with horizontal diversification and the impact it could have on overall profits (Saito, 2015).

The Mitsubishi keiretsu grouping may have had less of a need to diversify given the number of subsidiaries and strength of group ties, but even this is changing, as reflected in Mitsubishi Corp.’s decision to buy one-fifth of Olam International, a

Singaporean agriculture-trader company (Daga and Azhar, 2015). Strong keiretsu ties allow a firm to have access to other industries, but in a global market maintaining such a strong influence becomes difficult unless the group becomes open to working with firms outside of its network. Both Marubeni and Mitsubishi work outside of their respective networks, as is reflected in their lists of top 25 Institutional Holders (Tables

4 and 7) and large proportion of foreign shareholders (Figures 4 and 7). Marubeni and

Mitsubishi represent keiretsu firms with both strong and weak group ties, and yet both firms have foreign shareholders and continue to work with foreign companies. This proves that regardless of the strength of group ties, affiliation with foreign firms provides benefits needed to compete globally.

Vertical Integration Theory and the Supplier-Buyer Firm Relationship

The second form of keiretsu, the vertical keiretsu, is a pyramidal structure of inter-corporate equity holdings based mainly by industry. In this structure, subsidiary

companies provide needed goods and services for the lead company, potentially reducing transaction costs and increasing efficiency. While vertical keiretsu requires maintenance of company networks, work by Lawrence supports the claim that

“keiretsu are more an efficiency enhancing than collusion-fostering institution,” as the role of vertical keiretsu in an industry tends to increase the amount of exports

(Saxonhouse 1993, p.36). However, the growth and success of keiretsu may be due to factors of comparative advantage. If the cost of choosing a local supplier is lower than importing, that supplier may become a part of a vertical keiretsu. However, if the main company had chosen to import, the establishment of a vertical keiretsu would not occur (Saxonhouse 1993). The growth of vertical keiretsu may happen as a result of these company decisions, but once it is established can lead to a network that reduces costs and protects the main company.

The Japanese Management System together with spinoff arrangements has allowed for large companies to downsize and become more specialized. The Japanese

Management System was developed in the 1950’s and 1960’s and includes the principles of lifetime employment, a seniority system, enterprise unions, flexibility through job rotation, quality circles, and respect for on-site experience (Abe 1997).

This style of management arose in response to the vertical keiretsu system and allowed for large companies to outsource their work and downsize as parts of the company were spun off into quasi-independent entities (Abe 1997). These spun-off business units generally would be owned by the parent company, but were managed somewhat independently and listed separately on one or more of the Japanese stock markets (Ito 1995). The subsidiary is based on a core competency that is different from that of the parent firm, and once the spinoff is established, the parent firm supports it until the spinoff can survive on its own. The spinoff firm may even

eventually come to support the parent firm, as in the case of Toyota Motors and

Toyoda Automatic Loom Works (Ito 1995). If both parent firms and its subsidiaries all specialize and prosper, then everyone benefits. However if one firm grows weak, the financially able firms can support the weaker members. This relationship between firms is possible only if there is an internal market providing benefits to the member firms (Ito 1995). These spinoffs, coupled with the Japanese Management system, allow for diversification and organizational flexibility in determining company structure in order to meet shifting demands (Abe 1997). Vertical keiretsu thus grow both from relationships with local suppliers and the natural expansion of the main company.

The vertical integration inherent in vertical keiretsu relationships aims at reducing transaction costs, resulting in positive efficiency and welfare effects. This commonly occurs in industries with technological congruencies, such as steel and iron making, as vertical integration in similar industries can result in cost saving

(Williamson 1983). Maintaining vertical integration among companies allows an increase in information exchange, easier solving of instrumental conflicts, the internalization of externalities and more stable supply reliability (Williamson 1983).

Similarly, two levels of production controlled via vertical integration increases output, lowers price, and improves economic welfare due to the effects of double marginalization (Waldman and Jensen 2001). A monopoly practicing vertical integration, as the sole supplier, can force competitive sellers to sell at a certain price.

This practice, known as resale price maintenance (RPM) can result in joint-profit maximization if used to set a price maximum, rather than a price minimum (Waldman and Jensen 2001). For vertical integration to be successful a company must maintain

monopoly or near monopoly control over the market, forcing smaller competitors out in the process.

Vertical integration can result in economic welfare in theory, but in practice has often times resulted in higher prices and barriers to market entry. RPM can result in higher retail prices, rather than low ones, because many companies use RPM to set price minimums rather than maximums (Waldman and Jensen 2001). Collusion to keep prices high makes price minimums more attractive and can even result in prices kept at monopoly level (Waldman and Jensen 2001). With their higher profits, a vertically integrated dominant manufacturer can rise prices on inputs by buying large amounts and subsequently decrease the price of the final good (Waldman and Jensen

2001) This price squeeze results in competitors no longer able to participate in the market. With such great influence, large vertically integrated firms have the ability to gain more profits from the market and prevent other competitors from gaining success.

Case Study: Toshiba

Many vertical keiretsu developed in the electronics and automotive industries, due to the need to receive inputs from suppliers. Toshiba Corporation is just one commonly cited example. The origins of Toshiba go as far back as 1873, when

Hisashige Tanaka built Tanaka Engineering Works after being commissioned to develop telegraph equipment (History 2015). Following this, Ichisuke Fujioka, developed Hakunetsu-sha Co. Ltd., a company that manufactured light bulbs. After

The Great Kanto Earthquake of 1923, the Japanese government established a ban on producing home appliances. Eventually though, as technology improved and the demand for home appliances grew the two companies created by Tanaka and Fujioka merged into Tokyo Shibaura Electric Co., Ltd. During the war era, the company grew

quickly as it filled orders for radios, vacuum tubes and other war supplies. In the post war era, the company continued to grow due to its original technologies and eventually the company name was changed to Toshiba.

