Keiretsu--the Latest Scare Imported from Japan


You don't hear much about MITI anymore. Tokyo's Ministry of International Trade and Industry was said to be directing Japan's diabolical plot to take over the world one industry at a time.

But now MITI has been replaced in the anti-Japanese demonology by an even more diabolical organism: the keiretsu.

Keiretsu (same word, singular or plural) are networks or families of corporations. Toyota, for example, heads an auto industry keiretsu. Through interlocking directorates, share-holdings, and simple buying power, Toyota dominates its family of parts manufacturers.

As I was struggling to explain the alarm over keiretsu to colleagues, "It's a gigantic conspiracy to . . . to . . . to . . . "

"To build cars?" suggested one helpfully. Exactly.

Keiretsu are said to have roots in the ancient relationship between feudal landlords -- daimyo -- and their samurai, and also in the huge industrial combines -- zaibatsu -- that built the Japanese war machine.

And companies like Toyota are now said to be importing this un-American concept, with its associated blizzard of foreign words, into the United States when they open plants here and form relationships with American suppliers.

In the Harvard Business Review last winter, a Japanese executive described the nightmare of life inside a keiretsu: "I went to the president of this big company, not to demand my freedom but to profess my sincere desire to support his company's growth. . . . 'Your words are like an expression of

affection from an ugly woman,' he answered. . . . My loyalty was taken for granted." Well!

As with other allegedly nefarious Japanese practices -- trade protectionism, MITI -- the critics of keiretsu don't make clear whether they think this is an outrage that ought to be eliminated or a brilliant stroke that ought to be copied.

"Keiretsu is a great part of Japan's economic success," writes Texas financier T. Boone Pickens. "It reinforces Japan's stable business environment, providing corporate managers with the time and capital to plan for the long term." Sounds great.

So why fear the arrival of keiretsu in America? Because keiretsu fits the classic definition of ". . . business monopolies. Suppliers become captives. Worker freedom is restricted. And consumers pay more."

Consumers pay more? Wait a minute. A main accusation against keiretsu is that they enable a Toyota to squeeze its suppliers and unfairly undercut American rivals. That means consumers pay less.

Meanwhile, the Federal Trade Commission is investigating whether Japanese companies with American plants discriminate against American suppliers in favor of their keiretsu-mates back home. But if being a "captive supplier" is so awful, why complain about being left out?

And then there's a consulting firm study of keiretsu in America, financed by Mr. Pickens, which raises yet another contradictory worry: that Japanese automobile manufacturers "could induce low-cost Japanese auto parts suppliers in their respective keiretsu systems to refuse to sell to U.S. automobile manufacturers."

In other words, the system will discriminate in favor of American parts manufacturers by denying General Motors and Ford access to Japanese parts.

Clearly, explanations for keiretsuphobia lie more in the realm of psychology than in the realm of economics.

Growing up in Detroit, I several times took the public tour of Ford's great River Rouge plant. The guide would explain how, for maximum efficiency, virtually everything that went into a car was manufactured from scratch on-site. Ford even made the steel right there.

Later, that kind of thinking went out of fashion. It came to be thought that "contracting out" different bits of the manufacturing process and buying supplies "off the shelf" was more efficient. Who knows?

But American companies still do it both ways, and Japanese vertical keiretsu are just a middle way between these two extremes.

Robert Z. Lawrence of the Brookings Institution has done the most important study of keiretsu in Japan. Are they an efficient method of production, or just a cozy arrangement that blocks opportunity for American suppliers?

Mr. Lawrence found that keiretsu tend to reduce imports but have no significant effect on exports. From this he reasoned, logically, that keiretsu are an unjustified impediment to trade: If they actually made products more efficiently, they would increase exports as well as reducing imports.

L So American negotiators are right to try to break them open.

That's fine. But a corollary of this logic is that keiretsu are doing Japan no special good, either. Far from a nefarious plot, they are a foolish archaism.

Yet keiretsuphobes don't take that point of view.

Indeed the Harvard Business Review published another article last year on keiretsu, this one urging American and European computer manufacturers to join in a giant keiretsu-style combine with all their suppliers to take on the Japanese.

Yet Boone Pickens wants to use the antitrust laws to prevent Japan from "exporting its keiretsu cartels to the U.S."

Should Japan's keiretsus be envied or deplored? Copied or banned? The answer, I think, is none of the above.

PD TRB is a column in the New Republic written by Michael Kinsley.

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