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:
• 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 illequipped to address this increasing competition (cross
shareholdings, preferential inter-network trading, etc.)
Research Methodology
• Primary methodology: case study & historical
• 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
Japan: Number 3 Economy
• 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
Japanese Economy post
1990: Painful Recession
• Slowing macroeconomic growth
• Declining average economic growth rate each
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
Causes for Recession
• Decreased domestic consumer spending
• Domestic economy over-dependent on
• 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
What are Keiretsu?
• Keiretsu is an organizational structure that is
comprised of several aspects:
– Financial - cross shareholdings
– Managerial - exchanging of management expertise, advice,
– Trade - preferential treatment given to partner firms
– Exclusion - keeps foreign competition out of domestic
– Political - tightly interwoven relationships with government
– Social - “old boys network” of presidents and senior
• Six main keiretsu business groups in Japan today,
though many non-KBG companies form structural
relationships modeled after keiretsu
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
– Tight integration with government, exclusive
contracts to rapidly industrialize nation
• Broken up by Allied Occupation after WWII,
re-emerge as keiretsu (minus family
Nissan Motors - Selected
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
• Ideal example of member firm in keiretsu
business group
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
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
• 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)
Nissan Motors, Inc.: Financial
Performance background - pre & post Renault merger,
NRP, Nissan 180º Plan
Debt (automotive)
Net Sales
Net Income
Operating Income
Vehicles Sold
Total Employees
Fiscal 1999
Fiscal 2006
Approx. US $22 Billion
 US $0 (completely eliminated)
US $56.4 Billion
 US $88.7 Billion (+11%
increase over 2005)
loss of US $6.5 Billion
 US $3.9 Billion
US $779 Million
 US $6.6 Billion
 3,483,000
 186,336
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
Nissan - Renault Merger
• Japanese government would not bail out
Nissan, and keiretsu bank would not either
• Nissan courted numerous buyers/merger
– 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
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
3. Within 3 years, operating margin
rise to 4.5% of sales
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
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
• Simpler to manage smaller number of
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
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
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
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
• Formulate strategic partnerships on mutually
beneficial aims, not static keiretsu

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