Today, Toshiba still focuses in industries that require the maintenance of a buyer-supplier firm relationship. The main industrial groups include energy and infrastructure, community solutions (management systems for roads, water, disaster prevention and broadcasting), healthcare systems and services (patient diagnostic systems), electronic devices and components, and lifestyle products and services

(appliances) (Figure 8). To meet up with high demands for its products on a global scale, Toshiba has established a network of companies throughout the world, focusing on Japan, Europe, North America and Asia (Figure 9).

Despite Toshiba’s growing network of suppliers and branch companies, recent scandal and competition has proved to hold an impact on the firm’s overall performance. After admitting to a $2 billion overstatement of profits, Toshiba recently changed up its management. (Addady 2015). With company mangers setting too high of profit margins, subordinates could not meet targets without inflating their division results, causing such a high overstatement. Additionally, Toshiba faces the challenges of making their lifestyle products division more profitable while strengthening their electronic devices division against increasing Chinese competition (Addady 2015).

These struggles are reflected in Toshiba Corporation’s dropping share price (Figure

10). Similarly, while Toshiba outperforms many competitors in revenue, its overall net income remains negative (Table 8). While this decrease in overall performance can be at least partially credited to the recent scandal and increase in competition, the relationship of supplier and buyer firms can also be a source of this financial difficulty. Managers at Toshiba set goals too high for suppliers to meet and failed to

recognize the potentially disastrous impacts. As competition increases, management will naturally feel inclined to place greater pressure on their supplier firms, causing the vertical chain to function in a less productive manner.

Case Study: Canon

Unlike Toshiba Corporation, Canon’s company history begins in the 20th century when Precision Optical Instruments Laboratory was created to conduct research on quality cameras (The History of Canon 2015). After producing prize- wining cameras, the company eventually became Canon Camera Co., Inc. and established offices both in Japan and abroad. Today Canon focuses production on digital lens cameras, digital printing systems, digital compact cameras, digital cinema cameras, projectors, various printers and semiconductor lithography equipment

(Corporate Activities 2015). Like Toshiba, Canon has established offices and subsidiaries globally (Figure 10). However Canon does not face the challenge of overcoming scandal created by managers putting too much pressure on the vertical supply chain. Like Toshiba, Canon has seen a decrease in profits due to competition from mirror less cameras (Zhang 2015). As a result, Canon, Inc.’s share price has remained stable over the past year (Figure 11). In comparison to other competitors though, Canon’s revenues and net income are nothing impressive (Table 9). Therefore whether maintaining the vertical chain of company relationships is the best business strategy, even when company managers do not place unrealistic expectations on subsidiaries, remains in question.

Comparisons and Merit of Vertical Groupings

The cases of Toshiba and Canon present an interesting comparison: what are the results of putting too much pressure on subsidiary companies versus not doing so.

In the case of Toshiba, placing pressure on subsidiaries has caused a scandal, share

price to decrease and a negative net income. In the case of Canon there is no recent evidence to suggest that the company is overstating its profits, and as a result the company maintains a stable share price, but unimpressive revenue and net income.

Although vertical integration can result in increase economic welfare, in practice this can be difficult to achieve, due to a need to maintain a monopoly at multiple levels of production and the role of RPM. With increased competition for both corporations, vertical integration will not work as effectively. Therefore, earning profits and getting ahead of the competition requires more than just a network of companies, although having one can be useful in some situations.

Keiretsu Networks for Globalizing Companies

Keiretsu networks provide multiple benefits that can be applied on a global scale in the face of increased competition. Keiretsu networks support a firm’s ability to grow due to the number of resources the interconnections provide. The increased ability of firms in a keiretsu network to grow remains a valuable resource for Japan and in turn keiretsu firms may acts as a source of leadership into the future. In comparison with firms that do not have a network, keiretsu firms have greater access to a variety of resources, including expanded knowledge on market and business strategies. These resources allow for keiretsu firms to be able to adapt to changes more easily than independent firms. Independent firms lack the ability to consult others and therefore must face the changing business world alone and as a result may develop less complete approaches to successfully adapting. Firms in countries like the

United States do not have a motivation to help each other unless they are partnered or share stock in some form. Even when these conditions are met though, trust is extremely difficult to establish without a long history of mutually beneficial interaction. Keiretsu firms that have grown into multinational enterprises (MNE) still

maintain these linkages of trust, although the nature of these relationships has changed overtime. However this permanence combined with the flexibility keiretsu networks provide in a global context allows MNE’s to have “an ability to function as

Japan’s central nervous system [and] secure further global and domestic advantage”

(Kensy 2001, p.215). Keiretsu MNE’s hold an important leadership role in Japan, but in order to maintain a leading role globally “higher priority must be given to a strategy of diversifying business activities into new areas and increasing global market share rather than any other strategy”(Kensy 2001, p. 215). Given the ability of keiretsu firms to meet and develop well thought out strategies, the task of diversifying is not only a possibility, but also one that can be achieved more skillfully than independent firms.

Beyond resources and the leadership role keiretsu MNE’s hold in Japan, internalization, communication in the modern world and risk and profit concerns increase competiveness of these firms on a global scale. By internalizing transactions and other important activities within the network, there is less of a need to approach external participants, which minimizes prospecting, and in turn results in reduced control and organizational costs (Kensy 2001). If a member keiretsu firm provides inefficient sources, the benefits will be decreased, which is why it is important that keiretsu firms work together in order for the benefits to be maximized. Furthermore, keiretsu firms have an even greater incentive for their fellow firms to succeed given cross-shareholdings. Keiretsu firms that still maintain high levels of cross- shareholding and ownership hold interest in the achievements of all member firms.

Additionally, keiretsu MNE’s do not face as great of a concern to produce high amounts of profit, due to the reduced individual risk firms linked to a group face.

