Keiretsu Corporate Structure of Toyota Company - Case Study Example

Abstract

The document addresses Keiretsu corporate structure of Toyota Company and the embedded Japanese corporate culture that support its existence. Toyota Company is a vertical keiretsu with numerous partners. At the lower end are the supplies of Toyota automotive parts and the dealers and consumers at the upper end. Toyota works with affiliates such as Kanto Auto works, which has been making Toyota bodies and Lexus models since the mid 20th century. In regard to shareholding, Toyota controls majority of its subsidiary supplier companies. The company partially owns some of the supplier firms and it has done so by purchasing their share units. The Keiretsu corporate structure of Toyota has been efficient to the company for many decades, but due to the contemporary market structures that are inconsistent with keiretsu groups’ exclusive relationships, the structure is now an obstacle to Toyota as it limits its ability to innovate and regain international competitiveness. The Keiretsu corporate structure and the Japanese corporate culture present an obstacle to Toyota to innovate and regain international competitiveness as argued in this paper.

Keywords: Toyota, Keiretsu Corporate Structure, Customers, Suppliers, Shareholders, challenges, parts, competitive

Introduction

The Keiretsu system has been an essential historical factor in Japanese economic development for decades. It has contributed to numerous growths of automotive industries among them the Toyota group, which is popular due to its image and success. Although this has been the case for decades, the market structures that exist today are not consistent with the exclusive relationships that keiretsu groups have (Ostrom, 2000). According to Grabowiecki, “Kairetsu groups are defined as clusters of independently managed firms maintaining close and stable economic ties, cemented by a governance mechanism” (2006, p.4). Generally, the word ‘Keiretsu’ means a headless combination. Since the early 20th century, Toyota Company in Japan adopted the vertical keiretsu model with others competitive automobile industries following suit. This paper argues that the Keiretsu corporate structure and the Japanese corporate culture present an obstacle to Toyota to innovate and regain international competitiveness.

Toyota’s Vertical Keiretsu Structure

Toyota is a vertical keiretsu company. Vertical keiretsu are also referred to as nonfinancial keiretsu. In comparison to horizontal keiretsu, vertical keiretsu are more complicated. The increasing trends towards overseas production leaves vertical keiretsu firms such as Toyota isolated (Grabowiecki, 2006). According to Grabowiecki (2006, p. 2), the “relatively unrestrained shift of production by Japan’s transnational corporations is contributing to a massive “strategic failure” of the Japanese economy.” In vertical keiretsu, the assembler is found at the apex of the pyramid, followed by first-tier suppliers, first-tier suppliers then subcontract second-tier suppliers and the rest of the subcontracting relationships fall on the other tiers of the pyramid (Anderson, 2004). Generally, this makes the system a closed one, thus inhibiting the ability to engage with other parties internationally.

Fig 1: Vertical keiretsu structure (Undervaluejapan, 2014).

Toyota as the parent company of affiliates

Toyota has remained a car manufacturing company with ancillary companies which manufacture parts and supply to Toyota. For the past decades Toyota Company has worked closely with both large and medium scale supplies for its parts, hence creating a unique vertical integration and relation to its supplies. Toyota Company has established long term relations with its suppliers to ensure future productivity and return on investments in the business. It has operated with a network of suppliers of its assembly components through affiliated companies (which it owns a percentage of the equity), suppliers within the automakers’ association and second tier suppliers whom manufacture standardized parts (Kim & Mitchell, 1999, p. 119). There has emerged a strong customer- supplier relation between Toyota Company and these massive supplies due to the cultivated relation and trust for the continuity of the business. The strong customer-supplier relation ensures that Toyota Company remains competitive.

Toyota supply chain

Toyota Company’s survival and prosperity records to have heavily relied on in house automotive parts makers, which tend to develop and make specific components for Toyota (Higashi & Lauter, 2012). Aligned to Toyota’s objectives, these supplies offer tailor made components, services and technologies for Toyota’s growth. They strive to ensure that their development feeds through Japan and meet more of Toyota’s customer needs. With its subsidiary companies, Toyota has established dependent hierarchical relationships to achieve a more flexible system of production. According to Benhabib, “several thousands of smaller companies form a pyramid to supply the flagship company that bear the name of a vertical kairetsu” (2003, p.19). Toyota group is a vertical kairetsu with hundreds of affiliate and independent companies operating at its lower level as suppliers and others at the higher level to facilitate it’s distribution of finished products to the consumer.

Affiliates like Kanto Auto works is historically known for its extensive dedication to makes of Toyota bodies and Lexus models since mid 20th century. Aisin’s, another long term dedicated Toyota supplier has history of producing proportioning valves for all Toyota vehicles Other member companies of Toyota group entails the Kyowa leather clothe that focus on Toyota’s interior materials. Basically in its supply chain, Toyota deals with vendors or receives automotive parts from its suppliers at the bottom level, goes into production of the vehicles through (TPS process) Toyota production system, hands over the finished products to dealers for shipment and distribution to link with the end user/consumer.

Fig 2: A layout of Toyota’s supply chain (udapat, 2010).

Structure of shareholding

Majority of these subsidiary supplier companies are partially controlled by Toyota through capital participation. Over the decades Toyota has involved itself in partial ownership of supplier firms by purchasing their share units. For example Toyota company owns approximately 30 percent of Aisin’s. Karan argues that “Toyota uses shareholding leverage to strengthen its relationship within its keiretsu” (2005, p. 325). Nippon Denso co is major supplier of air conditioners for Toyota Company in Japan, but did with time establish itself as an independent entity capable of producing components even for other automotive companies. Despite the suppliers’ expansion capacity to serve other automotive companies and industries, majority of them have retained their principal supply relation to Toyota. Toyota’s corporate culture, which comprises of keiretsu corporate structure and the Japanese corporate culture, has been efficient in supporting its supplies to ensure quality, cost sharing and financial health. It continuously enforces its rigorous screening for incoming suppliers before any mergers or acquisition and ensures the subsidiaries functions to supply the parts.

Personnel transfers in Toyota kairetsu

Toyota Kairetsu culture places more emphasis in strengthening of its supplies tacit knowledge to enable solves developing problems. It invests heavily in human assets and placed effort in training and sharing of information for overall future growth of supply chain. DiMaggio claims that “vertical Kairetsu has a cascading structure of shareholding and of personnel transfers from lead firm to first tier suppliers from first tier to second tier and so on” (2001, p. 127). The transfer of suppliers’ human assets across the Toyota’s centers temporarily enables the suppliers and Toyota to coordinate in activities pertaining development and changes in production. Due to such opportunities for learning, the partners transfer and cordially apply new knowledge to develop advanced models of innovation. The desire for greater innovation and edged competitiveness in Japanese and global market push Toyota to look out for anomalies and develop quick ways of resolving them to meet consumer needs.

Toyota has built a reputation of assigning suppliers’ engineers to Toyota centers to enable direct interaction with Toyota’s workforce and ideas. By bringing together engineers from Toyota and suppliers in the same room, there emerges extensive exchange of ideas and dynamic communication for a shared common objective. Through this it can forge deep relations, successfully incorporate suppliers’ ideas and improve product design and its development. It has also employed a residential engineer program bringing together Toyota’s designers and suppliers experts for defined period, hence reducing product development complexities in future (Aoki & Lennerfors, 2013). Due to the network and infrastructure used by Toyota that supports knowledge sharing, both the suppliers and the automotive industry have experienced relative productivity advantages. It’s because of the strategized knowledge exchange through personnel transfer that has brought about improved technical and managerial expertise to affiliated Toyota suppliers. Past reviews of Toyota affiliated suppliers companies indicate that about 20 percent of their top managers were previously groomed and experienced Toyota employees, whom are in a position to coordinate and direct the suppliers in line with Toyota’s mandate (Dyer, 2014).

