Coordination amongst the Horizontal Keiretsus - Essay Example

QN Keiretsu in Japan The expression Keiretsu as per Moffatt’s definition is a of a system that is depicted by the relationships framework of the after-war Japan where it was common with big firms and large banks. Companies which were related would form up around a large bank such as Sumitomo and Mitsubishi that owned a big chunk of equity in the bank as well as in one another. They would do a lot of businesses with each other. The system of Keiretsu is merited for its ability to maintain business relationships in the long-run as well as stability with regard to clients and suppliers. Its major undoing is the slow reaction to external events due to the fact that players in this system are in part protected from factors emanating form external markets. (Moffatt, 2011) It is of ample importance to revisit the definition of what the system of Keiretsu comprised before tackling it further. Keiretsu was that system adopted by Japanese firms where they would have transactions between or among them in the long-run. One of the major firms that took up this system is those in the automobile industry besides others like the banking industry and insurance sector. In this line, it is quite notable that the major information that is exchanged among the concerned firms involves broadly technology and this is especially in the subcontracting of tasks. Mostly, parent companies have the knowledge about the production capacities of the subcontracting firms, the financial conditions, employee’s skills, corporate cultures among other things. On the other hand, subcontracting firms are bestowed with the knowledge of their parent firm’s requirements in terms of production plans of the future, and technological needs, among others. This knowledge that has been shared between the two groups of firms is made easy by the exchange that is witnessed whenever they are giving each other consummatory kind of information by way of relations that have been set for long-run by the parent firms and subcontracting firms. Keiretsu, therefore, is a major example of social exchange based on relations. Social exchange has been merited for its transaction costs’ reduction. Opportunistic behavior is also discouraged by the long-term relations, which are dependent on shared knowledge amongst these firms. These long-term relations that are social exchange based to a high extent reduce the costs of transactions in consideration to technology, where the technology meme is divided more effectively in the parent-subcontracting firms’ relationship. Vertical integration is, particularly noted to be the main way transaction costs are reduced. Therefore, in the Keiretsu system any given transaction is preferred to display a vertical kind of integration and the benefits to the parent company are a must so that the independent subcontractors are allowed to enjoy their freedom as independent entities. The vertical integration type of approach means that the meme of the parent company absorbs that of the subcontracting company’s in terms of at least the management style or the corporate culture. If it happens that the meme of the subcontractor has proven beneficial to the parent company, then the parent company will pick the keiretsu as opposed to vertical type of integration. (Yamamura, 1997 p253) According to Tabeta and Rahman, in 1996, Keiretsu is to huge extent efficient and besides this it aids in environmental adaptability of the companies of Japan. The structure of a Keiretsu group reduces the costs relating to transactions as well as enhancing coordination between the suppliers and automakers. It was founded from the 1984’s discussions by Aoki as well as Asanuma’s and their studies were focused on the economics of transaction cost outlays in the system of subcontracting in the automobile industry. (Tabeta and Rahman, 1996) In the period towards the late 1980s, the economy of Japan enjoyed a Keiretsu contribution to the economy of around 17% in terms of total sale revenues as well as an 18% contribution to the aggregate net gains from all businesses in this Economy of Japan. The workforce of Japan was also not left behind while it came to benefitting from Keiretsus where the entire Japanese work force in employment had 5% of the whole as Keiretsu employees. The Fair Trade Commission of Japan reported that in the year 1992, at least a fifth of the economy’s capital was in the hands of the largest six Keiretsus as well as the affiliated companies. Keiretsus were of various varying types like Vertical and Horizontal. They were most common around companies like trading, banking, and insurance. Horizontal types of Keiretsus were mostly headed by big banks that could infuse capital into the cohesive units and in line with their needs. These Horizontal Keiretsus involved the largest six banks; namely, Mitsubishi, Sumitomo, Mitsui, Fuyo, Dai-Ichi Kangyo and Sanwa. Coordination amongst the horizontal Keiretsus was by banks as well as the monitoring of the companies’ performance