With less of a need to focus on short-term profit, firms create strategies that will

generate profit in the long-term. As a result, quality should not be sacrificed for short- term gains. There are cases in which firms face pressure to produce profit. The revelation that Toshiba has been overstating its profits by almost 2 billion dollars highlights ineffective use of the network. Keiretsu networks should not try to act in the same manner as American MNE’s do, but rather focus on what the strengths of the network are.

Finally, one of the greatest benefits the keiretsu network provides is communication. While communication can be cumbersome and take a longer amount of time, the result is often a well-thought out strategy. Now though, given the progress of Internet and technology, firm leaders do not need to meet face-to-face to communicate. This global change allows keiretsu firms to be connected together more loosely “but with higher communicative intensity. And, the best communication, the one that can deal with all this postmodernity, will win” (Kensy 2001, p. 262).

Communication becomes even more important as firms grow into MNE’s and the scope of their enterprises crosses many countries. Given the long history keiretsu have of communicating, they hold an advantage in comparison to independent firms around the world.

Although many of the benefits of a keiretsu network can be applied in a global field, other key characteristics that have traditionally given keiretsu an advantage are changing and even disappearing. Many vertical keiretsu linkages have grown too difficult to maintain. With industries no longer expanding and companies asking subcontractors to work for too low of rates, subcontractors have had to look for work outside of the keiretsu in order to stay in business (Mori 1994). After companies defaulted on loans from the main bank in the 1990’s, main banks no longer offer easy money to keiretsu firms. Even though companies have a reliance on borrowing, banks

no longer lend to companies and instead hold newly issued stock (Mori 1994). Finally cross-shareholding between keiretsu firms has decreased and member companies have begun to seek transactions with outside companies more frequently (Mori 1994). With less of a vested interest in another firm’s success, communication, one of the key advantages keiretsu have in a globalized economy, could be weakened dramatically.

While being a part of a keiretsu network provides unique advantages, keiretsu firms must find a balance between maintaining communication within the group and working with outside companies as needed in order to maximize the benefits.

How Mitsubishi has gained Success as a Keiretsu MNE

Mitsubishi, one of the most prominent keiretsu MNE’s, has managed to transition its main forms of communication in order to suit present day needs and maintain the keiretsu’s general structure. The Mitsubishi keiretsu centers around three nucleus firms responsible for integration and development: Mitsubishi Bank,

Mitsubishi Corporation and Mitsubishi Heavy industries. The role of subsidiaries in the keiretsu network is less clear and overtime the structure has grown looser as formal ties of cross-shareholdings grow less important (Kensy 2001). This transition has made it even more difficult for outsiders to understand the keiretsu structure, but other elements reflect how the firms remain in communication with one another.

Presidents and board members of major Mitsubishi companies representing the top of their sectors in Japan attend monthly Friday club meetings (Kensy 2001). These monthly meetings are used as an extended power base to work on new projects, foreign investment, major lending, support measures for companies in crisis and a general information forum (Kensy 2001). As the table cited by Kensy suggests, these firms earn substantial profits (Table 10). Whether or not this is due to monthly

meetings is up for debate, but this practice no doubt holds an influence. Companies do not need just cross-share holdings to remain connected.

Even though monthly meetings foster connection between companies, newer forms of communication have allowed firms to more easily stay in contact with one another. Additionally, Mitsubishi’s nuclear companies are taking steps to become more globalized, which will result in more of the keiretsu network firms striving towards the same goals. The Mitsubishi Motors-Daimer Chrysler deal, Mitsubishi

Bank’s integration with a major city bank and insurance house and Mitsubishi

Corporation’s embrace of internet strategies are all examples of how the nucleus companies are adjusting to the standards of the new economy (Kensy 2001). As the main companies lead the way, subsidiaries follow suit, taking the experiences and advice of the nucleus companies as they develop strategies in the global market.

However, there is still more work to be done for Mitsubishi globally, as the decreased in income forecast and poor performance of Mitsubishi Corporation’s resource field reflect (Figures 5 and 6). Overtime as Mitsubishi continues to adjust to the global economy, the keiretsu will be more able to balance the advantages of keiretsu firm communication with involvement with outsiders. While monthly meetings and mutual directorship are a direct way to establish communication between companies, the growth in communication technology allows for centralization in the network to become less of a focus, thus allowing the nucleus to grow more diffuse and spend more resources on growing globally. Looser communication and symbolic management create a more flexible and adaptable structure that can “handle all the overlaps and mutual permeations without risk of plunging into chaos” (Kensy 254).

Given these changes, it is natural that keiretsu networks will grow looser in the

present time. However, this is not necessarily an indicator of the network being inefficient, but rather reflects the development of communication.

Using both Keiretsu ties and the Global Market

Another case of maintaining intra-company relationships successfully while remaining competitive is Toyota. One of the main issues of vertical keiretsu is that buyer firms are often times stuck buying higher priced products in order to maintain a relationship with their supplier. By finding a balance between sourcing from supplier firms and the global market, Toyota overcomes this obstacle. Toyota sets target prices for suppliers by looking at prices offered by multiple global companies, but allows sources from the global market “including mega suppliers whose streamlined operations allow them to offer very low prices” (Aoki 2013). When it is more cost effective for Toyota to turn towards the global market to purchase inputs rather than suppliers, the relationship with the supplier is not cut off. Instead, Toyota focuses on improving underperforming suppliers by dispatching engineers to improve efficiency or buys other needed products from the supplier (Aoki 2013). Further, Toyota suppliers provide “integrated system of components” rather than just parts, which results in a reduction of costs. Toyota’s Construction of Cost Competitiveness for the

21st century resulted in an even greater cost reduction. Under this plan, suppliers are selected on the basis of globally competitive target costs. Furthermore, Toyota sets annual cost reductions over the life of a contract and shares the benefits with suppliers rather than setting annual target prices. Toyota requires suppliers to have hands on training on Toyota’s process and manufacturing goals. Not only does this assure greater quality production, but also it increases suppliers’ investment in Toyota’s success. After Toyota’s 2010 vehicle recall, revised quality standards for parts were created based on suggestions by suppliers. Suppliers can provide more than just

products for the buyer firm, these firms can also provide knowledge that can result in the final stage product being of greater quality, crucial in global markets with many competitors. Despite the perception that supplier-buyer firm relationships are inefficient, integrating these relationships with the global market can result in benefits for both the supplier and buyer firms.

