UC Berkeley
Working Paper Series
Title
Keiretsu, Governance, and Learning: Case Studies in Change from the Japanese Automotive
Industry
Permalink
https://escholarship.org/uc/item/43q5m4r3
Authors
Ahmadjian, Christina L.
Lincoln, James R.
Publication Date
2000-05-19
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University of California
Institute of Industrial Relations
University of California, Berkeley
Working Paper No. 76
May 19, 2000
Keiretsu, governance, and learning:
Case studies in change from the Japanese automotive industry
Christina L. Ahmadjian
Graduate School of Business
Columbia University
New York, NY 10027
(212)854-4417
fax: (212)316-9355
cla15@columbia.edu
James R. Lincoln
Walter A. Haas School of Business
University of California at Berkeley
Berkeley, CA 94720
(510) 643-7063
lincoln@haas.berkeley.edu
We are grateful to Nick Argyres, Bob Cole, Ray Horton, Rita McGrath, Atul Nerkar, Toshi Nishiguchi,
Joanne Oxley, Hugh Patrick, Eleanor Westney, and Oliver Williamson for helpful comments. We also
acknowledge useful feedback from members of the Sloan Corporate Governance Project at Columbia
Law School. Research grants from the Japan – U. S. Friendship Commission, the Japan Society for the
Promotion of Science, and the Clausen Center for International Business and Policy of the Haas School
of Business at UC Berkeley are also gratefully acknowledged.
2
Keiretsu, governance, and learning:
Case studies in change from the Japanese automotive industry
ABSTRACT
The “
keiretsu
” structuring of assembler-supplier relations historically enabled Japanese auto
assemblers to remain lean and flexible while enjoying a level of control over supply akin to that of
vertical integration. Yet there is much talk currently of breakdown in
keiretsu
networks. This paper
examines some recent developments in Japanese parts supply
keiretsu
.
We argue that
keiretsu
relationships are drifting from “hybrid” or “network” (i.e.,
keiretsu
)
governance modes toward the extremes of arms-length contracting and top-down administration. These
changes are best understood through a combination of transaction cost and learning perspectives on
alliance. Consistent with transaction cost economics, the shift in purchase - supply relationships can be
traced to changes in the nature of parts transactions and
keiretsu
governance structures. A learning
perspective on alliance complements and extends transaction cost theory, providing additional
explanation of the sources of change and the specific governance choices being made.
Our first two cases document a drift in Toyota’s
keiretsu
supply network toward hierarchical
form in the management of parts supply transactions. Toyota has effectively internalized its transactions
with Daihatsu by taking a controlling interest. Toyota’s strategy toward long-term partner Denso, on the
other hand, was very different. Toyota built from the ground up an in-house capability in electronic
components—thus (particularly at the high end) buying less from and scaling down its dependence on
Denso. A third case considers a general trend in the Japanese auto industry toward greater
standardization of parts. With the routinization of quality, reliability, and speed in supply management
the need for
keiretsu
-style governance has declined. The withering of
keiretsu
obligations is also
traceable to globalization and the continuing weakness of the Japanese economy, which have prompted
Japanese firms to question received business practice.
3
Keiretsu, governance, and learning:
Case studies in change from the Japanese automotive industry
INTRODUCTION
Transactions between Japanese automobile manufacturers and their suppliers, distinguished by
long-term purchasing relationships, intense collaboration, cross-shareholding, and the frequent exchange
of personnel and technology, have been a conspicuous reminder that not all viable contracting and
governance forms are clustered at the extremes of market and hierarchy. High trust, long-term
cooperation between assemblers and their suppliers has made possible reductions in new model
development time in the Japanese auto industry, sharing of the costs and responsibilities of innovation,
endless rounds of cost-cutting, and quick response to fluctuations in demand. By spinning off much parts
development and manufacture to independently managed yet closely linked suppliers, Japanese
assemblers could exploit the incentive benefits of market-based exchange while reaping the learning and
coordination benefits of internalization within a corporate hierarchy (Clark 1993, Smitka 1991,
Nishiguchi 1994).