in relation to those companies affiliated to the Keiretsus in question. The problems facing Keiretsu in the 1990s In the 1990s, the system of Keiretsu was not the best way to go about business. This decade saw this system face an uphill task in attempting to survive. Most are the firms that succumbed to the new ways that brought Keiretsu to its knees. One of the major causes of the decline in Keiretsus witnessed in the 1990s was the reluctance by Japan to allow into the Economy foreign commodities, foreign management and foreign capital. The companies which were not Japanese were aggrieved by this behavior by Japan of exclusionary practices of trade. Due to this denial of access to the Japanese market by the foreign economies, these foreign companies would face huge challenges in trying to penetrate the Japanese economy. One of the major examples is that of the automobile sector where with the manufacturers in Japan as well as their dealers was by itself an very high hurdle for any foreign player to manage. (icmrindia.org, 2004) In the recent times, (since the setting in of the 1990s) Keiretsu has been seen to be facing substantial reduction alongside the financial deregulation in Japan. The deregulation factor started in mid 1970s decade and has been traceable up to year 1998. This change-over witnessed in 1998 was popularly known as Big Bang. The implementation of the big bang approach was aimed at changing the corporate environment to an environment that is more finance and corporate governance systems, which are considered more market oriented. This has lead to a disintermediation procedure unlike the major bank oriented type of system. (Goyal and Muckley, 2010) Towards the late 1990s, the variances in the conditions of industries as well as the deregulation factor, along with the rise of takeovers of the Japanese firms by foreigners and e-commerce made a very huge change in the scale and nature of Keiretsu system and especially in the networks of supply chain front. Main automakers of Japan have had their holdings of equity being taken over by such companies as General Motors from foreign. More particularly, General Motors have taken over Subaru and Suzuki, Ford has taken Mazda, Nissan have been acquired by Renault, DaimlerChrysler have taken over Mitsubishi. As a matter of fact the only firms that have withstood the takeovers are with the inclusion of Honda and Toyota and these two represent the victors of the successors of Keiretsu. There are several cases to illustrate the fall of Keiretsu. Most specific to the cases of takeovers is like the scenario of Nissan Corporation’s CEO Ghosn initiating the bringing down of the configuration of Keiretsu’s top-down type. The reforms that were seen through by him in his revolutionary management that was dubbed turning Nissan Around resulted to a situation where Nissan was overly exposed, which led to Nissan Keiretsu being faced with a basketful of challenges like the decrease in the suppliers’ magnitude by approximately 40% together with the costs decrease by around 20%. The CEO of Nissan Keiretsu did away with the notion of relational contracting through the disposal of the company’s equity of about 1394 companies with the exception of Jatco’s and Calsonic Cansei among the two others. The advice was that the members of the Nissan group were urged to make stronger the quality of products as well as technology without having to rely upon the parent company. This radical situation of Nissan seemed to mean the demise of Keiretsu. However, unlike Nissan Company, Toyota made stronger their control over the finance systems of the associated companies. Lincoln and Ahmadjian, who are both authors of Keiretsu, learning and governance say in their works that the Rationale behind the approach by Toyota towards management is that if there is a tighter way of directing the group companies of Toyota, then, this is vital for the success of the entire company in the newly competitive global environment. The major point of demarcation of Nissan and Toyota is that the latter shows the importance of maintenance of group-oriented type of interrelations in the firm while the former has the characteristics of de-keiretsu-ization kind of advancement. The Keiretsu groups of Isuzu and Honda portray a case where there was a very big escalation of the levels of equity share in the period from 1993 through 2008. Notable is the fact that as the new ways of arrangement has had Nissan companies turn into independent suppliers. They would serve several car manufacturers. This state of independence would give space for Keiretsu firms to come up and implement new client relationships, in regards with other automobile assemblers, with a lot of ease. Simultaneously, it also happened that some groups of Keiretsu suppliers changed their approach to utilizing different Keiretsu parent companies after dumping their former parent companies. (Kawai, 2009) QN 2 Throughout the 1990s the economy of Japan was facing a prolonged anemia. After the collapse of the bubble, most