Performance of Keiretsu MNE’s

Although these two examples highlight how both horizontal and vertical keiretsu can adapt to a globalized market well, what is perhaps more important is how these firms perform in comparison to non-networked MNE’s. Even if there are benefits to maintaining a network, if these benefits are not reflected in profits and performance, then changes to the network system should be made. A study by Jerry

Haar compared the performance of successful United States, European and Japanese multinational enterprises (including keiretsu firms) (1989). The biggest indicator of future profitability, he found, was past profitability. While this study does not compare specifically Japanese networked firms to non-network firms of other countries, the results are still revealing. Given that keiretsu firms are not under pressure to get high profits every period, many keiretsu firms’ profit margins are lower in order to achieve long-term goals. By having this focus, keiretsu firms face the risk of underperforming, given the relationship between past and future profits.

Keiretsu networks provide firms with advantages that can be applied in a global market, including leadership, resources and communication. Overtime changes have occurred in the role of bank, presence of cross-shareholdings and supplier-buyer firm relationship. However, the examples of Mitsubishi and Toyota prove that these challenges can be overcome by taking advantage of society’s changes and communication can still remain beneficial. However, given that the biggest indicator

of performance for Japanese, American and European MNE’s is past profitability, keiretsu firms need to change their approach to become more profit-oriented.

Discussion

Overtime, both horizontal and vertical keiretsu structures have grown to become much more loosely organized. Formal ties, such as cross-shareholding, bank support, and exclusive buyer supplier relationships no longer hold as much of an influence on firm’s decisions to work with one firm as opposed to another.

Particularly for horizontal keiretsu, which already face efficiency issues associated with poor export performance and the limits of group membership, losing the benefits of formal ties puts these firms at a greater disadvantage. Cross- shareholding of firms provides access to patient capital, which is what allows keiretsu firms to focus on long-term profitability rather than quick returns. The large number of Fuyo and Mitsubishi group firm members (as shown in Tables 2 and 5) and the various industries, and profits they accumulate (Tables 3 and 6) reflect the large amount of capital and information a keiretsu firm could potentially have access to.

While switching to a more profit-focused approach would be beneficial as past performance determines future performance, switching to this approach quickly and successfully can be difficult to do. Keiretsu with successful member firms, such as

Mitsubishi, are less likely to be hurt in this transition, but for horizontal keiretsu dependent on network ties, the change will be daunting. Even if communication remains prominent among group members, financial support remains a crucial factor as firms transition to becoming more profit-oriented.

While this transition can be difficult, the need to work with foreign firms reflects the inevitability of keiretsu networks becoming more loosely defined. The cases of both Marubeni and Mitsubishi illustrate how horizontal keiretsu, especially

those with a lax network, must work with foreign firms in various projects. Both these companies now allow foreign firms to have an increased role in company ownership and therefore influence, as shown in Table 4, Figure 4, Table 7 and Figure 7. Japanese firms do not represent a large enough portion of the global market to avoid working with other powerful foreign brands. As Japanese keiretsu firms are forced to make this decision, the network will grow even less important. The resulting benefits of having a network will continue to grow less significant over time, but in exchange firms gain the ability to act more independently.

While for horizontal keiretsu maintaining the network linkages appears ineffective, vertical keiretsu tend to be more successful in this endeavor. The case of

Toyota proves that vertical keiretsu can use both the global markets and loyal suppliers to get the best inputs for their products. Additionally, suppliers have been a key resource to Toyota in addressing issues of quality concerns, something that a buyer firm picking the cheapest option cannot rely on. In such circumstances, keiretsu ties appear to be effective, as long as these ties are given equal importance and held to the same standards as the global market. However, finding a balance between supplier-buyer firm relationships and the global market is difficult to achieve.

Toshiba’s managers placing too high of goals for supplier firms to meet has resulted in scandal, a decreasing market share price (Figure 10) and negative net income

(Table 8). Canon, another vertical keiretsu, has not faced any recent scandal and yet much like Toshiba, faces a decreasing market share price (Figure 11) and is not particularly successful in comparison to its competitors (Table 9). The ability of

Toyota to grow successful with the help of its supplier firms while Toshiba and

Canon struggle to do so prove that it is possible to gain success internationally as a vertical keiretsu firm, but difficult. Finding the balance between maintaining network

ties and remaining competitive globally takes experimentation that may result in failure, but once that balance is reached it can be worthwhile.

One of the key aspects of both horizontal and vertical firms is communication.

With formal ties less prominent, management between keiretsu firms becomes more

“symbolic”. While communication itself is more efficient due to the increase in communication technology, the symbolism can be lost over time as firms begin to focus less on maintaining traditional relationships and more on becoming as competitive as possible. The need to make profit is more important today than preserving the historic company ties. Firms can still use the significance of their brand name and logo association to their advantage, such as Mitsubishi and the three diamonds, but soon this may be one of the few benefits left to these historic ties, except in the case of vertical keiretsu that gain additional benefits from their supplier- buyer firm relationships.

Less academic work has focused on keiretsu as of recently, and this may be due to the belief that they no longer exist or are not significant. Despite the low proportion of Japanese employment belonging to keiretsu groups, the high proportion of sales keiretsu firms generate reflect the importance these firms hold, as seen in

Table 1 and Figure 1. In the case of horizontal keiretsu especially, there remains important linkages between keiretsu companies, but these ties have become less and less useful as formal ties fade out and companies must work with foreign companies.

Vertical keiretsu, in contrast, can still maintain an influential role in the global market, without sacrificing their relationships in the process. Doing so requires maintaining communication. While this task is quicker in recent years, for horizontal keiretsu there is less of a benefit in preserving the transfer of information as firms grow more independent. For vertical keiretsu, both the supplier and buyer firms

benefit in this exchange due to their shared transactions. Therefore, vertical keiretsu firms will be motivated to maintain these relationships, even when facing global competition.

Appendix

Table 1 The Number of Group Companies and Employees in Japan Fiscal Year 1997

Eight Major Industrial Number of Companies (%) Number of Employees (%) Groups (1,000 persons) 6 major industrial groups 1,245 (0.051%) 2,130 (5.7%) Other two groups 98 (0.004%) 108 (.3%) Sub-total 1,343 (0.055%) 2,238 (6.0%) Total for Japan 2,433,951 (100.0%) (100.0%)

Source: “The Number of Group Companies and Employees- Fiscal 1997” (“The Number of Companies and Employees,”1999, p.25)

Figure 1 Annual Sales of Major Industrial Groups: FY 1997

Other (83%) DKB (3.1%) Mitsubishi (3.1%) Sumitomo(3%) Fuyo (2.5%) Sanwa (2.3%) Mitsui (2.2%) Tokai (.6%) IBJ (.2%)

Source: “Hojin Kigyo Nenpo,” Ministry of Finance as cited in “Annual Sales,” 1999, p.27)

Table 2 Fuyo Group Council Members

Finance and Insurance Fuji Bank Yasuda Trust & Banking

Yasuda Fire & Marine Insurance Nichido Fire & Marine Insurance Yasuda Mutual Life Insurance Fuyo General Lease Fuyo General Development and Finance Fujigin Credit Diners Club of Japan Daito Securities Credit Saison

Trading and Commerce Marubeni Corporation Kosugi Sangyo Fishery Nippon Suisan Construction Taisei Corporation Taisei Prefab Construction Tekken Corporation Tobishima Corporation Maeda Corporation Nishimatsu Construction Toa Corporation Penta-Ocean Construction SxL Corporation Taikisha Ltd. Ohki Corporation Matsui Construction Nippon Densetsu Kogyo Food and Beverage Nisshin Flour Milling

Sapporo Breweries Nichirei Corporation Takara Shuzo Honen Corporation Fibres and Textiles Nisshinbo Industries Toho Rayon Teikoku Sen-i Suminoe Textile Katakura Industries Pulp and Paper Nippon Paper Industries Japan Paperboard Industries Chemicals Showa Denko NOF Corporation Kureha Chemical Industry Nippon Sanso Hitachi Chemical Petroleum and Coal Products Tonen Corporation Rubber Products Okamoto Industries Achilles Corporation Cement Nihon Cement Iron and Steel NKK Corporation Yodogawa Steel Works Nonferrous Metals Sky Aluminum Machinery- General Kubota Corporation NSK Ltd. Tokyo Kikai Seisakusho

Teikoku Piston Ring Electrical and Electronics Hitachi, Ltd. Oki Electric Industry Yokogawa Electric Transportation Machinery (Automobiles/ Nissan Motor Auto Parts) Kayaba Industry Precision Machinery Canon Inc. Manufacturing- Others Yamaha Corporation Nittan Co. Real Estate Tokyo Tatemono Yuraku Real Estate Land Transportation Keihin Electric Express Railway Tobu Railway Warehousing Yasuda Warehouse Service Industry Kyoto Hotel Palace Hotel Hotel Pacific Tokyo Fuji Ad System MHS Planners, Architects and Engineers Fuyo Air Service Nippon Carriere Source: “The Fuyo Group- Council Members” (The Fuyo Group,” 1999, p.83-84)

Table 3 Major Fuyo Group Companies Organized by Sector

Sector Revenues/ Net Paid-up Employees Annual Profits Capital Income or (¥mil.) (¥mil.) Sales(¥mil.) Finance and Insurance 7,099,418 -578128 978,181 74,655 Trading and Commerce 16,058,528 -74,129 373,686 28,505 Agriculture/ Fishery/ 83,504 -440 3,000 706 Forestry Mining- no major companies Construction 5,691,502 -87,298 318,361 56,287 Food and Beverage 1,788,548 -8,200 118,935 14,064 Fibres and Textiles 407,830 816 59,050 10,241 Pulp and Paper 121,761 448 16,012 2,804 Chemicals 1,337,004 24,280 207,163 16,240 Petroleum and Coal 646,119 10,558 33,237 2,261 Products Rubber Products 70,666 1,352 13,047 1,151 Glass/Cements/ Carbon 589,341 6,577 84,226 10,644 Iron and Steel 1,623,063 -5823 323,427 23,810 Nonferrous Metals 271,772 2,844 33,560 4,552 Metal Products 117,843 -1,420 8,262 2,328

Machinery- General ( 1,898,197 39,213 242,897 39,641 Electrical and 1,907,938 37,091 206,356 40,816 Electronics Transportation 201,941 1,489 19,874 5,097 Machinery Precision Machinery 1,733,963 87,638 172,034 23,163 Manufacturing- Others 75,322 87,638 172,034 23,613 Real Estate 278,844 -15,686 61,457 1,481 Land Transportation 1,100,640 21,046 190,572 89,242 Shipping 105,545 -27,035 28,634 353 Air Transportation- No Major Companies Warehousing and 112,499 1,657 10,712 1,611 Transportation-Related Business Communications- No Major Companies Electric Power and City Gas Supply- No Major Companies Service Industry 325,241 410 29,629 12,197 Source: “Major Fuyo Group Companies” (summarized by sector only) (“The Fuyo Group,” 1999, p.86-92)

