Structural Imperfections in Japanese Automotive Keiretsu Business Groups:

How Business Group Structure Failed the Business

A Case Study of Nissan Motors

College of Management Honors Seminar

Spring 2008

David Killeffer

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Overview of Thesis: Hypotheses

• Basic hypotheses:

– structural inefficiencies within Japanese automotive keiretsu business groups have caused demonstrable performance problems (vis-à-vis Nissan) and contributed to the macroeconomic recession in Japan since 1990

– Global competition has increased, and many keiretsu organizational attributes (acceptance of lower profitability, closed trading network, etc.) are ill-equipped to address this increasing competition (cross shareholdings, preferential inter-network trading, etc.)

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Research Methodology

• Primary methodology: case study & historical analysis

• Historical analysis established the framework for what keiretsu are, how they have evolved, and what their primary goals/attributes are

• Case study format offers a clear application of hypothesis principles to Nissan, clear correlation

• Primarily qualitative in nature, partially due to difficulty in obtaining accurate and translatable accounting data (very difficult to obtain desired datasets without insider access, different accounting standards)

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Japan: Number 3 Economy Worldwide

• Despite India’s allure, Japan remains #3 economic power (after US & China)

• 2nd most technologically powerful country (after US)• GDP at official exchange rate: $5.103 trillion • As of 2007:

– 0% inflation rate

– Only 4% unemployment

– 3rd highest life expectancy overall, 1st among advanced economic nations

– Six major keiretsu business groups - ~10% of economy

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Japanese Economy post 1990: Painful Recession

• Slowing macroeconomic growth• Declining average economic growth rate each

decade:– 1960s: 10% GDP growth– 1970s: 5% GDP growth– 1980s: 4% GDP growth– 1990s: 1.7% GDP growth– 2000s: ~2% GDP growth

• Rising unemployment rates• Late 1980s, 1990: extremely high land prices, stock

market crash

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Causes for Recession

• Decreased domestic consumer spending• Domestic economy over-dependent on exports• Speculative asset bubble - over-inflated stock

and land prices• Inefficiencies in keiretsu business groups

– Primary driver of Japanese economy– Represent over 10% of entire economy– Largest employers are keiretsu companies– Accept lower relative levels of profitability in

exchange for diversified risk profiles

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What are Keiretsu?

• Keiretsu is an organizational structure that is comprised of several aspects:– Financial - cross shareholdings– Managerial - exchanging of management expertise, advice,

training– Trade - preferential treatment given to partner firms– Exclusion - keeps foreign competition out of domestic

economy– Political - tightly interwoven relationships with government– Social - “old boys network” of presidents and senior executives

• Six main keiretsu business groups in Japan today, though many non-KBG companies form structural relationships modeled after keiretsu

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Brief History of Keiretsu

• Predecessors: Zaibatsu business cartels: 1865-1945 (Meiji-era to WWII)– Family owned conglomerates– Family owns central holding company– Firms in several areas, complementary businesses– Tight integration with government, exclusive

contracts to rapidly industrialize nation

• Broken up by Allied Occupation after WWII, re-emerge as keiretsu (minus family ownership)

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Nissan Motors - Selected Case

• Major international automotive giant• Number 2 in Japan for several years• Reputation for engineering excellence• Well-known brand, critically acclaimed car

lines: Altima, Maxima, Z, Pathfinder, etc.• Economic weight greater than 1% Japanese

GDP• Ideal example of member firm in keiretsu

business group

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Nissan: Then and Now

• As of 1999:– Massive debt: US $22 Billion, verge of bankruptcy– Lost domestic market share 27 years straight– Flagship vehicle, Z sports car, discontinued

• As of 2006:– 10 new models introduced– Return to profitability– All key financial indicators up significantly over

