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OM in the News: Japan’s Keiretsu Scandal

February 21, 2013

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?”

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