In recent years, the Japanese automobile industry has been buffeted by shifts in market
environment and technology. Of course, change has not been confined to the automotive sector—the
effects of globalization, a rising yen, foreign government pressure, and the bursting of the late 80’s
economic bubble have rippled across all sectors of the Japanese economy. The recessionary 90's have
evoked prophecies of gloom and doom—both from smug Westerners who only ten years ago were
warning of Japanese world economic domination—and from the Japanese themselves, who in rising
numbers fear for the country’s economic security, if not its very survival. The
Nihon Keizai Shimbun
,
Japan's most prestigious economic newspaper, opened the new year of 1997 with a series entitled "
Nihon
ga Kieru
" or "Japan is disappearing.”
1
Yet the apocalyptic rhetoric from both sides of the Pacific on the
demise of Japan and return of American supremacy is rarely offset by systematic examination of just
where and how these changes are actually transforming Japanese economic organization.
Our focus is some major new developments in how Japanese auto manufacturers and suppliers
manage their procurement relationships. There are significant cracks in the system of mutual obligation
1
Ekonomisuto
, a leading business magazine, announced that the mid-1990’s had become a time of Japan “nothing,”
as Japan’s influence in the world economy waned with its economic fortunes (Kurozawa, 1997, see also Yamamura,
1997 for a review of the post-bubble Japanese political economy).
4
between customer and supplier that historically has distinguished Japanese industrial goods markets.
They are not yet gaping fissures, nor are their origins fundamentally cultural in nature—erosion of trust
and obligation as Japanese value patterns, for example, or a belated embrace of American individualism
.
While broader cultural shifts may be encouraging some trends in Japanese business practices, culture, in
itself, cannot account for all of the changes in contracting practices. The impetus behind new modes of
contracting in the Japanese auto industry comes from alterations in the form and content of transactions
and in the business and technological environment in which they are embedded. The drift is away from
once dominant hybrid or network (i.e.,
keiretsu
) governance modes toward the extremes of arms-length
contracting and top-down administration.
The study of change in auto parts procurement networks is valuable, not only in its own right, but
also as an opportunity to consider some critical theoretical issues in research on organizational alliance.
Much of the theory of alliance and networks is built on a foundation of cross-sectional data (Nohria
1992). The longitudinal analyses that do exist see evolutionary processes pushing transacting firms
toward ever more intense and interdependent relationships (Piore and Sabel 1984; Saxenian 1990). The
Japanese automotive industry in the early 1990’s, in contrast, was in the throes of discontinuous change.
Shifts in technology, global markets, and governance practices bring centripetal force to bear on buyer-
supplier relationships. A study of how these changes are reshaping alliances between auto assemblers and
suppliers can provide perspective, not only on the automotive industry of the 21st century, but also on the
processes that so closely bound buyers and suppliers to one another in the past.
Our theoretical framework draws on two dominant models of alliance formation. One, which we
term the “governance approach,” is based on transaction cost economics (TCE), particularly that branch
of it that deals with hybrid governance forms (Williamson 1985, 1991). The other—the “learning
approach”—melds several theoretical traditions. One of these is the resource-based view of the firm
(Wernerfelt 1984), particularly as it applies to relational assets and organizational alliance (Dyer and
Singh 1998, Mowery, Oxley and Silverman 1996), plus a broad tradition of scholarship in economic
sociology and political science on interfirm networks (e.g. Powell 1990, Baker 1992, Sabel 1994). While
transaction cost economics is much maligned in the literature on organizational learning, there has thus
far been little to no systematic treatment of how these two paradigms compete with or complement each
other in giving a complete picture of alliance (Oxley 1999).
The empirical materials are three case studies. First, we examine Toyota's program of building
internal capacity in automotive electronics and its increasingly arms-length relationship with Denso, its
long-term supplier of electrical and electronic parts. Second, we examine Toyota’s purchase of a
controlling (now majority) stake in Daihatsu. The third case is the restructuring of Japanese parts supply