people argued that this predicament was just a temporary one, but not structural. However by the close of year 1997, Japan had experienced five quarters of negative rates of growth of its economy and these happened consecutively. Inspite of the 1998’s injection of expenditure to the economy by the Obuchi government that saw the ratio of Debt: GDP rise up to 130%, there was no signs of the economy surging forward. The ratio reflected the worst case of all the industrialized countries. On average, the Japanese economy grew by about 1.5% over the entire decade of the 1990s and this was the lowest compared to any other industralised country over the same period. Yasuba, in his book argues that poor fiscal and monetary policies are to blame for the Japanese recession in the 1990s. As a matter of fact, concentration of the concerned stakeholders to the formation of the relevant policies instead concentrated to a great extent on the budget deficits per annum. The 1980s’ financial bubble was eventually burst courtesy of a monetary policy that was tight. The rates of growth of GDP got very near zero with the exceptions of year 1990, year 1991, year 1995 and year 1996, in the decade of the 1990s. The mean rate of growth of GDP per annum over this period of the 1990 through 1997 was a meager 1.6% in comparison to the relatively high rate of 4.1% witnessed in the 1980s and 4.4% in the decade of 1970s. The rate of unemployment which had not at any given time gone beyond 2.9% since the 1960s went above to the rate of 4.3% in the year 1998. The rate of discount as set by the Bank of Japan got decreased from a high percentage of 6.0% to 3.25% in year 1992 and even further below to 0.5% in year 1995. For all the other years with the exception of years 1990 and 1991, the ratio of operating capacity was way below 100% such that the Bank of Japan got into an awkward situation where it had to rely upon the monetary policy so as to trigger demand. At this juncture it was quite clear that the Economy of Japan had been caught in what is called economically ‘the liquidity trap’. Therefore, the fiscal policy had to come in to rescue the situation such the effective demand to increase growth rates could be triggered. Despite the argument presented by Keynes and which would have provided a way ahead of the situation at hand, there never was a fiscal policy that would ensure that the negative gap experienced in the operating ratio was closed. The biggest challenge was the resistance by the ultra-conservative Finance Ministry officials that were said to be ‘committing a crime against humanity’. They put their entire concentration upon the yearly budget deficits. Neoclassical economists were especially the most opposed to this approach by the officials. In the end only a non-sufficient stimulus of the fiscal policy was set and which never got anywhere close to solving the predicament of operating under capacity where the operating ratio remained below 100% (Yasuba, 1999) Japan’s predicament portrayed by recession of its economy, can be correctly labeled a liquidity trap. This situation led to various different measures being undertaken to curb the whole problem, but none was a panacea. The task of locating the origin of Japan’s deflationary and recession with regards to period can be one of the hardest. One of the main factors that bring about the complexity is demographic issues like smaller workforce, older population, and dismal growth as these were taking form in the 1980s. Firstly, there is the decline in the growth rate of the economy to below 3% as well as the appreciation of Yen that resulted in the negative impact to the export sector. To resolve this the Bank of Japan came up with a decision that the monetary policy would be eased so as to bring about higher growth rates as well as guard the economy against a catastrophic period of deflation. The 9.25% rates of discount of year 1980 were brought down to 2.75% by year 1987. The most vital of the reduction in rates of discounts happened in the period 1985 through 1987 that saw a reduction by about 2.5%. The reduction in these rates of interest caused an expansion of the base of the monetary system at a rapid rate. Inflation remained unchanged and output did not rise, though. The expectation was that there would be a bigger rate of growth of GDP and better investments, but despite the efforts money was put into the stock markets for speculation purposes as well as real estate business. This resulted to a major economic bubble. The prices of land rose in two-fold and Nikkei index realized 50% returns per annum, growing three-fold from year 1985 to year 1990. In reaction to this economic bubble of speculation, the Bank of Japan tried to bring the effects to manageable levels as well as prevent speculation by way of escalated rates. This makes the count of interventions to be two, where the Bank of Japan was attempting to undo the prior reduction in rates of discount rates. But this was too hasty for the economy, where they had raised the rates by 