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
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.) 2
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) 3
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 4
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 5
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 6
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 7
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) 8
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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 10
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 11
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) 12
Nissan Motors, Inc.: Financial History Performance background - pre & post Renault merger, NRP, Nissan 180º Plan Fiscal 1999 Fiscal 2006 ⇓ US $0 (completely eliminated) Debt (automotive) Approx. US $22 Billion ⇑ US $88.7 Billion (+11% Net Sales US $56.4 Billion increase over 2005) ⇑ US $3.9 Billion Net Income loss of US $6.5 Billion ⇑ US $6.6 Billion Operating Income US $779 Million ⇑ 3,483,000 Vehicles Sold 2,404,650 ⇑ 186,336 Total Employees 141,526 13
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 14
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 15
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 16
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 17
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 18
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 19
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 20
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 21
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 22
Questions ??? 23
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