1999 levels

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Nissan: The 1990s

• Posted losses in 7 out of 8 years in from 1990-1998• Lost 50% market share to Toyota domestically, lost

domestic market share for 27 years straight overall• Keiretsu supplier network consisted of over 1400

different suppliers (all with cross-shareholdings) - unmanageable– 1 factory making 200,000 vehicles annually had six tire

suppliers

• Overpaying by 20-30% for auto parts• Factories and plants operating at 50% capacity• By 1999: US $22 Billion in debt (nearly 40% of total

annual revenues)

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Nissan Motors, Inc.: Financial History

Fiscal 1999 Fiscal 2006

Debt (automotive) Approx. US $22 Billion US $0 (completely eliminated)

Net Sales US $56.4 Billion US $88.7 Billion (+11% increase over 2005)

Net Income loss of US $6.5 Billion US $3.9 Billion

Operating Income US $779 Million US $6.6 Billion

Vehicles Sold 2,404,650 3,483,000

Total Employees 141,526 186,336

Performance background - pre & post Renault merger, NRP, Nissan 180º Plan

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Nissan: Internal Problems

• Complacent management team• Lack of exciting, innovative car designs• Lack of cross-communication between

departments/divisions within the company• Non-productive workers remained on payroll,

under-utilized plant & factories• Dropped production of premier sports car: Z

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Nissan - Renault Merger

• Japanese government would not bail out Nissan, and keiretsu bank would not either

• Nissan courted numerous buyers/merger targets:– Chrysler, Mercedes-Benz, Ford, Renault

• Merger announced March 27, 1999 - Renault would give Nissan $5 Billion cash, take 36.8% ownership stake in Nissan

• Renault sent core management team of 8 executives to Nissan, including Carlos Ghosn

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Carlos Ghosn: Le Cost Killer• Ghosn named new COO,

announced “NRP: Nissan Revival Plan” on 10/18/99

• Goals of NRP:1. Return to financial stability within

one year

2. Within 3 years, reduce debt by 50%

3. Within 3 years, operating margin rise to 4.5% of sales

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NRP & Nissan 180º Plan

• NRP: Oct. 1999 - 2003– Reached 2 out of 3 goals within 1 year– All goals reached within 2 years

• Nissan 180º Plan: 2003-2006– Successor to NRP, more ambitious– Goals:

1. Produce and sell 1 million additional vehicle sales by 2006 as compared to 2003

2. Achieve an 8% operating profit margin3. Reduce total net automotive debt to zero

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Changes to Nissan’s Keiretsu• Reduced number of auto parts suppliers

from > 1400 to six, sold off ownership in nearly all suppliers

• Major supplier cost reductions, 20-30%

• Better economies of scale for remaining suppliers

• Simpler to manage smaller number of suppliers

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Changes to Nissan’s Keiretsu• Establishment of highly-productive

cross-functional teams, enhanced communication and blurred lines of responsibility/increased autonomy

• Foreign leadership team and ownership (now Renault owns ~44% of Nissan)

• Much less reliant on main keiretsu bank for loans and new venture financing

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Results of Changing Keiretsu Structure and Ownership

• Significant debt reduction• Improved operating margins• Drastically improved communications

between divisions• More agile - better able to respond to

customer wants/needs• Several new product offerings (new Z, etc.)• Gained significant new partner in Europe -

Renault

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Macro Trends in Japanese Business Today

• Central keiretsu banks less likely to bail out ailing member firms

• Many keiretsu firms loosening ties with other members

• Foreign leadership, ownership stakes, and partnerships more common

• “Lifetime employment” as a social contract diminishing

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Keiretsu Business Groups - Looking to the Future

• Old goals and ideals of keiretsu no longer compatible with a globalizing market

• Japan already industrialized - no need to exclude FDI or partnerships

• “Lifetime employment” no longer feasible in light of global “hyper-competition”

• Rethink keiretsu structure to raise relative profitability

• Formulate strategic partnerships on mutually beneficial aims, not static keiretsu relationship

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Questions

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