Structural Imperfections in Japanese Automotive Keiretsu Business - - PowerPoint PPT Presentation

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

• rganizational 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

• wnership)

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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 2006 Fiscal 1999 ⇑ US $6.6 Billion US $779 Million Operating Income ⇑ 186,336 141,526 Total Employees ⇑ 3,483,000 2,404,650 Vehicles Sold ⇑ US $3.9 Billion loss of US $6.5 Billion Net Income ⇑ US $88.7 Billion (+11% increase over 2005) US $56.4 Billion Net Sales ⇓ US $0 (completely eliminated)

• Approx. US $22 Billion

Debt (automotive)

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%

• wnership 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

• ne 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 margin
• 3. 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
• ut ailing member firms
• Many keiretsu firms loosening ties with
• ther 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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