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TOKYO (KWR) -- This Article is Part III of a series that discusses the origins of the Japanese corporate complexes and groups that have characterized Japan’s modern economy. Part I, explained the origins of pre-WWII zaibatsu. Part II, explained the dissolution of the zaibatsu and the origins of current company groups known as keiretsu. This Part III, will explain typical structures of the current company groups.

Current Company Group Types: As explained in earlier articles of this series, keiretsu is a vague term. The company relationships in Japan that we often hear referred to with this term are probably more diverse in their structure than is generally understood. For example, unlike the zaibatsu, current company groups include not only vertical company relationships, but also horizontal relationships tied together by capital, and company groups tied by transactional rather than capital relationships. These post-WWII intercompany relationships generally can be categorized into three groups:

The Big Six – Typical of the Horizontal Type: The Big Six constitute what many people think of when the term keiretsu is mentioned. These company groups are said to typify the horizontal-type keiretsu because the group’s business interests extend into diverse fields. Over the years these groups have been characterized by stable vertical cross-shareholding relationships, horizontal affiliations that reach to diverse markets, and possession of large-scale economic resources. Shareholding and other ties of affiliation may be held together through strategies such as cross-stockholding, the dispatch of executives and regular meetings of the companies’ presidents (shacho kai).

Common denominations of the Big Six include that each has (or had) a central city bank, general trading company, and insurance company within the complex. It remains to be seen how the recent consolidation of these banks, trading companies and other institutions will affect the longstanding ties within these complexes going forward.

The Big Six have historically had great influence upon the Japanese economy. A 1992 study of the Big Six indicated that while only 0.007% of the registered corporations in Japan were members of the Big Six, this small percentage of the company population controlled 19.29% of the capital, 16.56% of total assets, and 18.37% of sales revenue among such corporations. The typical percentage of intra-group stockholdings among companies in the Big Six has been calculated at approximately 20%. Traditionally, approximately one-third of the cross-shareholding relationships have been coupled with not only capital ties but also transactional business relations. A large number of the vertical company groups (explained below) are also found to be aligned within the Big Six.

Vertical Company Groups: The typical vertical company group is held together in an umbrella-like form with a large-scale enterprise at its apex. In contrast to the zaibatsu and Big Six, the scope of business of these vertical company groups tends to be more closely connected to the original industry of the leading enterprise. Matsushita, ITOCHU, Hitachi, Toshiba, NTT, Tokyo Electric Power and Toyota could be pointed out as examples of this type of vertical company group.

In addition to capital ties, long-term contracts, financial and technological support have all been more or less a part of the foundation that holds together these company groups. Spin-offs have in certain cases led to the expansion of these groups whereby individual plants or divisions became separate legal entities, which entities remained wholly-dependant upon the leading enterprise. One study indicated that in 1995 the largest 30 groups were comprised of approximately 12,577 subsidiaries and affiliated entities.

Overview and Summary: It has been said that the extent of control that members of keiretsu actually hold over other members is difficult to quantify. Some have pointed out that the relationships of control are not necessarily unilateral because subsidiary companies have also been known to exercise de facto influence over parent companies; for example, as suppliers of production units. It may, therefore, be an over-simplification to view the keiretsu as simply top-to-bottom relationships. There can be no doubt, however, that the financial, technological, transactional and managerial ties among companies in the Big Six and the vertical company groups have had a central role in defining not only the economic landscape within Japan but also the advance of Japanese interests overseas.

As a result of recent consolidation in the Japanese market, there is some speculation that the ties that bind company groups in Japan could be loosening. Foreign investors hope that this phenomenon will provide opportunities for foreign financial investors, lenders, foreign suppliers of goods and services, etc., to develop business relationships with companies who previously tended to transact primarily with their corporate groups. If these hopes become reality, the ability of foreign investors and suppliers to offer better prices, innovative solutions, quality, etc., will be important in markets where relationships were once the supreme competitive advantage. If the traditional ties among company groups continue to weaken, the need for consolidation and rationalization of supplier relationships, etc., may also lead to domestic and strategic foreign M&A opportunities as the members of corporate groups seek to consolidate to meet the requirements of an increasingly competitive market place.

This is the last of a three-part series that provided a summarial overview of a topic that has filled volumes. Readers interested in recent works on the history and function of Japanese corporate groups might be interested in the following books and articles: