Master Thesis Msc IB&M
Is there an Asian way of organizing supplier
networks in the auto industry?
Supervisor: Dr. Miriam Wilhelm Dr. Henk Ritsema
Content
ABSTRACT ... 4
1 INTRODUCTION ... 5
2 LITERATURE REVIEW ... 8
2.1 ASIAN &WESTERN CAPITALISM ... 8
2.2 THE JAPANESE INSTITUTIONAL ENVIRONMENT AND KEIRETSU ... 9
2.2.1 Japanese institutional environment ... 9
2.2.2 Keiretsu—Japanese business group ... 10
2.2.3 Japanese automobile industry development and Keiretsu ... 11
2.3 THE KOREAN INSTITUTIONAL ENVIRONMENT AND CHAEBOL ... 14
2.3.1 Korean institutional environment ... 14
2.3.2 Chaebols—Korean business group ... 15
2.3.3 Korean automobile industry development and Chaebol ... 16
2.4 THE CHINESE INSTITUTIONAL ENVIRONMENT AND QIYEJITUAN ... 18
2.4.1 Chinese institutional environment ... 18
2.4.2 Qiyejituan—Chinese business group ... 19
2.4.3 Chinese automobile industry development and Qiyejituan ... 20
3 RESEARCH DESIGN ... 21 3.1 METHODOLOGY ... 21 3.2 CASE SELECTION ... 21 3.3 DATA COLLECTION ... 22 3.3.1 Toyota ... 22 3.3.2 Hyundai... 25 3.3.3 FAW Group ... 27 4. COMPARISON/DISCUSSIONS ... 28
4.2 DISCUSSION AND CONCLUSIONS ... 34
5 IMPLICATIONS ... 35
REFERENCES: ... 36
APPENDIX ... 41
FIGURE 1:CHAEBOL STRUCTURE ... 41
FIGURE 2:KEIRETSU STRUCTURE ... 41
Abstract
This paper aims at finding an Asian way of organizing supplier networks in auto industry by comparing different features of Japanese keiretsu, Korean chaebol and Chinese qiyejituan. Utilizing the varieties of capitalism that the various institutions of capitalism have an important and direct effect upon corporate governance, I suppose that there may be an Asian way of organizing supplier networks in auto industry different from the one of Western countries. Then I select three case firms representing three types of business groups to compare in five characteristics. However, the result shows that there is no an Asian way of organizing supplier networks found by the substantial differences within three Asian business groups and insignificant similarities.
1 Introduction
During 1990s, Asian countries have made great and rapid economic gains. Tu, Kim and Sullivan (2004) state that many Asian firms outperformed their worldwide counterparts in 1990s. The rapid growth of Asian countries poses the intriguing question whether the organizational structures of business groups were in fact the source of their rapid economic gains. Business groups are alliances of firms, linked together by varying degrees of legal and social connection, that transact in several markets under the control of a dominant, or core, firm (Keister, 1998). Following the success at enhancing the financial performance and efficiency of the nation’s enterprises of Japan’s keiretsu and Korea’s chaebol, policy makers studied keiretsu and chaebol in preparation for formation of business groups in China (Keister, 1998). Some researchers have demonstrated the importance of diversified business groups in the development of companies. Leff (1978) depicts that business groups are common as an interfirm organization in developing countries due to market imperfections. Chakrabarti, Singh, and Mahmood (2007) claim that business groups tend to be more influential in emerging economies. They further explain that business groups attempt to overcome inefficient market or institutions in emerging economies by diversifying broadly through the creation of networks of related firms (Chakrabarti et al., 2007).
The growth of the Japanese automobile industry is the most visible indicator of the Japanese economic developments. Compared with the late 1940s when just around 20000 units of vehicles were manufactured yearly in Japan, over 13 million vehicles were manufactured in 1991, making it the largest in the world (Shimokawa, 1994). The rapid increase in the international competitiveness of the Japanese automobile industry since 1950s is an outstanding achievement (Schimokawa, 1994). Toyota Motor Corporation, the leading player in the global automobiles and components industry, accounts for 8.8% of the industry’s share (Datamonitor, 2010). It sells its vehicles in more than 170 countries and regions worldwide. Toyota has outperformed the other big manufacturers of European and the United States market such as General Motors Corporation (6.5%), Ford Motor Company (5.8%) and Daimler AG (5.5%). Prior researchers stated that two broad reasons for this success of Japanese automobile industry: the flexible production system created by Toyota and the Keiretsu style automobile parts contracting system (Sambharya and Banerji, 2006). Some researchers also state that it is exactly the Keiretsu, Japan’s unique business group structure that was the main cause for Japan recovering at a fast speed from economic crisis (Tu, Kim and Sulliven, 2002; McGuire and Dow, 2008; Sambharya and Banerji, 2006).
and Korea made the great economic growth respectively. Keiretsu from Japan and chaebol from Korea are created in the background of Asian countries and seem to have played an essential role in their business development. Compared with the Japanese automobile industry and Western countries, automobile firms in China are less competitive. In the early 1980s, China’s auto industry opened to foreign investors when its capability in the passenger vehicle sector was weak (Zhao et al., 2005). However, there are 21 qiyejituan in the Chinese automobile industry by 1997 which accounted for more than 90 percent of total Chinese automobile firms and revenues (China Automobile Industry Yearbook, 2003). Due to China’s entry into the WTO, Chinese auto firms have faced competitive challenges from MNEs since the late 1990s. Zhao et al. (2005) state that firms have undertaken a couple of restructuring plans within qiyejituan in response to the rising competitive pressure from outside. The restructuring obtains multiple successes in the development of Chinese auto industry in the end.
