HISTORICAL DETERMINANTS OF CONTEMPORARY MEMBERSHIP PATTERNS

Important as the Occupation-induced dissolution of the zaibatsu was, in retrospect it is dear that it was far from the kind of universal overhaul of the Japanese economic system that its initiators had intended. The dis-

solution successfully eliminated the position of the zaibatsu families, dissolved the zaibatsu honsha (holding companies), broke up the trading firms and large manufacturing operations, and swept top management clean in the subsidiary companies. These proved, however, to be only a portion of the networks of connections that held together the various elements constituting the group, and important connections to the past remained. A new generation of executives was selected to replace those who had been forced out, but these people came from middle management in the old subsidiaries and had developed and maintained ongoing personal connections with managers in other subsidiaries extending back to the war and prewar years. Moreover, many were chosen for their new positions by the top executives being removed.

Similarly, while the leading manufacturing and trading houses of the group were broken up (most later regrouped), the group banks were not. These banks had already taken up a position during the wartime period as leading financiers to the group. In his study of financing in the Sumitomo group, Asajima (1984, pp. 109-10) finds that after the mid-1930s, the group commercial and trust banks replaced Sumitomo Honsha and the Sumitomo family as primary sources of external funding, accounting for 32 percent of total funds during the 1937-43 period in comparison with under 1 percent coming from the honsha.^[5] After the war, these banks3/4 still intact-took on the role of filling the power vacuum left by the dissolution of the holding company, a position enhanced considerably by the scarcity of capital during the postwar period.

Another form of continuity was the significant equity interlocks subsidiaries had maintained even before the war. Table 3.4 above, which outlines intragroup holdings in Sumitomo at the time of dissolution, indicates that Sumitomo Bank held 40 percent of the shares of Sumitomo Trust & Banking, as well as 7 percent of the shares of Sumitomo Metal Mining and Sumitomo Metal Industries. Other zaibatsu subsidiaries held significant positions in the Sumitomo Bank itself, as well as Sumitomo Metal Industries, Sumitomo Metal Mining, Sumitomo Electric, Sumitomo Chemical, Sumitomo Heavy Industries, and Nippon Electric-all of the major subsidiaries that were to constitute the core of the newly formed Sumitomo group. Unlike honsha and family holdings, these shareholdings were not eliminated after war and served as a structure around which the groups began reforming. By the mid-1950s, over 15 percent of the shares of core Sumitomo companies were in the hands of other group companies. An executive in the Sumitomo group explained at the time,

If one looks for stable and trustworthy shareholders, one naturally turns to former Honsha subsidiaries. It is not that any specific plan was followed in going ahead with interlocking ownership. It would be more correct to say that things happened in this way out of the desire, among brother-companies, to help each other. [Oriental Economist, April 1955.]

The family metaphor was also used by another executive: "Because one's parents are dead, one is not prevented from continuing as before with one's brothers and sisters. What could be more natural than the brothers and sisters of a family helping each other to keep going as a group?" (Oriental Economist, January 1959). We find the keiretsu emerging out of the structure of existing exchange networks, facilitated by the emerging dominance of the bank as financier to group operations. Thus, when Sumitomo began meeting again in the early 1950s, all eleven of its old first-line subsidiaries, now each independent operations, took part in the first meeting.

Patterns of Expansion

The membership roles of the six big intermarket groups expanded rapidly during the 1960s and 1970s, before leveling off in the early 1980s. Core membership, as defined by shacho -kai participation, increased from 137 to 193 for the period 1966-89. This net gain of 56 participant represents an increase of 41 percent over this twenty-three-year period. If we include six firms that were eliminated due to intra-group mergers, then 62 new memberships in total were actually created during this period. A listing of new members is shown in Table 5.1, by group.

The newer bank groups of Dai-Ichi Kangyo and Sanwa were far more aggressive at expanding than the other four groups, accounting for more than two-thirds (68 percent) of total new core memberships. Growth in the Dai-Ichi Kangyo group was accelerated by the consolidation of the group bank under the 1971 merger bringing together the Dai-lchi and Nippon Kangyo. Both groups have been less limited by historical, and particularly zaibatsu, connections and have actively sought to grow to a scale comparable to that of their competitor groups.

The complete list of membership initiates from 1966 to 1989 is shown in Table 5.2. What all sixty-two companies on this list have in common are extensive and longstanding ties with their group before becoming official members. Prior to joining the shacho -kai, each had group financial institutions (especially the group bank) as a leading source of capital,

had group companies among its leading shareholders, or, most frequently, had both.^[6]

Of the twenty companies for which Keiretsu no kenkyu provides detailed information, all retained the group as a leading source of capital before joining. An average of 25 percent of the capital borrowed by these firms in 1966 came from financial institutions in the group each eventually entered.^[7] In addition, 13 percent of the shares of these same companies were held by other companies in the same group. Several huge enterprises that had strong associations with the prewar zaibatsu but have developed relatively independently since the war decided during this period to participate in meetings of the newly reformed groups-notably Toyota and Toshiba of the Mitsui group.