Therefore Toyota Keiretsu and its corporate culture have provided an accessible platform to utilize and expand their workforce talents, ensured just in time production, reduced defects and lag time in vehicle production. However, international competitiveness still remains restricted due to the keiretsu structure that can be termed as outdated.

Kairetsu Corporate Structure Abroad and Challenges

Turning away from specialist component producers/suppliers

Toyota has huge investment abroad, which it has given priority in its expansion plan. Due to its attractive returns on investment, many suppliers seek to acquire contracts with the corporation. Most of its close affiliates/ subsidiaries back in Japan did excel in their coordinated business with Toyota. Unfortunately, as Toyota Company invested abroad, some of the subsidiaries have followed the parent Company into the foreign environment as part of the greater supply chain associate, only to experience complex struggle to penetrate in the market. The market dynamics and costs incurred by such subsidiaries reduce Toyota’s affiliate’s capacity in face of established non Japanese and non affiliates to Toyota Group of Companies.

Toyota has managed to transfer part of its production abroad. With new plants set up, some vendor/suppliers found business opportunities, established factories near the plants and began operation. When Japanese Toyota’s supplies follow Toyota abroad, they meet foreign established keiretsu and other non Japanese suppliers. These non keiretsu part automotive makers contribute to competitive market of quality components for Toyota industry; hence, making it possible for Toyota to obtain supplies for parts elsewhere (Odaka & Kiyokawa, 2008). Most the competitive suppliers abroad have diversified into parts supermarket rather than specializing in component supplies. They have also opened up to external influence and are actively capable of keeping up with global trends.

Challenge with adoption of Japanese culture of personnel transfer

The manner of management of the human resources across abroad differs from Japanese culture. With intensive competition, human assets needs to be motivated and kept within the interests of the company at all times. Unfortunately, Toyota has a reputation of utilizing their past employees to higher position due to built up experience and knowledge of Toyota aligned objective. A qualified personnel abroad may be denied the opportunity to lead the a Toyota company or subsidiary suppliers simply because of the guaranteed employment of former employees in Toyota. Coming to enforce new corporate culture in a foreign culture abroad has often been met with rejections to changes. As Groose puts it, “corporate governance can lead to inflexibilities in sourcing strategies in labor market and corporate restructuring” (2009, p.136). Though enforcing decentralization management in Toyota companies abroad, foreign corporate cultures and management have in the past met the changing organization culture with rejection (Batyko, 2012). As such Haghirian argues that “the disconnect in management cultures can cause difficulties when implementing foreign principles…where difficulty in transferring management practices has also proved to be a challenge in exporting TPS to Toyota factories oversees” (2009, p. 151).

Customer diversification for Toyota suppliers

Major keiretsu companies in Japan’s automotive industry have witnessed intensive global competition and economic turmoil that have led them to seek alternative ways to stay ahead and maintain profitability. While automotive like Nissan have portrayed a move to de-kairetsu-ization, Toyota have maintained strong ties with is local suppliers even abroad. However, without such close ties in foreign countries, Toyota face high cost of production than it could experience back home. Unfortunately, the global market trends now offer free market environment where most suppliers strive to achieve customer diversification. Toyota’s investment abroad experiences quite a loose network of supplier relations than back in Japan. Other than specializing to production of Toyota tailored products alone, they secure contracts that offer them flexibility to also produce for other automotive industries. The case of Nippon Denso, a major Toyota supplier has shown to distance itself from the long standing obligations to Toyota. Where it was limited to Toyota sales, the linking ties have weakened, as Denso supplier sought to diversify its customer base to loosen its dependence on Toyota (Aggarwal, 1999). Foreign suppliers and evolving affiliate Toyota suppliers are motivated to formation of new joint ventures to other companies abroad, which threaten the long established Toyota keiretsu.

Toyota is only been strategic but admits to the wave of change in management, technology and supply chain. It now advocates its group of suppliers in the local and foreign setting to compete and develop within and outside the keiretsu boundary. Already Toyota Australia has offered its diversification support for its suppliers’ transition into non automotive sector and global automotive chains, which best positions the suppliers/firms to attain sustainability and international competitiveness (“Toyota,” 2015). Denso continue to form more strategic alliances with numerous performing foreign component manufacturers, conducted various outsourcing of their production as a supplier, hence maximally reducing their cost price of the end products.