3.5% in a period of two years to the level of 6.25%. The bubble could no longer hold. The aftermath of the popped economic bubble was a decline in the Nikkei index from its maximum by around 60%, and a gigantic decline of the prices of the real estates by 80%. The growth and inflation died down alike. They eventually came to a point of stagnation. Then, the Bank of Japan was caught in a snare it had been sometimes earlier. It was in its worst situation, which was something it had worked so hard to avoid. The options of coming up with policies were minimal, judging from the fact that negative growth had started to be experienced and deflation was clinging along. The Bank of Japan had to act by applying both fiscal and monetary policies again. At this point, it did not have any other option. In the monetary policy front, the rate of discount was to be brought down to around 0.5%. Also reduced was the fundamental tool of monetary policy, the overnight call rate to about 0.001%. The resultant end was a more increase in the base of money, which had no impact on the levels of inflation. As a matter of fact the level of prices was continually falling as the decade of the 1980s came to close. On the fiscal policy front, Japan made an injection of above Yen 100 trillion from year 1992 through 1999. Also the cuts in taxes in years 1994 as well as 1998 made an additional trigger to the levels of real income. But, despite all this policies’ application to curb the problem in Japan, this second approach to the predicament of recession in Japan did not. It did not lead to increment on the levels of GDP growth as well. The possible impact of the reforms was to haunt Japan with debts in future. The problems of the economy of Japan over the 1990s decade were one too many. Numerous theories could be made as to the reason why the recession problem was not arrested at an early stage. The overall answer to the dragging of the various measures put in place by the Bank of Japan may be as under. There was not such a fiscal or monetary stimulus that would make a quick fix of this situation of the economy. A major problem is that the response of the economy to the monetary stimulus was a bit sluggish. The rapid turn into a cotractionary monetary policy is known for bursting the bubble in year 1990 with the inclusion of the 1.75% rise between the periods of March through August of year 1990. This brought about the need for the Bank of Japan to make a turn around, but to this issue it was only able to do a 0.50% reduction in a period of three years. However, taking into account the activist central bank’s policies of expansion-contraction-expansion, then the approach cannot be said to a permanent solution. This, therefore, makes it easy to explain the fact why there was no impact noted in growth, and inflation, subsequent to the lower rates of interest that saw an expansion of money supply levels. (Stepro, 2009) Reference list: Goyal Abhinav and Muckley Cal. (2010). Corporate Payout Policy in Japan. Retrieved 31st May 2011 http://docs.google.com/viewer?a=v&q=cache:vhhtufj9Zd8J:www.ucd.ie/t4cms/G oyal%2520and%2520Muckley%25202011%2520Japan%2520corporate%2520pa yout.pdf+deregulation+and+the+demise+of+Keiretsu&hl=en&pid=bl&srcid=AD GEESh7CalQHvuprpr7li39T9YG11jicC6NZU49- htVTWh5HpaL25ZRkDJZZ70Gd12WUC0s8IGIiWDc62WU9hCq5fXBspUI4OZ V7mrGuIBHyImF4T1GUwBW08UyhqV9CxFTcJ3S2adS&sig=AHIEtbTzgySw b_pkL53YGlK-OnlOWhpUXA&pli=1 icmrindia.org. (2004). The Rise and Fall of The 'Keiretsus' in Japan. Retrieved 31st May 2011 http://www.icmrindia.org/casestudies/catalogue/Economics/Rise%20and%20Fall %20of%20Keiretsus%20in%20Japan-Economics%20Case%20Study.htm Moffatt , Mike. (2011). Definition of Keiretsu System. Retrieved 31st May 2011 http://economics.about.com/od/termsbeginningwithk/g/keiretsu_system.htm Kawai, Norifumi. (2009). Keiretsu corporate networks are innate to the Japanese auto sector, but could this system finally be changing? Retrieved 31st May 2011 http://www.japaninc.com/mgz85/keiretsu- corporate-networks Stepro, Nicholas. (2009). Expectations and Pessimism in a Liquidity Trap. Retrieved 31st May 2011 http://docs.google.com/viewer?a=v&q=cache:OYT6cjS6q_gJ:www.nickstepro.co m/writing/ec191_final_paper.pdf+POLICIES+BY+JAPAN+TO+OVERCOME+ THE+LIQUIDITY+TRAP+OF+THE+1990S&hl=en&gl=ke&pid=bl&srcid=AD GEESjVR9h8aQ1dqi3cqlKmyFvze7OnAjPr5wsgCYRZZrVc9aQ9PRus0PkcyM4 eo35d_rdfPjp3W8s2WMjQd_ut7BEdvcpMiRJUDyYolIP3xIMRD8iUuAzHXx2e V tf3M4bMQZZ_8e&sig=AHIEtbTI5YtWkGT4Dcm2oHEkJKEPVvw-jg&pli=1 Tabeta, Naoki and Rahman, Shahidur. (1996). The Risk Sharing Mechanism in Japan’s Auto Industry: The Keiretsu- vs. Independent- Parts Suppliers. Retrieved 31st May 2011 http://www3.ntu.edu.sg/nbs/sabre/working_papers/22- 96.pdf Yamamura, Kozo. (1997). A vision of a new liberalism?: critical essays on Murakami's anticlassical analysis. Edition illustrated. Stanford University Press. p253. Yasuba, Yasukichi. (1999). The Japanese Economy in the Nineteen Nineties. Retrieved 31st May 2011 http://epress.anu.edu.au/agenda/006/03/6-3-A-5.pdf Read More