In the paper, I employ the varieties of capitalism (VoC) perspective which is helpful to understand the relationship between national institutions and corporate behavior in Asia’s dynamic econcomic development (Carney et al., 2009). The general underpinning is that each variety of capitalism will shape a typical type of firm which is an organization form that fits the particular institutional environment best (Carney et al., 2009). Hall and Soskice (2001) portend that VoC is best suited to be an institutional theory of firm strategy to explain institutional foundations of comparative advantage. Hall and Soskice (2001) introduce the competitive advantages of firms from liberal market economies (LMEs) such as UK, US, and Australia, and coordinated market economies (CMEs) such as Germany, Japan, and the Scandinavian countries. Due to the unstable institutional environment that Asia’s economies are at various stages of emergence and transition, Asia doesn’t easily belong to the LME-CME dichotomy with the exception of Japan. Some researchers describe Asian capitalism in stereotypical, singular, and undifferentiated terms (Carney et al., 2009). Krueger (1994) argue that Asian capitalism could be defined by its distinctive relational contracting among politicians, state officials, and elite entrepreneurs. According to the VoC theory, I suppose that there should be an Asian way of corporate strategy to be present. Therefore, the main research question of this thesis is formalized as “Is there an Asian way of organizing supplier networks in auto industry?” Based on the main research question, several sub-questions as follows need to be explained:
1. What are the features of Japanese business group (i.e. keiretsu), Korean business group (i.e. chaebol) and Chinese business group (Qiyejituan) respectively?
2 Literature review
This chapter reviews the literature on business groups from the institutional perspective, previous studies on business groups in Japan, Korea and China respectively, and the influence of business group on the development of auto industry as well.
2.1 Asian & Western capitalism
According to Carney et al. (2009), the various institutions of capitalism have an important and direct effect upon corporate governance. Hall and Soskice (2001) have pursued an approach termed as “Varieties of Capitalism” to examine cross country differences in political and economic organizations. Soskice (1942) treats ‘the VoC approach as a political economic analytic framework to understand how national economies work and what degrees of freedom they may have in a global economic environment and in a world of rapid technological change.’ However, globalization has progressively reduced state capacity. Therefore, VoC focuses on the company rather than the state and cares about how the company solves problems relating to the supply of skills, workforce cooperation, technology transfer, access to finance and so on (Soskice, 1942). Here the key institutions are the education and training system, labor market regulation, the institutions of technology transfer, and the corporate governance system. Because these institutions are principally at the national levels, VoC has studied national models (Sockice, 1942).
policies, including higher taxes, larger welfare states, and more state intervention in the economy (Campbell and Pedersen, 2007).
Hall and Soskice (2001) divide CME into three sub-types: ‘industry based (or intra-sector) coordination (typically Northern European based on intense intra-sector cooperation); group based coordination (Japan, Korea, where cooperation is based within a family of companies); and state-led coordination (France and Southern Europe, where senior industry managers have strong connections to the state). They further explain that governments may play three roles in all three sub-types of CMEs: facilitating deliberative and coordination processes between different actors; facilitating supporting strategies that emerge from these processes; and actively promoting particular coordinated strategies (Dorward et al., 2005). The arguments of Hall and Soskice are utilized by some researchers to explain the crucial role of active state coordination in ‘governed markets’ in the development of the East Asian Tigers, with governments providing strong, stable and consistent leadership and coordination, and strong links between firms, financiers and government (Dorward et al., 2005). CMEs show a sharp contrast in which coordinated business plays an important role in maintaining the institutional framework. They offer the education and training system to develop specific skills and strongly networked technology transfer between companies, sector research institutes, technical universities, and so on (Soskice, 1942) Soskice (1942) states that CMEs capitalisms like Japanese capitalisms have long operated differently to the Anglo-Saxon versions like the US.
2.2 The Japanese institutional environment and Keiretsu
2.2.1 Japanese institutional environment
Japan is an economically advanced country with well-developed infrastructures and business environment. It is ranked as the 9th in the most recent Global Competitiveness Report 2011-2012 (World Economic Forum, 2011). As mentioned before, in Japan, banks and other financial institutions constitute the major players in their external capital markets and play an important role in firms’ corporate governance systems.
In Japan, the bank-centered system has an advantage over market-centered system for development of markets for corporate control by lessening hostile takeovers (Hoshi, Kashyap, and Scharfstein, 1990). Hoskisson, Johnson, Yin and Wan (2001) indicate that firms have a lower bankruptcy risk for banks and other financial institutions; therefore, they are willing to obtain high debt levels so as to help member firms with financial distress. Suzuki and Wright (1985) state that Japanese managers believed that massive investment will contribute to high cash inflows in the future. However, it is difficult for companies seeking to maintain their market share to accumulate enough capitals. In the end, Japanese firms turn to the external funds: bank funds (Suzuki and Wright, 1985). On the other hand, banks in Japan
In Japan, it is seldom to find layoffs in distressed firms due to the practice of lifetime employment (Hoskisson, Johnson, Yin and Wan, 2001). Lincoln, Gerlach and Takahashi (1992) state that job-hopping is rarely seen among business partners, particularly between banks and their client firms or between larger firms and their suppliers. Within keiretsu groups, excessive diversification leads to hierarchical overcapacity. The other way around is that the practice of lifetime employment requires continuous corporate expansion and diversification which results in overstaffing (Hoskisson, Johnson, Yin and Wan, 2001). The financial sector of Japan is under the control of so-called “Big Band” transformation announced in 1996. The Big Bang concerns three key fields: cross-border capital flows, securities brokerage business and financial product development, and merging of commercial and investment banking and insurance (Ozawa, 2000).
2.2.2 Keiretsu—Japanese business group
Lincoln and Gerlach (2004) state that the fluctuation of Japan’s business organization forms are in the parallel with the Japan’s country economic fortunes. Between 1950s and early 1970s, Japan was growing rapidly but still lagged behind Europe and the United States. While in the 1980s, Japan emerged as the equal, if not the superior, of the West in an array of business and technological terms. And it is argued that Japan’s unique patterns of industrial organization have evolved to improve performance with substantial efficiency (Lincoln and Gerlach, 2004).
manufacturing firm and its key suppliers at the center of the network (MaGurie and Dow, 2008). It consists of a core or parent firm with several affiliated firms that generally operate in one industry. Then, it seems that many of these vertical keiretsu are part of a horizontal keiretsu. Keiretsu is a network without holding companies or home office or family of owners sitting at the top. Even if they do have leaders, like the central banks and trading companies in the horizontal group and the parent manufacturers in the vertical keiretsu, the minority shareholders and periodic personnel weaken the link of firms together to give any member full control over the network (Lincoln and Gerlach, 2004).
