A case Keiretsu in command

The Sumitomo Group began as a copper mining company nearly 300 years ago. Today, the group is comprised of 20 core companies and dozens of smaller businesses located in a variety of industries around the world, including computers metals, steel, glass, coal, real estate, beer, consumer electronics and life insurance. The group is tied together first and foremost by ritual and behavior. For example, each year the presidents of all 20 companies come together with the Sumitomo family at a special temple like hall that commemorates the group’s founders. In addition, the presidents meet separately each month in what is called a “Hakusuikai” or “whitewater group” to discuss business matters from planning new ventures to providing support for ailing group members.

The Sumitomo Group is one example of a Keiretsu – a huge business conglomerate. Often labeled “the corporate equivalent of blood brotherhood”, these “business families” underlie many Japanese business arrangements. Members of a keiretsu are often obligated to show preference to one another, regardless of what other opportunities might exist. At times, keiretsu loyalties thus preempt otherwise beneficial relationships with companies from different countries or different keiretsus.

Such a business structure defies American practices, grounded firmly in the encouragement of head-to-head competition among companies in the marketplace. Antitrust laws actually prohibit the sort of behavior and anti-fair play that keiretsus promote. In the US, the view is that “if you build a better mousetrap, the world will beat a path to your door. In Japan it appears to depend more on who your friends are.

The Keiretsu system has placed foreign companies at a serious disadvantage in Japan. Most of the conglomerates are focused around a major bank, something prohibited by law in the United State. The six largest Keiretsu cluster around Sumitomo, Mitsubishi, Mitsui, Dai Ichi Kangyo, Fuji and Sanwa Banks. The Dai Ichi Keiretsu is the largest of these, and claims sales five times larger than the most powerful American companies such as General Motors and Exxon.

Keiretsu arrangements account for roughly one sixth of Japan’s sales and profits. In addition, inter-company holding keep 60 percent to 80 percent of Keiretsu stock from being publicly traded. As mentioned earlier, many of the keiretsus are organized around large Japanese banks. This enables the group companies to take on financial losses without having to worry about the lowering of their credit ratings – they will always be able to turn to the group’s bank. In the electronics industry, this situation has proved especially disadvantageous to foreign firms. Japanese electronics companies such as NEC, Hitachi and Fujitsu compete on price without having to worry about rising financial losses. This prevents foreign competitors from engaging in head-to-head competition with the Japanese; it hurts foreign businesses, and the global consumer.

The Sumitomo keiretsu has come to the rescue of members on numerous occasions. Sumitomo Bank is the absolute expert in arranging its peanut shells to make the problem disappear, said Alicia Ogawa, an analyst at S G Warburg Securities. One example occurred when Sumitomo Bank bailed Mazda out during the early 1970s and brought the company back from the brink of bankruptcy. Members of the Sumitomo keiretsu rescued Mazda by offering the ailing company financial support and hiring former Mazda employees who had been laid off. All members of the Sumitomo keiretsu purchased only Mazda cars for the duration of the company’s recovery.

Sumitomo Bank was also involved in bailing out troubled computer manufacturer NEC. Before NEC had become a manufacturer of mainframe computers, Sumitomo relied upon equipment made by NCR. When the bank chose to upgrade its computer systems, however, it replaced its existing NCR machines with NEC mainframes. NEC is close to us and is part of our group, explained a Sumitomo Bank manager. We hope our order will lead to more NEC mainframes being used in banks. We want their business to expand. Switching costs amounted to more than $1 billion as a result of hardware and software changes, but the bank absorbed the expenses out of loyalty to NEC as a member of the Sumitomo Group.

Japanese officials claim that the influence of keiretsus has dwindled as a result of modernization and deregulation of the economy. Evidence of Sumitomo’s protectionism, however, suggests that the keiretsu system does in fact continue to be an influence on the decision making process in the Japanese market as well as interfere with the business of foreign companies in Japan.