Tag: keiretsu networks

OM in the News: Understanding South Korea’s Chaebol System

The heads of South Korea’s most powerful chaebol companies at a recent parliamentary hearing in Seoul as part of a corruption inquiry.
The heads of South Korea’s most powerful chaebol companies at a recent parliamentary hearing in Seoul as part of a corruption inquiry.

I was just chatting with my coauthors, Jay and Chuck, about our coverage of keiretsu networks in Chapter 11, Supply Chain Management. We don’t mention the somewhat similar system of interconnected companies in S. Korea in that chapter, but the New York Times (Feb. 18, 2017) just published an article called “Inside the Chaebol of S. Korea” that is worth sharing. Chaebols, a handful of family-controlled companies dominate economic life in South Korea. Some, like Hyundai, LG and Samsung, are well-known outside their home country. But domestically, they all wield immense power — and are coming under increasing scrutiny. The word comes from the combination of the characters for “rich” and “clan.”

Chaebol are generally conglomerates of affiliated companies. LG, for example, makes smartphones, televisions, electronic components, chemicals and fertilizer. It also owns Korean baseball and basketball teams. Hyundai, which makes the Hyundai and Kia cars, also makes elevators, provides logistics services, and runs hotels and department stores.

Chaebol rose from the ashes of the Korean War. After the conflict ended, officials steered relief funds and cheap loans to businessmen who promised to rebuild the country. The government also protected homegrown industries from foreign competition to help them develop. The recipe proved to be potent: Chaebol played a major role in South Korea’s rise as an industrial giant in the following decades.

But the recipe also created imbalances. Money meant for the common people often ended up in the hands of the wealthy families, creating resentment that lingers to this day. Chaebol became sprawling businesses that held a nearly 2/3 market share in S. Korean manufacturing by the end of the 1990s. The Asian financial crisis at that time stirred worries that the cozy relationship between chaebol member companies could lead to severe damage across multiple businesses and supply chains if one failed.

Classroom discussion questions:

  1. What is the difference between Japan’s keiretsu networks and S. Korea’s chaebol?
  2. Why is chaebol a potential supply chain issue?

OM in the News: Toyota Shocks Its Keiretsu Network

Toyota's Akio Toyoda wants his firm's Japanese car-parts suppliers to be more globally competitive
Toyota’s Akio Toyoda wants his firm’s Japanese car-parts suppliers to be more globally competitive

Toyota launched a new Corolla in Japan this year that held a shock for its closely knit Japanese supplier network: a cutting-edge crash prevention system made by a German parts maker, reports The Wall Street Journal (Oct. 29. 2015). Until now, Toyota relied on Denso Corp., a major parts maker and key member of its traditional supplier network. The decision to go outside its traditional network highlights a growing concern within Japan’s auto industry: Parts suppliers, once considered the foundation of the country’s auto export prowess, are losing their edge, especially in next-generation software technologies for safety and autonomous driving.

The Japanese are lagging behind rivals in the innovation race in part due to their de facto control by the big auto makers, a system called keiretsu. This tight relationship enables close communications between car manufacturers and their suppliers, allowing them to fine-tune development of parts, but the insular nature of the groups may have stifled breakthroughs. “The globalization of Japan’s auto parts industry and competitive jockeying mean uncertainty and unpredictability” in a society that values stability,” says a U. of California prof.  Toyota is the last of Japan’s Big Three to fully maintain a keiretsu. Nissan dismantled its keiretsu about 15 years ago to slash costs.

“There is no Google, Apple or Uber in Japan to force a rethinking of mobility and the features in a car,” said an industry consultant. “So Mr. Toyoda really has no choice but to look outside of the keiretsu, which concentrates on traditional automotive parts.” Toyoda himself  adds: “If Toyota and its keiretsu members don’t get the best information and technologies and remain closed off to external influence, we won’t be able to survive.”

Classroom discussion questions:

  1. Describe the concept of keiretsu. Why is it widely used in Japan?
  2. Why is it not used in the U.S?

OM in the News: Japan’s Keiretsu Scandal

keiretsu The Wall Street Journal (Feb. 16-17, 2013) provides an interesting analysis of problems with keiretsu networks, a topic we discuss in Chapter 11, Supply Chain Management. The Journal writes: “For decades, Japan’s auto industry keiretsu—networks of parts suppliers closely allied with companies including Toyota and Honda appeared as a black box to outsiders. But there was a lot going on behind the scenes and some of it wasn’t legal.” In fact, some areas of the Japanese auto-parts business were rife with bid rigging and collusion, and have produced multimillion-dollar fines and a dozen prison sentences. A U.S. official calls the probe the “largest price-fixing investigation ever.”  Prosecutors claim the Japanese firms conspired to boost the costs of some of the best-selling vehicles on the road.

Japanese auto makers have long seen keiretsu as a way to ensure quality over the long term by building trusted relationships with suppliers. The brand-name companies often own significant stakes in keiretsu parts makers and  enjoy the right of first refusal for newly developed technology. Typically, they work closely from the design stage onward, sharing proprietary technology.

Those relationships began to change more than a decade ago when France’s Renault took a controlling stake in struggling Nissan and sent a Brazilian executive known as “Le Cost Killer,” Carlos Ghosn, to run it. Nissan disbanded its keiretsu and shifted to open-source bidding among suppliers, many based outside Japan. There has been some quiet pushback from industry officials in Japan who assert that any collusion was more of a bid for survival than for outsize profits. “Different suppliers work hand-in-hand and divide up large lot orders in a way that assures a steady flow of parts,” says one Japanese auto exec. Adds Toyota’s VP, “We feel a duty to protect our keiretsu. We are trying to incorporate more outside suppliers, but won’t give up on our own way of doing business in Japan.”

Discussion questions:

1. Why do the Japanese believe in the use of keiretsu?

2. Is a keiretsu  “collusion,”  or “a bid for survival?”