In the horizontal keiretsu, each firm typically represents a separate industry sector. Historically, six principal horizontal groups (“the big six”) dominated the landscape of Japanese economy after World War II. Among the big six, three are direct descendents of the former zaibatsu- Mitsui, Misubishi, and Sumitomo. These three were centrally administered in the pre-war period by prominent families. The other three are the post-war bank-centered groups because their main structural feature is dependence on a main city bank: Dai-Ichi Kangyo, Fuyo and Sanwa. Lincoln and Gerlach (2004) mention that in common economics the term horizontal refers to relations among competitors within the same industry. However, in the horizontal keiretsu, the horizontal means that the social quality of the relationship is considered horizontal. Lincoln and Gelarch further state that although in the earlier period of Japanese economic development the big-six groups played useful role, the horizontal groups have no real significant economic results (Lincoln and Gerlach, 2004).
On the other hand, vertical supply keiretsu are pyramids of large manufacturers, their suppliers, and suppliers’ suppliers. Like other distinctive institution of Japanese economic society, the keiretsu have been given the competitive advantage on Japan in the world markets. The groups can reduce cost and risk for member firms due to the trust and reliability in the communication of business transaction. Japanese automobile industry is organized as a typical vertical keiretsu (Sambharya and Banerji, 2006). Lincoln et al. (1996), Tabeta and Rahman (1999), and McGurie and Dow (2008) as well claim that inter-corporate holdings in vertical keiretsu have a control orientation. The core firms exercises direct and unilateral surveillance with the extent of control in accordance with their transactional and equity ties to member firms (McGurie and Dow, 2008). In Japanese auto industry, automotive manufacturers hold greater equity of suppliers who dedicated to them a large part of their production and those whose supplies are more critical to the firm (McGurie and Dow, 2008).
2.2.3 Japanese automobile industry development and Keiretsu
further divided keiretsu into three broad categories: corporate groups, financial centrality and industrial interdependence. In addition, the Japanese auto industry has been structured in the model of industrial interdependence keiretsu known as vertical keiretsu (Banerji and Sambharya, 1996). Several automakers such as Toyota, Honda, Nissan and Mitsubishi organized by following a structure of keiretsu as the core firms and have numerous affiliate firms as their suppliers (SambharyaandBanerji,2006). Among these firms, they have both cross-ownership of equity and non-financial relationships. And the member firms in Keiretsu emphasized the close cooperation between them to coordinate production and they are normally situated in close geographical proximity to each other. Similarly, Banerji and Sambhary (1996) indicated that for most vertical keiretsu their member firms all belonged to the same industry but carried out different functions along the industry’s value-added chain. The aim of the member firms is to create a win- win benefit and the benefit for themselves. Gittelman and Dunning (1992) argue that the close cooperation between keiretsu member firms is the major cause for the success of Japanese auto manufacturers in international competition.
It shows that the member suppliers of the major Japanese auto assemblers have been hierarchically managed in three tiers according to the type of products they supplied (Banerji and Sambhary, 1996). The first-tier suppliers produced finished components; and the second-tier and third-tier did business with the level of suppliers. Furthermore, the first-tier suppliers are divided into two categories: group firms and independent firms. To investigate the model of Japanese automobile industry structure, the important study normally concentrated on the automobile assemblers and first-tier suppliers. The group firms have close ties with the major assemblers through the exchange of information, personnel, capital and etc. In most situations, the group firms provided key components and interior furnishings that are directly related to the products design. Independent firms had no so close ties with major assemblers like group firms. Normally, they don't provide exclusive service to single auto assemblers, and are often members of multiple keiretsu.
As the rapid development in computer and communication technology, the forms of social and economic organization are changed. Lincoln and Gerlach (2004) argue that the network thinking has influenced the business world that companies everywhere began to think their relationships with suppliers, customers, banks, shareholders and other stakeholders. They do rethink the relationship among them as well. For some industries, firms endeavor to form alliances within one industry or across industries in order to develop new technologies to make more opportunities. At the same time, for others industries, the scale and scope of business activities has grown so broad that no firm can handle all the steps of business activities and they cooperate together to survive.
seemed to provide superior monitoring and governance at lower cost by concentrating ownership to give some close business partners the power to monitor and control the network. Lincoln and Gerlach (2004) also claim that “keiretsu affiliation is a very useful thing to have when a company finds itself in dire financial straits”.
Edward and Samimi (1997) argue that vertical keiretsu emerged as a means for Japanese firms to expand their production in the context of scarce financing in 1950’s. McGurie and Dow (2008) suggest that economic context is the critical factor to investigate the formation of keiretsu in Japan. They further explain that Japanese Keiretsu emerged in a specific economic and institutional context where firms meet financial and institutional challenges. Vertical keiretsu could provide stable financial stakeholders during periods of economic decline and access to stable supplier and distribution networks to promote the development and growth (McGuire and Dow, 2008). Many researchers document a significant decline in the role of bank financing and increased reliance of non-bank financing (McGuire and Dow, 2008). McGuire and Dow (2008) mention that the intensified regulatory pressure is the main factor to reduce reliance on bank financing. Based on this reasoning, the increased high costs incurred for bank support exacerbate the dissolution of banking ties and financial pressure on Japanese banks may impede the ability to work with troubled firms. In the context of under-performing economy and intensified regulatory pressure, Woo (2003) discusses that group affiliated banks work on a more effective lending strategy than independent banks regardless of regulatory pressure.
In addition, McGuire and Dow summarize several benefits of vertical keiretsu affiliation such as oversight by core firm, reduced governance problems, lower costs and etc. Brief benefits are listed in the Table 1 below. Further,
McGuire and Dow (2008) discuss that vertical group membership could provide suppliers a stable market for their products and the access to the technical, managerial or financial assistance from core firms.