In several cases in which ties to the group had previously existed, ties to another group were equally strong if not stronger. This is uncommon and is a sensitive situation for firms to negotiate. The working rules of alliance in Japanese business custom are clear on the point that old relationships are not readily dropped. After joining the new group, therefore, these companies maintained some form of association with their old groups. The following three examples illustrate the point:

1. The Sumitomo group has collectively remained a more important source of borrowed capital for Kubota than has the Fuji group, on whose shacho-kai it currently sits (13.8 percent as opposed to 11.9 percent, according to Industrial Groupings in Japan, 1982), though loans from

the Fuji Bank have risen so that they now constitute the identical mount as those from Sumitomo Bank.

2. C. Itoh, which has gradually been shifting toward the Dai-Ichi Kangyo group, has also maintained its financial ties with the Sumitomo group as a whole. While C. Itoh now uses the Dai-Ichi Kangyo Bank as its single largest creditor, Sumitomo Bank retains the number-two position as equity holder and number-three, after Sumitomo Trust and Banking, as lender.

3. Kobe Steel has also become a new member of the Dai-Ichi Kangyo Bank group but has maintained its membership in the Sanwa group and continues to use Sanwa as its leading source of borrowed capital. Like Kubota, Kobe Steel has equalized its loans from its two main banks, increasing borrowing from Dai-Ichi Kangyo to the point of parity with those of Sanwa Bank.^[8]

In a number of cases, new members are closely linked as affiliates of existing member firms. This is most strikingly seen in the case of a trio of firms affiliated with the Hitachi subgroup-Hitachi Chemical, Hitachi Metals, and Hitachi Cable. Each has 51-56 percent of its shares held by Hitachi, Ltd., as of 1990 and each has followed its parent concern into the Sanwa group. Other examples of satellite companies becoming formal members under the aegis of a parent company are Mitsubishi Motors (26 percent owned by Mitsubishi Heavy Industries), Sumitomo Bakelite (21 percent owned by Sumitomo Chemical), Sekisui House (21 percent owned by Sekisui Chemical), and Kawasho (25 percent owned by Kawasaki Steel).

The Permanence of Core Positions

In no cases have companies that are presidents' council members left their council for any reason, except for mergers and resulting company dissolvements. This indicates an extraordinarily high degree of stability in core group membership, as these positions become de facto permanent seats for their occupants. In part this stability reflects the prestige associated with affiliation, which firms are unlikely to want to give up. But it also reflects strong pressures within the larger business community to maintain "loyalty" toward one's alliance partners even if it is not in one's immediate interest to do so. The durability of memberships also implies something else: group companies rarely fail. That not one of these nearly

two hundred firms has left its group because of bankruptcy is a striking record and points to the important protective function the group plays for its members, discussed later in this chapter.

In its longevity, the keiretsu conforms to the image of alliances that comes out of anthropological field studies suggesting long-term social relationships that link kinship groups over generations (e.g., Dumont, 1957). This image is quite different from that of another social science metaphor, the coalition, as it has developed in contemporary game theory (Schotter, 1981) and organizational theory (Cyert and March, 1963). Coalitions, particularly in their game theory formulation, are viewed as a relatively fluid set of relationships established and reestablished among actors in a continual search for advantage, responding to the logic of strategic self-interest. Self-interest is evident too in the alliance but is tempered by the central role played by group history-ties of mutual obligation as they have developed over extended periods of interaction. More transient coalitions may, of course, arise within alliances-as, for example, when some firms push for a group-wide project that other group members oppose-but these are set within the context of a basic acknowledgment of the group as a perpetually ongoing social unit.

This view of the keiretsu stands in contrast to that provided in some other accounts of the alliance formation process in Japan. Clark (1979), for example, claims, "It is this mutability of the relations between companies, the formation of and disengagement from alliances, and the gain and loss of independence, that most conspicuously differentiates any of these groups from the centralized conglomerate" (p. 87). Although this view might accurately capture certain strategic alliances among Japanese firms in areas such as high technology development, it does not for the kind of keiretsu relationships studied here. Unlike many large firms in the United States, which actively buy and sell business units in response to perceived profit opportunities or changes in corporate strategy, the keiretsu has proved to be a remarkably durable institution.