Table 4 Marubeni Corp. Institutional Holdings Institution Name Total Shares Total Value Change in Shares Aberdeen Asset 142493921 477355 -8519548 Management Pope Asset Management 133191199 5809 0 LLC J. P. Morgan Chase & Co. 122994744 3207702 56315815 Capital Research Global 107415435 359842 0 Investors Goldman Sachs Group Inc. 70522321 1839222 8096390 Northern Trust Corp. 66047841 1550803 -6294413 Northern Trust Corp. 6494592 15834 -2557490 Bank of America Corp. 64147829 1672977 8096390 Barclays PLC. 51854157 1296355 51854157 Feinberg Stephen 41516297 846102 0 Capital Research and 36709341 846102 0 Management Co. Division 3 Vanguard Group Inc. 32598051 459306 -79303 Mondrian Investment 31819914 106597 -4346600 Partners LTD. J. P. Morgan Chase & Co. 31571437 959456 10130101 Tocqueville Asset 31049900 10796 0 Management LP. Cohen & Steers Inc. 28894074 407118 191039

Greenhaven Associates Inc. 28609415 420041 535800 Bank of America Corp. DE 28495631 2290764 16671896 Vanguard Group Inc. 28049716 571653 442091 Capital World Investors 27000000 206010 0 RBS Partners LP. 26206029 171126 0 Vanguard Group Inc. 26059892 87301 -2667327 Morgan Stanley 25409068 193872 -439817 Capital World Investors 24682820 22708 6950000 Bank of America DE 24150699 2647399 14061165

Source: Mergentonline, 2015.

Figure 2 Marubeni Equity and Return on Equity

Source: Marubeni Financial History, 2015

Figure 3 Marubeni Net Income & Earnings per Share.

Source: Marubeni Financial History, 2015

Figure 4 Marubeni Corporation Ownership Breakdown

Financial Institutions and Banking Facilities (27.38%) Private Individuals (27.74%)

Other Domestic Corportations (6.65%) Foreign Corporations and Foreign Individuals (27.38%) Other (3.86%) 0% 20% 40% 60% 80% 100% Marubeni Ownership Breakdown (1,737,940,900 Shares)

Source: Shareholder composition 株主構成, 2015

Table 5 Mitsubishi Group Council Members

Finance and Insurance Bank of Tokyo- Mitsubishi Mitsubishi Trust & Bankig Meiji Mutual Life Insurance Tokio Marine & Fire Insurance DC Card Mitsubishi Auto Credit-Lease Trading and Commerce Mitsubishi Corporation Mitsubishi Office Machinery Mitsubishi Liquified Petroleum Gas Mitusbishi Heavy Industries Air- Conditioning and Refrigeration Systems Construction Mitsubishi Construction Food and Beverage Kirin Brewery Fibres and Textiles Mitsubishi Rayon Pulp and Paper Mitsubishi Paper Mills Chemicals Mitsubishi Chemical Mitsubishi Gas Chemical Mitsubishi Plastics Dai Nippon Toryo Petroleum Products/ Nuclear Fuel Mitsubishi Oil Mitsubishi Petroleum Development Glass/Cement Asahi Glass Mitsubishi Materials Iron and Steel Mitsubishi Steel Mfg. Nonferrous Metals Mitsubishi Materials Mitsubishi Shindoh Mitsubishi Aluminum Mitsubishi Cable Industries Mitsubishi Nuclear Fuel Machinery- General Mitsubishi Heavy Industries Mitsubishi Kakoki Toyo Engineering Works Shin Caterpillar Mitsubishi Electrical and Electronics Mitsubishi Electric Mitsubishi Precision Transportation Machinery Nikon Corp. Shipping Nippon Yusen Mitsubishi Ore Transport Real Estate Mitsubishi Real Estate Warehousing Mitsubishi Logistics Service Industry Mitsubishi Research Institute Mitsubishi Space Software Space Communications Source: “The Mitsubishi Group- Council Members” (“The Mitsubishi Group,” 1999, p.41-42)

Table 6 Major Mitsubishi Group Companies Organized by Sector

Revenues/ Net Paid-Up Employees Annual Profits Capital (¥mil.) Income or (¥mil.) (¥mil.) Sales (¥mil.) Finance and 10,588,578 323 1,419,490 104,075 Insurance Trading and 17,759,989 30,430 266,925 36,635 Commerce Agriculture/ Fishery/ Forestry- no major companies in this industry Mining 28,398 1,285 21,563 411 Construction 26,650,460 -33,856 95,147 31,221 Food and 3,516,335 41,039 248,285 33,759 Beverage Fibres and 458,594 15,485 70,586 10,842 Textiles Pulp and Paper 314,181 2,107 55,534 5,546 Chemicals 2,470,347 29,242 392,044 37,744 Petroleum and 1,470,404 -30,004 105,232 3,642 Coal Products/ Nuclear Fuel Glass/ Cement/ 2,247,799 56,465 313,981 42,452 Ceramics/ Carbon Iron and Steel 138,745 -5,531 11,869 2,523 Nonferrous 1,148,540 -65,032 155,790 14,001 Metals Machinery- 3,145,838 89,925 308,143 49,999 General Electrical and 3,333,754 -29,495 262,806 58,579 Electronics Transportation 2,697,720 -25,152 146,158 32,358 Machinery Precision 493,942 6,782 54,252 11,754 Machinery Manufacturing- 358,850 1,972 24,454 7,829 Others Real Estate 457,253 20,956 98,749 3,423 Land 165,855 1,520 3,395 3,093 Transportation Shipping 824,429 5,547 97,787 1,964