In Japan, the firewalls between competitors in the same industry are respected higher than others. Keiretsu in Japan constrains the degree to which a company’s suppliers and distributors serve its competition. And the keiretsu boundaries regulate the lines of competition and cooperation in the Japanese economy. And some researchers show that “Toyota’s own reliable standing as one of Japan’s most profitable corporation, Toyota kyoryoku-kai (cooperative association) supplier are likewise more profitable than the industry average. Interestingly, much research on the efficiency of the vertical keiretsu form the business markets seem to derive from Toyota case. Take a example, the Toyota suppliers such as Denso or Aisin Seiki might sell to Honda, Mazda, or Isuzu but never to Nissan, nor would Toyota purchase electronic components from Nissan affiliate Hitachi. Keiretsu affiliations heavily shape the business activities about which companies compete with, contract with, or borrow from. Some researchers argue that the distance and location are also powerful forces in the structuring of business networks. And the different cultures and competitors also contribute to this localization of networks a lot (Lincoln and Gerlach, 2004). The specificity of networks’ localization gave Toyota suppliers easy access to one another and to the headquarters and assembly plants of the parent firm. Toyota’s strategy since the mid-1980s was dispersing production both within and outside Japan which erodes the traditional system. The Toyota case also reflects the vertical keiretsu structure of this industry that the control from major auto assemblers to the firms in a variety of industry with whom they do business.
2.3 The Korean institutional environment and Chaebol
2.3.1 Korean institutional environment
During the past several decades, the government in Korea has intervened extensively in the economic development. There is a saying called ‘Korea, Inc.,’ which describes the situation in Korea (Green, 1992). This testifies the importance of the state in the development of economy. In the early stage of a country’s economic development, it is almost impossible to raise funds through domestic sources due to the undeveloped internal economic environment (Hoskisson et al., 2001). The Korea’s government utilized its control of the banking secotor to allocate 50-70% of available domestic credit (Green, 1992). The government could offers funds to strategic, export-oriented or heavy secors. Firms which receive the support from the government diversify their business portfolios, and grow into big business groups and vice versa.
cars in a half million-unit new car market. On Korean road, 99.9% of the cars are Korean made. This forced Korean car makers to learn and develop from their mistakes. The high volume of Korean cars sold with high domestic prices also could afford the expense of exports.
Hoskisson et al. (2001) state that due to the backwardness of external capital markets in the Korean economy, the internal financing was regarded as the essential method to fund business groups. For example, in Korea, once a subsidiary was established in chaebol groups, equity or working capital could be provided by subsidiaries (Hoskisson et al., 2001). In Korea, financial institutions prefer to choose large, diversified firms to specific or small- and medium- sized ones. Hoskisson et al. (2001) illuminate that the size and diversified structure of business groups could guarantee high-quality human sources. Chaebol groups could provide a number of opportunities for promotions and career development by diversifying into different areas (Hoskisson et al. 2001). However, the absence of external labor markets in Korea inhibits starting new businesses due to the lack of senior managers from outside (Kim et al., 2000). In Korea, chaebol groups have the advantage of accumulating and sharing financial and human resources which are of help for chaebol groups to enter into many sectors and obtaining more opportunities (Hoskisson et al. 2001).
Due to many assemblers in markets with limited demand resulted in short production runs, high costs and huge over-capacity, the Korean government reduced the number of assemblers and sought to establish a large business group in 1989 (Green, 1992). A characteristic of Korea’s industrial structure is the synergetic relationships between member firms within the chaebol. The entire operation is highly controlled and cooperated (Green, 1992).
2.3.2 Chaebols—Korean business group
the organization, even though they might be less capable than professional managers” (Change, 1998). Only one exception is the Daewoo Group where family members have never participated in the management of the enterprise except of the founder’s wife (Change, 1998). Secondly, in South Korean, schools are very important. The schools from with one person graduated will influence an executive’s career success. Trainees graduating from prestigious universities do have a chance to enter chaebol groups (Chang, 1998). Moreover, the regional relationship also strongly influences the management system in Korean. This feature of chaebol groups shows that top executives of many chaebol groups are from the same region like the founders (Change, 1998). Last but not least, Chang (1998) declares that chaebol groups has no possible way to be established without the support of government and political leaders even though South Korea is a capitalist country.
According to Tsui-Auch and Lee (2003), the chaebol were the largest form of family- controlled business group in the world. Chaebols are the unique corporate system in South Korea and produce a larger portion of Korean GDP and consists of many related firms like those in Japan. Yoo and Lee (1987) stated that, due to huge size of the chaebol, they hired managers from the top Korean universities and recruited them through formal procedures. However, the top management positions were often allocated to the owner’s family members. In other words, even though the firms were run following the model of a managerial enterprise, the distribution of power was centralized in the hands of the owner’s family (Tsui-Auch& Lee, 2003). Meanwhile, Yoo and Lee (2001) list three features of Korean Chaebol: self-made founders, management by family and close government relationships.
The chaebol in Korean has experienced rise, fall and restructured over time. In the early stage of Korean economic development when external markets were undeveloped, the chaebol’s ability of transferring and sharing financial resources, human resources and know-how technologies across firms played an essential role in their rapid growth (Tsui-Auch& Lee, 2003). According to Ungson, Steers and Park (1997), the 30 largest chaebols accounted for 40% of Korea’s total output by 1996. Amsden (1989), Chang and Hong (2000,2002) argued that the chaebolb as been regarded as the driver of the unprecedented success of the Korean economy due to their abilities in transforming from exporters of cheap products to major global players.
2.3.3 Korean automobile industry development and Chaebol
10 Korean business group (chaebols) were ranked in “The Fortune International 500” list. And Hyundai became the largest exporter of automobile to Canda in the same year (Yoo& Lee, 1987). Yoo& Lee (1987) argue that although there were several other reasons to contribute to the rapid economic growth of Korea, the efforts of business group (chaebols) has been the real catalyst for Korean economic growth. And also according to the report by the Korea Federation of Small Business (KFSB), the 20 largest companies listed in 1983, 15 out of 23 were owned by the 10 largest Chaebols (Yoo& Lee, 1987). Chang and Choi (1998) find that chaebol groups outperform nonchaebol firms through the study of 182 publicly traded companies from 1975 to 1984.
Chaebol emerged as the method to secure funds, access to foreign technology, resources during the underdeveloped domestic economy market (Kim, Hoskisson, Tihanyi and Hong, 2004). In the early stage of Korean economic development, South Korea experienced a period of lacking adequate resources, experience, and market institutions. The government tended to seek rapid growth by building up some strategic sectors for the concentration of scarce resources. In the period of the underperforming economy in South Korean, chaebol played a critical role in promoting the rapid growth with the ability to transfer and share financial resources and etc. across subsidiaries (Kim, Hoskission, Tihanyi and Hong, 2004). Moreover, the Korean government provided chaebol groups with preferential policies like low-cost loans to compete globally. (Campbell II and Keys, 2002). However, Campbell II and Keys (2002) mention that the support of government was concentrated on several top chaebol groups. Simultaneously, Yoo and Lee (2001) also show that many chaebol groups were formed based on various support plans by the government.