Slow reactions to external generated events

The companies in the supply chain of Toyota companies are often protected by the parent company through risk sharing. In the event of disasters, Toyota Company has experienced a halt in production caused by the adversaries experienced in the damaged supplier. Therefore although Toyota automotive comes to the rescue of the affiliated supplier, the core business of production is temporarily stopped (affected department) to support recovery of the subsidiary. Unfortunately, it lags behind in production, which could have been covered if it had alternative suppliers for the parts. For example, the floods in Thailand during 2011, caused damage to numerous Toyota supplies effectively affecting the output of vehicle that year in Toyota (Toyota Annual Report, 2012). Similarly, Kobe earthquake in Japan 1995 and 2011 Tsunami are catastrophes that worst hit Toyota company and its keiretsu to cause plant shutdowns and delayed automotive production below the schedule (Raimbault & Barr, 2012). Despite Toyota’s relief programs, the vertical Kairetsu and close mutual ties contribute to slower decision making for Toyota and its affiliates due to exercised control and extensive consultation to reach a decision.

Analysis

From the information gathered, keiretsu have strength in the two kinds of assurance they supply to members. These include the trust they create among the vertical trading partners such as customers, suppliers, assemblers and manufactures, and the safety net that protects member firms from bankruptcy when times get hard or in instances when the business cycle faces a downtown. However, arms length negotiation is absent in the picture and it can only exist if Toyota deals with other partners in its supply chain (Bagby, n.d.). This means that keiretsu are not costless. In fact, an analysis of the costs versus the benefits shows that the costs are higher. The costs include the lack of choice and free will among customers and suppliers, which leads to loss of opportunities and in cases where sales are forgone or unused capacity produced, the results are losses (Bagby, n.d.). There is generally the inability to take full advantage of opportunities that can bring profits. The exclusive dealings prevent distributors and retailers from selling cars from other automobile manufacturers.

Conclusion

Toyota has strongly maintained vertical keiretsu over the decades while majority of other automotive industries as Nissan broke loose from it. The keiretu corporate structure is build upon close relations between the suppliers and manufactures. It practices employee transfer and utilizes shareholding structure to support closer ties. It has consistently supported innovation through its employees’ management, but its international competitiveness is threatened by the changing global trend for supplies seeking customer diversification. For this reason, vertical keiretsu are diminishing as they are not consistent with contemporary market structures.

For Toyota, the vertical keiretsu is a hindrance to innovation and international competitiveness. This can be seen from the costs that Toyota incurs which outweigh the benefits. Members in Toyota’s vertical keiretsu have no free will to make choices. This lack of independence leads to loss of opportunities that can make profits especially on forgone sales and unused capacity. Relationships following the keiretsu style have basic expectations that should always be met. This has been observed to lead to supplier underutilization. The exclusive dealings are another downside as retailers and distributors are prevented from having more than one supplier. If the case was left open, it would be possible for the markets to be open and competition would be encouraged. With stiff competition, innovation would become a necessity hence companies such as Toyota would strive hard to be more innovative and competitive internationally.

It is a fact that Toyota Company has reinvented the keiretsu. This has been achieved by gradually making supplier relationship more open, cost-conscious and global than before. This has in turn led to deepening of collaboration, trust and support. Obligational relationships that are the common phenomena in traditional relationships are no longer present at Toyota. The break from the traditional relationships for Toyota can be seen from four perspectives i.e. the fact that Toyota now buys from the global market and not from particular companies, integrated systems components instead of individual parts are provided b suppliers, long term suppliers receive considerate target prices and encouragement to suppliers to engage in product development. The move from the traditional restrictive keiretsu by Toyota is a great move. However, if possible the company needs to consider a total break free from the keiretsu structure so as to be able to innovate more and compete more internationally.