Japan:
Vertical Integration, Keiretsu, and Government Coordination

In 1952, when the Japanese became independent, they set a goal, embodied in the motto, "We will match the standard of living in the West." At that time, over half of the Japanese population was engaged in subsistence agriculture, and yet, by improving their output-to-input ratio, they were able to improve their productivity. Since then, the Japanese have moved from subsistence agriculture into light manufacturing, into heavy and chemical goods, and into the higher-technology areas. Today, as a result of an innovative corporate structure and governmental industrial orchestration, the Japanese have positioned themselves to become the dominant suppliers of information technologies to the world.

Japan today has a different, more sophisticated structure to its economy than our own. The major Japanese firms producing computers are all vertically integrated, meaning that a strong presence is maintained across the spectrum of computing machinery—from micros to supercomputers—and in all allied technologies: microelectronics, networking,

consumer electronics, etc. In contrast, there is only one vertically integrated company in the computer field in the U.S.—IBM.

Table 2 illustrates this situation. The three leading Japanese supercomputer firms—NEC, Fujitsu, and Hitachi—are integrated all the way from consumer electronics to microcomputers, minis, intermediates, mainframes, and supercomputers. All are large-scale producers of semiconductors. In contrast, U.S. firms producing semiconductors are either "merchant" suppliers, with the bulk of their sales and earnings coming from the sale of semiconductors on the open, merchant market, or "captive" suppliers, such as IBM and AT&T, which produce semiconductors only to satisfy internal demand. Further, when previously successful merchant suppliers have been purchased and merged into large U.S. companies to become both captive and merchant suppliers, they have uniformly gone out of the merchant business.^[*] Usually they have shut down completely. No U.S. captive supplier has become a successful merchant supplier to the market. Japanese firms, however, do both successfully. They are captive suppliers to themselves, and they are merchant suppliers to the market. This suggests something amiss in our system or between our system and that of the Japanese.

[*] AT&T has since withdrawn from the manufacture of mass-market semiconductors, and many U.S. firms were driven out of the dynamic random-access memory chip business between 1985 and 1987.

Japanese firms are not only integrated across virtually every aspect of semiconductors and computers but are also prominent members of Japanese industrial conglomerates, or keiretsu . The major Japanese keiretsu groups are each structured around a major bank.^[*] The Bank of Japan supports these banks with differential interest rates for loans to "target" industries.

From their keiretsu structure, Japanese corporations get diversification, risk reduction, and a lower cost of capital, which allows them to maintain a favorable output-to-input ratio. Additionally, while competition in their home market among the keiretsu forces reduced costs and improved quality, these firms will cooperate when operating in foreign markets or when facing foreign firms in their home market. Should they temporarily fail to cooperate, the Japanese government steps in and reestablishes "harmony," especially in their dealings with outsiders, or gaijin . Thus, the Japanese have not only a team but a team with a strategy.