A detailed examination of the history of chaebol groups shows that Korean chaebols are categorized into three parts: the late 1950s, the 1960s, and the 1970s. Hyundai, as the representative chaebol group of the phase of late 1950s, was built up with the help of the government such as preference in taxation and finance. Chaebol groups in the second phase of the 1960s were formed due to the incorporation of foreign loans in a couple of five-year plans such as Hanjin and Sangyong. Last phase in the 1970s, chaebol groups Daewoo came about during the economic boom (Yoo and Lee, 2001).
2.4 The Chinese institutional environment and Qiyejituan
2.4.1 Chinese institutional environment
Hoskisoon, Johnson, Yin and Wan (2001) argue that due to the dominance of government ownership in most emerging economics such as Russia, Latin America and Asia (especially China) a variety of approaches have been utilized to facilitate economic transition through privatization programs. In Russia, Latin America and Asia (especially China) adopted restructuring which primarily consist of privatization programs (Hoskisson, Johnson, Yin and Wan, 2001).
In privatization program, China has taken a gradual approach other than the outright approach took in Russia and Argentina and other countries (Hoskisson, Johnson, Yin and Wan, 2001). Accompanying with the State Enterprise Reform program formed in 1978 during implementing gradual approaches, the central planning regime has been gradually disassembled and the government has weakened its role in influencing economic changes and has to accept more private ownership of firms. Hoskisson, Johnson, Yin and Wan (2001) point out that considering the China’s cultural mentality and institutional environment the gradual approach has been working well during the privatization program. Murrell and Wang (1993) show that in transitional economies such as that of China the gradual approach is more realistic.
Furthermore, the government at all levels keeps the bureaucratic control in privatized former SOEs (state-owned enterprise) in China. Besides that, the ideology of keeping employed and the danger of social unrest caused by massive unemployment have made the government hard to carry out large-scale privatization (Hoskisson, Johnson, Yin and Wan, 2001). At the same time, Chinese SOEs have been with so heavy social welfare burdens that make it much harder for the government engaging in large privatization program to weaken its role in economic exchange (Lin, Cai and Li, 1998). As a consequence, a number of Chinese SOEs have been organized into business groups because of the lack of soft infrastructure mentioned before (Hoskisson, Johnson, Yin and Wan, 2001).
2.4.2 Qiyejituan—Chinese business group
According to the NSBC (National Statistics Bureau of China), a Qiyejituan consists of legally independent entities that are partly or wholly owned by a parent firm and registered as affiliated firms of that parent firm (Ma & Lu, 2005). Furthermore, the State Administration for Industry and Commerce (SAIC) provides a more quantitative definition: to qualify as a Qiyejituan, the core company should have the register capital of over 50 million yuan (US $ 6 million) and at least 5 affiliated companies, and the total register capital of the core and other affiliated companies should be over 100 million yuan (US $ 12million).
According to Ma & Lu (2005), business group in China is similar to many other countries’ in several terms. First, group member firms are legally independent. Then, the member firms are closely tied by various relationships. Third, Qiyejituan member firms operate in a more or less cohesive way. Chinese government has observed that keiretsu has played an essential role in Japan’s postwar recovery and chaebol has created the tremendously development to Korea’s “Miracle of Han River”. For several years, Chinese officials have been learning about keiretsu and chaebol. Chinese firms run their business in parallel with their counterparts in Japan and Korea. And they form their own business group. Ma & Lu (2005) also mentioned that the business groups, in these three countries played a dominant role, or at least partly acted on Korea’s 1997 financial crisis, Japan’s 1990 economic bubble, and China’s endless triangular debts, respectively.
According to Ma & Lu (2005), there are two prominent features existing in Chinese business group. One is the type of enterprise ownership system that while groups member companies in other countries are private, groups in China are state-owned and non-state-owned. The other is that Chinese business groups are more focused than those in other countries. There are four types of enterprise ownership systems: state, collective, private, and foreign-invested ones. Normally, the business group is classified as stated-owned if the core enterprise or parent company is a state-owned enterprise. Similarly, non-state-owned one is that its core company or parent company is a collective or private entity. However, foreign-invested companies are usually not belonged to be Chinese domestic firms.
An interesting phenomenon in Chinese business groups is that Chinese state-owned groups are more focused than their counterparts in other countries. Some scientists argue that in planned economy system Chinese planners viewed state-owned factories as both production and social welfare units. And their missions were to be the leading players and top national company in their own industries.
2.4.3 Chinese automobile industry development and Qiyejituan
China’s auto industry opened up the restrictions on foreign investors in the early 1980s. And China’s auto industry is the first among china’s industries to restructure through the formation of business groups (Marukawa, 1995). At that time, the productivity of the automobile industry was extremely low (Zhao et al., 2005). The statistics shows that Chinese labor productivity was only 1/83 that of Japan’s (Marukawa, 1995). The auto industry is viewed as a pillar industry by the Chinese government. The government creates policies to develop local R&D capabilities in such pillar industry. For example, foreign MNEs which establish international joint ventures in the Chinese auto industry must have an internal technical center that transfers R&D capability to their business partners in the emerging markets. Besides, the government provides financial and taxation support for joint projects (Zhao et al., 2005). The local partners of most international joint ventures in the Chinese auto industry are affiliated with local business group which is called as qiyejituan. Until 2003, there are 21 qiyejituan in the Chines automobile industry, but they account for more than 90 percent of total Chinese automotive firms and revenues (China Automotive Industry Yearbook, 2003). Until the 1970s, China’s industries were entirely under the control of the government. Since the mid-1980s, the government started gradually supporting loose control over the auto industry. The core firms of these qiyejituan have extensive control or influence over their member firms. Marukawa (1995) states that most of business groups formed in China are within single-industry with upstream parts-and-material suppliers, downstream secondary-products manufacturers, marketing firms, and service firms organized around one large-scale corporation. The government regards as a business group one where the firm at the center of the group has steady ownership or control over three or more firms. Compared to Japanese big six business groups, Chinese business groups are evidently restricted in scale and in the scope of industries they cover.
influence of restructuring in the auto industry through creation of business groups (qiyejituan), strong manufacturers have emerged in Chinese auto market.