Air Transportation- No major companies in this industry Warehousing and 392,538 8,148 29,054 6,084 Transport- related Business Communications- no major companies in this industry Electrical Power and City Gas Supply- no major companies in this industry Service Industry 869,919 21,967 103,945 31,505 Source; “Major Mitsubishi Group Companies” (summarized by sector only) (“The Mitsubishi Group,” 1999, p.44-51)

Table 7 Mitsubishi Corp. Institutional Holdings

Institution Name Total Shares Total Values Change in Shares Aberdeen Asset 142493921 477355 -8519548 Management Pope Asset Management 133191199 5809 0 LLC

J. P. Morgan Chase & Co. 122994744 3207702 56315815 Capital Research Global 107415435 359842 0 Investors Goldman Sachs Group Inc. 70522321 1839222 8096390 Northern Trust Corp. 66047841 1550803 -6294413 Norther Trust Corp. 64945492 15834 -2557490

Bank of America Corp. DE 64147829 1672977 8903925 Barclays PLC 51854157 1296355 51854157 Feinberg Srephen 41516297 846102 0 Capital Research & 36709341 122976 2277989 Management Co. Division 3 Vanguard Group Inc. 32598051 459306 -79303 Mondrian Investment 31819914 106597 -4346600 Partners LTD J. P. Morgan Chase & Co. 31571437 959456 10130101 Tocqueville Asset 31049900 10796 0 Management LP

Cohen & Steers Inc. 28894074 407118 191039 Greenhaven Associates Inc. 28609415 420041 535800 Bank of America Corp. DE 28495631 2290764 16671896 Vanguard Group Inc. 28049716 571653 442091 Capital World Investors 27000000 206010 0 RBS Partners LP 26206029 171126 0 Vanguard Group Inc. 26059892 87301 -2667327 Morgan Stanley 25409068 193872 -439817 Capital World Investors 24682820 22708 6950000 Bank of America Corp. DE 24150699 2647399 14061165

Source; Mergentonline, 2015.

Figure 5 Mitsubishi Consolidated Net Income Forecast. (Results for the Year ended March 2015 and Forecasts for the Year Ending March 2016, 2015)

Source: Results for the year ended March 2015 and forecasts for the year ending 2016, 2015

Figure 6 Mitsubishi Forecasts for the year ending March 2016

Source: Results for the Year ended March 2015 and Forecasts for the Year Ending March 2016, 2015

Figure 7 Mitsubishi Corporate Ownership Breakdown

Financial Institutions and Brokerage Firms (43.92%) Private Individuals (16.17%)

Foreign Corporations (30.73%) Other Corporations (8.82%)

Reaquired Stock (.36%)

0% 20% 40% 60% 80% 100% Mitsubishi Ownership Breakdown (1,590,076,851 Shares)

Source: Stock Information, 2015

Figure 8 Toshiba Corporation Management Chart (2015-2016: Corporate Profile

Toshiba Today)

Source: 2015-2016: Corporate Profile Toshiba Today, 2015

Figure 9 Toshiba Basic Corporate Data (2015-2016: Corporate Profile Toshiba Today)

Source: 2015-2016: Corporate Profile Toshiba Today, 2015

Figure 10 Toshiba Corporation Share Price

Source: Mergentonline, 2016

Table 8 Toshiba and Competitors Performance Company Revenue Gross Net EBITDA Total Total PE Market Employe Share Price Name Margin Income Assets Liabilities Rati Cap es o Toshiba Corp 5672304 25.37 - 29302217 52798 437640602 - 477200000 198741 11.27 4034 3152626 50 91763 90 00 75 1 Schneider 3031347 37.72 2359294 33487158 50027 260434071 - 576000000 - 10.08 Electric SE 5704 933 89 74902 30 0 8 Eaton Corp 2255200 30.62 1793000 25020000 33529 177430000 11.0 221500000 102000 47.86 plc 0000 000 00 00000 00 787 00 0 Shanghai 1237188 18.71 4045141 - 23129 176132241 - 252990000 29261 8.51 Electric 9784 22 55591 01 00 Group Co., 4 Ltd. Tenaga 1032964 25.17 1460050 - 27952 166868709 - 652970000 35975 11.57 Nasional 7257 495 24482 11 00 Berhad 9 (Malaysia) LS Corp 9950013 12.07 4112589 23888225 94467 724855307 - - 63 209 4 4 59347 3 Fuji Electric 6756814 24.83 2331901 37224749 75389 511905737 - 226250000 25740 31.67 Co Ltd 674 95 8 82830 3 00 Delta 6020430 27.01 6536900 81154566 69620 371288895 - - 68000 Electronics 568 98 6 88098 2 Inc Bharat Heavy 5374681 - 7122530 - - - - - 43636 Electricals 276 16 Ltd. (BHEL) (India) SPX Corp. 4721100 28.88 3979000 76320000 59022 408430000 - 327000000 14000 8.01 000 00 0 00000 0 Zhengzhou 3141055 5.88 1003704 - 18311 115162809 - - 11833 Coal Industry 976 4 89695 0 & Electric Power Co Ltd BWX 2923019 17.57 2938800 63161000 28569 185823200 102. 306700000 11000 28.8 Technologies 000 0 36000 0 8571 0 inc Aggreko Plc 2461733 57.26 3356199 45113560 31954 151263115 - 317800000 - 12.45 050 15 7 13794 1 0 El Sewedy 2379694 15.18 5640566 13649224 19456 120240917 - - - Electric Co 320 3 6 22528 9 First 2220176 45.25 1259129 - 72286 576523401 - 700000000 2806 1.15 Philippine 807 34 81238 3 Holdings Corp. (Philippines) Allied 1910832 196.63 -778660 - 13135 998675312 - - 12049 Electronics 793 13695 Corp., Ltd. Elco Ltd 1745717 16.4 - 5488000 22225 202236300 - 188000000 7505 6.8 000 2262700 42000 0 0