3 Research Design
3.1 Methodology
The main research method adopted in the paper is literature review. In order to provide a more in-depth analysis, however, the literature review will be backed up by the study of three cases that each represents the ideal model of their respective institutional environment best. Thus, the cases serve a more illustrative purpose and are used less with the aim of theory-building (Eisenhardt 1989). A case study can be defined as ‘the detailed examination of a single example of a class of phenomena’ (Abercrombie et al., 2000, p. 41) or as ‘a research design that takes as its subject a single case or a few selected examples of a social entity’ (Marshall, 1998, p. 56). Feagin et al. (1991) define a case study as ‘an in-depth, multifaceted investigation, using qualitative research methods, of a single social phenomenon’. As a research strategy, the case study is to do the intensive examination of one or a small number of instances of the units of interest (Thomas, 2004, p. 127). In the paper, sample firms are supplements to illustrate the relationship between institutional environment and business groups.
3.2 Case selection
The case selection based on two criteria: the year when each business group was set up and the rank at which each business group in the list of the global car saes in 2009. Generally, I chose the case business group which was first set up in each country respectively and which is most successful in each country respectively according to the rank in global units’ sales. The first set up business group have experienced the whole progress of business group development in each country. Hence, in my opinion, the oldest business group should be the ideal model to be respresentive of its country’s business group.
shipbuilding and etc (Kim, Hoskisson, Tihanyi and Hong, 2004). In Japan, I will take Toyota as a sample corporation. Toyota Group was set up in 1937. Until now, Toyota is the most successful auto manufacturer in the world. For Chinese business groups, FAW Group is chosen to be investigated. FAW Group was established in 1956 and is the leader in automobile manufacturer in China now.
3.3 Data collection
In the paper, the data and information are collected from secondary data such as annual reports and the related literatures or articles.
3.3.1 Toyota
Table 2: Toyota Group & Supplier Organization (source: Toyota in the world 2010)
groups) could solve day-to-day problems and improve performance in a group-wide range (Nishiguchi and Beaudet, 1998).
Nishiguchi and Beaudet (1998) argue that for a variety of businesses, the capabilities developed through committed partnerships can improve competitiveness, driving participants to respond effectively to emergencies or crises and to work for continuous improvement on a day-to-day basis. Likewise, for Toyota group, the various capabilities cultivated from institutionalized problem-solving activities ensure the effectiveness and rapidity of the suppliers’ coordinated effort (Nishiguhi and Beaudet, 1998).
Nissan, as Toyota, is the major automobile manufacture in Japan. There are some similarities between Nissan and Toyota. However, Toyota still differs from Nissan in several respects. Sako (2004) summarize the differences between Toyota and Nissan in two ways. “Toyota has a distinctly different internal organizational structure for
delivering supplier development from Nissan and Honda, relying on decoupling the teaching of TPS and TQC” (Sako, 2004). Sako (2004) further explain that Toyota’s
bifurcated structure provide suppliers access to learn about TPS no matter they are extensions of Toyota’s internal factories or not. By contrast, the Nissan’s structure runs as a centralized united way. The united way brings the potential danger of creating a barrier between learning with Nissan’s internal operations and learning by suppliers. Another difference Sako (2004) mention is “Toyota has the most systematic
institution for inter-supplier sharing and learning of tacit knowledge, in the form of jishuken (self-study) groups” (Sako, 2004). The main idea of the difference is that
Toyota’s jishuken groups share the know-how in the practice of problem-solving with no direct competitors, while Nissan tends to share the know-how through presentation meetings and factory visits (Sako, 2004).
Sako categorizes suppliers at Toyota and Nissan in the 1990s showed in the Table 3 above. From the Table 3 above, it shows that the population of recipients of core supplier development ranges from 52 at Toyota and 25 at Nissan. Sako (2004) portrays that the core group of suppliers may be referred to as the boundary of the focal capability-based firm. Toyota has been able to build up the most stable set of inner core suppliers and resulted in the greater organization integration of inner core suppliers than at Nissan (Sako, 2004). Toyota group, as the best known case of vertical keiretsu in Japan, will be the case group in the paper to study the effect of vertical keiretsu on auto industry performance.
3.3.2 Hyundai
Hyundai Motor Company was founded in 1967. In the list of the world’s top ten car makers of 2009, Hyundai Motor is the only one South Korean car manufacturer appeared. Moreover, in the list of top fortune global 500 in 2011, Hyundai Motor is ranked top one among South Korean auto manufacturers.
Hyundai motor was established with the technological help from Ford of the U.S. in December 1967. It is diversified in a wide range of industry such as automobile, construction, shipbuilding, semiconductors, financial services and etc. During the period of the financial crisis of Korean economy happened in the late 1997, Hyundai tended to expand its business further rather than raising capital against the financial crisis (Kim et al., 2004). Due to outlays of new projects and the lack of cash flow, Hyundai’s financial situation deteriorated. In 1999, Hyundai made a decision to spin off some of its major affiliates. Hyundai Motor and other auto-related affiliates spun off from Hyundai established Hyundai Motor group (Kim et al. 2004). Kim et al. (2004) mention that Hyundai Motor group has been devoted to expand into interrelated lines of business. Hyundai Motor group including 10 affiliated at the time of spin-off, by 2004 it has 25 affiliates and the number is expected to grow. The expansion effort Hyundai Motor group made is to reinforce and complement the automobile business rather than diversifying into unrelated areas. Kim et al. (2004) argue that Hyundai Motor group seems to be a successful player in automobile group compared to bankruptcies of Daewoo Motor.
successful within forty years (Kim, 2008). Unfortunately, at the end of 1999, Daewoo Group collapsed in the aftermath of the Asian financial crisis.
As chaebol companies, Hyundai and Daewoo have much in common regarding structural features: high diversified conglomerates, heavily dependent on debt-financing and focused on exporting as their primary growth engines. In spite of the similarities they have, Daewoo and Hyundai differ in some ways (Table 4 below) (Kim and Lee, 2001).
Table 4 Comparison of chaebols-- Daewoo and Hyundai
Table 5: The Relational Structure of Hyundai 3.3.3 FAW Group
The First Automobile Works (FAW), now renamed the China First Automobile Group Corporation, as its name suggested, was the first automobile manufacturing firm to be set up in 1956. Even by the international standard at that time FAW was a large-scale truck factory (Marukawa, 1995). FAW diversifies in several different product lines like quality light, medium, and heavy-duty trucks, automobiles, municipal buses and luxury tourist coaches and etc. The enterprise produced most of its own parts, but other nonspecific components and basic materials were supplied from other firms.
The FAW group can be divided into three layers according to the extent of control that FAW exerts over the affiliated firms.
Table 6: The structure of FAW Group
4. Comparison/Discussions
4.1 The comparison of Keiretsu, Chaebol and Qiyejituan
Here, each feature compared among three business groups will be discussed as follows (Table 7).
Table 7 : comparisons among Keiretsu, Chaebol and Qiyejituan Keiretsu (Japan) Toyota Chaebol (Chaebol) Hyundai Qiyejituan (China) FAW Ownership Cross-stock ownership; Stakeholder orientation; Family owned; Family oriented; Shareholder orientation Partly or wholly owned by a parent firm; Common ownership; Network structure Structure Vertically;
Banks are core group member
Vertically;
Groups can’t own banks by law
Vertically;
More focused on core business; Independent Government “no lose” policy
and support of weaker firms; Supports from research subsidiaries; Reduced competition Direct subsidiaries and grants Trade barriers, tariff;import limit; quota Government direct investment;
Bank loans from commercial banks
Finance Own long-term
returns;
Internal banks and financial institutions Cross-debt payment guarantee; Government’s goal agenda; Internal financing Cross- shareholdings; Own financial companies ; Government supports Culture (leadership or HR) Require time to reach consensus Collective leadership; Long-term orientation Life employment
Quick decision and ability sell or liquidate unprofitable units; Strong autocratic leadership Commonalities in organizational culture; Member firms operate together in a cohesive way; Ebtreorebeyruak spirit 3 Ownership
Japanese are distributed among their affiliated companies. The differences in owenship contributes to different focuses (shareholder versus stakeholder).
Tu, Kim and Sullivan (2004) state that chaebol ownership is categorized into three patterns: sole ownership, domination by the core company and mutual possession. Sole possession is the type that the founder or his family members and relatives own all affiliated companies. Domination by the core company means that the founder or his family members or relatives which owning the core company own the control over all the affiliations. In mutual possession, the founder or his family members or relatives own the core company or other affiliated companies. However, whatever the pattern chaebol follows, chaebols are supervised or controlled by the owner family. It shows in Table 5 above that the Hyundai Group is unrelated vertically organized. The ownership of business group member firms are owned by several
The highly converged ownership in chaebols has two major effects on the managerial orientation. First of all, it is granted that family members influence the managerial activities a lot due to the converged control over the affiliated enterprises. Accordingly, chaebols are more shareholder orientation that the managerial activities more lean to the majority shareholder than outside minority shareholders. Second, chaebols generally have strong autocratic leaders. These leaders emphasize top-down decision making, kind of order communication instead of mutual communication. As a result, the decision-making structure in management level is unbalanced andopportunities missed as well due to the tough road of information from outside to top management (Tu, Kim and Sullivan, 2004).
In Japan, the ownership of affiliated firms is not given to one particular keiretsu. They follow the practice of cross-stock sharing which member firms own some stocks of other member firms. Therefore, member companies not only share the stocks, but also share the risks and prevent the hostile takeovers. In addition, based on the disperse ownership of member firms in keirestsu groups, leadership within the keiretsu tends to be more collective rather than autocratic (Tu, Kim and Sullivan, 2004). Moreover, the individual firms are more focused on their own interest rather than the total value of the group.
4 Structure
Tu, Kim and Sullivan (2004) compare the chaebol structure to an “octopus leg” due to its widespread expansion. Huh and Kim (1993) argue that chaebol groups in Korea are comprised of diversified business firms with a concentrated ownership structure. As shown in Figure 2, chaebol groups consist of a number of independent groups that are vertically integrated. Moreover, these groups are involved in diversified industries which are unrelated to each other. Based on the studies about chaebol, the structure of chaebol groups is based on the diversification strategy of chaebol (Tu, Kim and Sullivan, 2004). Different with Japanese keiretsu groups, chaebol groups do not have a central financial institution because it is not allowed for Korean companies to own or control it own bank.
Keiretsu groups are sometimes called “financial keiretsu” because major keiretsu groups typically diversify in wide range of industries but center around a main bank. In Japan, group-affiliated firms share three characteristics in structure (Huh and Kim, 1993). Firstly, affiliated firms of keiretsu groups appear to hold interlocking shares (Table 2 in the Appendix). In addition, close contact exists in keiretsu firms due to various business concerns and policies of mutual interests. Last but not least, most of member firms in keiretsu groups rely heavily on financial institutions such as the main financial bank and other core financial institutions (Huh and Kim, 1993). Generally, the financial institutions hold equity in the firms they lend to. It is different from chaebols that keiretsu expansion is planned and organized strategically (Tu, Kim and Sullivan, 2004). Vertical keiretsus run business groups in one industry and are integrated vertically.
In Japan, there is no law prohibiting keiretsu from owning any institution. Major keiretsu groups typically center around or rely heavily on a main bank, whereas chaebol groups are prohibited from owning or controlling a bank (Tu, Kim and Sullivan, 2004).
Compared to Keiretsu and Chaebol, Chinese state-owned groups (Qiyejituan) are actually more focused (Ma and Lu, 2005). Because Chinese economy was a planned system and the planners viewed state-owned enterprises as both production and social welfares, many Qiyejituan are also running social welfare related businesses such as restaurants, hospitals and so on (Ma and Lu, 2005). However, the strategy of state-owned business groups are more concentrated on core businesses. Moreover, more and more Chinese state-owned business groups have gradually got rid of social welfare businesses so as to concentrate on their core business (Ma and Lu, 2005).
Both the Korean and Japanese government interfere in the planning and development of their respective countries’ industries.