MeiHua 1589490 21.03 8060521 - 33194 199555016 - - 1847 Holdings 893 7 40481 8 Group Co., Ltd NARI 1435138 27.2 2067326 - 23841 123249946 - - 2370 Technology 896 84 10701 2 Development Ltd., Co. Genesis 1417347 30.19 7081332 - 23838 115044622 - - 931 Energy Ltd 586 3 68365 4 Ratchaburi 1380898 17.59 1538176 22028771 30473 152468151 - 187000000 306 1.29 Electricity 170 93 4 17527 7 0 Generating Holding Public Co., Ltd. Wolong 1110562 20.65 7182676 - 15779 970275792 - - 4051 Electric 708 0 96212 Group Co., Ltd. Barco NV 1104125 33.54 2909067 - 13071 593129907 10.9 801000000 3836 66.2 Belgium 719 8 34478 954 Daihen Corp. 1017342 33.39 4840834 73654362 11043 577941287 - - 3849 (Japan) 026 4 90364 Guangxi 9189566 40.65 9551661 - 35676 293715241 - - 2896 Guiguan 77 7 72361 5 Electric Power Co., Ltd.

Source: Mergentonline, 2016

Figure 10 Canon Financial Highlights (Financial Highlights 2015)

Source: Financial Highlights, 2016

Figure 11 Canon, Inc. Share Price.

Source: Mergentonline 2016

Table 9 Canon and Competitors Performance

Company Revenue Gross Net EBIT Total Total PE Market Employees Shar Name Margin Income DA Assets Liabilities Ratio Cap e Price Canon, Inc. 3123944 49.94 2135545 49414 373860 124248130 - 6460000 191889 27.65 0823 384 15178 45280 30 00 Xerox Corp 1954000 32.68 9690000 22120 276580 166750000 30.33 9213000 147500 9.1 0000 00 00000 00000 00 33 000 Ricoh Co., 1860272 40.63 5714485 - 227556 137193648 - 6323000 109951 9.69 Ltd. 3223 01 47397 11 000 Konica 8357757 48.83 3411754 - 828689 388252756 - 8928000 41605 17.79 Minolta Inc 296 75 5081 6 000 Nikon Corp. 7149415 37.93 1530597 29205 810927 334433479 - 5249000 25415 14.19 (Japan) 680 16 0341 2798 7 000 Olympus Corp 6373356 64.06 - 19916 901447 604961777 - 9832000 31540 37.21 911 7282088 7664 8828 4 000 5 Toshiba Tec 4378037 42.69 - 93282 347926 203823466 - 3877000 20580 14.12 Corp 977 2783813 746 6389 4 000 Hoya Corp. 4083712 81.35 7734999 - 611548 119785647 - 1632600 34635 38.51 244 95 7462 5 0000 Carl-Zeiss- 3111009 62.3 - 22346 504535 381786476 - - 12872 Stiftung 824 2654718 8266 8648 3 (Germany, 51 Fed. Rep.) Coretronic 2563674 13.92 8972493 13069 175760 101288571 - - 2413 Corp 701 4 4154 5576 5 Seiko Corp 2446021 35.53 1815146 18689 278132 202776619 - 2320000 13565 2 621 21 8882 1084 3 00 Screen 1980716 30.49 1010340 12819 207965 115562419 - 1697000 5082 7.15 Holdings Co 417 82 7097 8471 5 000 Ltd Sakata INX 1221618 23.19 3615623 66211 108278 560888347 - - 3765 Corp 904 2 413 6640 Canon 8002690 20.9 6182929 89579 851060 214512528 - 8850000 4839 21.65 Electronics Inc 16 3 976 057 00 Tamron Co., 6170441 32.01 3223471 51469 585907 150118539 - 5560000 2694 20.25 Ltd. (Japan) 05 1 932 352 00 Sharp S.A. 6032642 20.99 - - 648267 580953448 - - - Equipamentos 28 8830374 332 Eletronicos 6 (Brazil) Asia Optical 5592545 12.67 - 58377 726853 375811661 - - 13622 Co Inc 87 1054527 3 055 6 Avid 5302510 61.44 1472800 36337 191599 532669000 144.8 2860000 1413 7.24 Technology, 00 0 000 000 00 Inc. Altek Corp. 4873275 10.12 8695330 15066 500627 195123663 - - 509 80 968 249 Vitec Group 4832926 41.31 2029329 36996 428344 243207362 - 4370000 - 9.87 plc (United 77 7 242 673 00 Kingdom)

Noritsu Koki 4541449 52.15 8576478 44024 998855 488609222 - 1690000 1868 4.75 Co., Ltd. 48 255 506 00 (Japan) Tietech Co Ltd 3554831 16.87 - - 254862 182135985 - 4700000 899 4.65 62 5349489 86785 939 0 97 Carvajal 3537787 35.3 5963030 - 559753 257168720 - - - Internacional 10 670 S.A. (Colombia) A-Max 3283210 12.26 1742100 23519 189215 96638000 - - 1642 Technology 00 0 000 000 Ltd Musashi Co 3104868 20.88 9134908 15069 345942 129939064 - - 551 Ltd 52 264 964

Source: Mergentonline 2016

Table 10 General data of the Mitsubishi Keiretsu in the 1990s

Nucleus Companies Companies in the Kinyo- Kai Net profit (in million yen) 176000 668000 Shareholder’s equit (in 4699551 13291783 million yen) Employees 66202 278641

Source: cited in Kensy, Compiled from Dodwell, Industrial Groupings in Japan,

p.53ff; Japan Company Handbook 1991

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