Huh and Kim (1993) argue that the emergence and growth of chaebol groups is heavily related to the government’s policy. In the transition period of Korean economy, the government worked on encouraging the development of existing firms rather than building new firms. Based on this government policy, the Korean business group structure appears a horizontally trend (Huh and Kim, 1993). In addition, Tu, Kim and Sullivan (2004) demonstrate that Korean government gives the credit for the success to those chaebol groups who get the financial support from government. However, Tu, Kim and Sullivan (2004) mentioned the eager intervention into new industries of government caused unnecessary competition among most chaebols. They give a example by Samsung’s financial problems in 1998. Korean government supported Samsung group’s entrance into automobile industry in spite of the existence of two large chaebol groups: Hyundai and Daewoo (Tu, Kim and Sullivan, 2004). Despite the problems the Korean government produced, the government is really a key role in the emergence and growth of chaebol groups. Huh and Kim (1993) explained that in Korea the commercial banks cannot be allowed to be a part of chaebol groups. Thus, the government is actually the main support of chaebol groups.
Unlike the Korean government, ‘the Japanese government focused on reducing the competition among keiretsu groups, promoting the planned growth to create a “no loser” mentality’ (Tu, Kim and Sullivan, 2004).
6 Finance
It demonstrates that the targets of chaebol and keiretsu groups are derived from different resources although they both focus their interests on market share (Tu, Kim and Sullivan, 2004). It is known that chaebol groups are more family-oriented, however, their interests are guided by government’s economic goals. Tu, Kim and Sullivan (2004) further explore that keiretsu groups’ interests are dictated by their own financial institution’s long-term goals.
In contrast to Korea, Japan has few legal restrictions on financial institutions including bank, security and trust fund management firms. As a result, keiretsus have a major bank or bank group in the core network (Tu, Kim and Sullivan, 2004). At the same time, the financial strategies used by keiretsus are also related to government policy and the legal environment. The financial institutions bring in low-interest loans and other financial support among group members. Banks in the keiretsus encourage member firms to focus more on long-term strategies than short-term ones and to use more capital through expansion of output levels to increase their own gains. Financial institutions can brings in some good things, however, their breakup will have a tremendous impact on the whole network (Tu, Kim and Sullivan, 2004).
To control assets in a business group or firm, the Chinese state keeps banks under its direct control (Chen, 2010).
7 Culture
Tu, Kim and Sullivan (2004) argue that both chaebol and keiretsu groups based on the idea of harmony. However, the harmony idea is performed differently and translated into different meaning at chaebol and keiretsu groups. In addition, the differences in ownerships among three business groups have taken shape into differences in management style (autocratic and collective).
Tu, Kim and Sullivan (2004) interpret harmony as a sharing action under extreme situation by groups’ leaders. And the power of chaebol groups is centered on the top management layer; hence, business leaders behave more autocratic (Tu, Kim and Sullivan, 2004). They further explain that due to the autocratic culturethe groups’ managers can react quickly to crisis and shut off the unprofitable companies if needed without disagreement. And based on the sharing culture the managers of unperformed firms accept the shut-off as a part of sharing (Tu, Kim and Sullivan, 2004).
Unlike the interpretation of harmony in Korea, harmony means a kind of no-loser policy under the influence of Japanese government (Tu, Kim and Sullivan, 2004). Based on the no-loser policy member companies are more concerned on maintaining relationships among group members and supporting each other’s survival (Tu, Kim and Sullivan, 2004). In contrast with chaebol groups, keiretsu groups won’t give up companies with poor performance (Tu, Kim and Sullivan, 2004). Therefore, Tu, Kim and Sullivan (2004) say that keirestu groups are of help to reduce corporate corruption. Compared with autocratic culture in chaebol groups, collective culture in keiretsu groups results in slower reaction to crisis than chaebol groups’ reaction (Tu, Kim and Sullivan, 2004).
they think that is a good opportunity. Guanxi stands for any type of relationship in China. The entrepreneurs put much emphasis on the establishment of guanxi with government works and managers of other companies. To some extent, guanxi secures the access to get some benefits from government or banks or other companies.
4.2 Discussion and conclusions
Based on the detailed analyses and comparisons among Keiretsu, Chaebol and Qiyejituan, there are some differences and similarities summarized in the end. In ownership, chaebol and qiyejituan are shareholder oriented. However, keiretsu is stakeholder oriented. Due to the majority of the executive officers of the top Korean chaebols consist of the owners’ family members; family members can exert substantial influence on managerial activities. The great pressures from owner family members force managers in the chaebol prefer short-term orientation. The managers have to consider more about majority family shareholders than outside minority shareholders. In qiyejiuan, government as the big owner tends to pay more attention on non-profitable goals such as social welfare rather than shareholder value and profit maximization. In keiretsu, there is no a major owner because the ownership is spread among affiliated group. The affiliated firms are more concerned about their own interests rather than other members’ or the whole group’s value. Keiretsu member firms behave more stakeholder orientation than shareholder’s.
Concerning the structure of business group, the common thing among those business groups is that they are vertically organized. Nevertheless, they are still different in some aspects. For Korean chaebol, the member firms are independent and operate in diversified unrelated industries, whereas, vertical keiretsu members are involved in one industry and around a main bank. In qiyejituan, the group members are legally independent. The business group is vertically diversified and around the core business.
With regard to government influence, the government plays an important or essential role in all three business groups. Generally, the government builds up rules or policy and supports companies in terms of technology and funds. This is different from western countries. In western countries, the government generally has no ownership or a small part of ownership in the company. The role of government in the companies is insignificant than Asian countries.
to own internal banks. In qiyejituan, business groups own financial institutions like keiretsu.
In terms of culture or leadership, the decision making is slow in Keiretsu and Qiyejituan. In chaebol groups, strong autocratic leadership dominates the whold group with quick decision and ability to sell or liquidate unprofitable units. In detail, in keiretsu groups, it often require time to reach consensus,. In qiyejituan, membership firm so operate together in a cohesive way.
Based on the summary of comparisons among keiretsu, chaebol and qiyejituan, it is seen that there are still some significant differences within them although Japan, Korea and China are very close in geography. In some respects, they have similarities with western countries. Hence, it is difficult to summarize a typical Asian type of business groups in auto industry.
5 Implications
Although an Asian type of business groups in the auto industry is not found or summarized, the detailed analyses of three typical business groups at least are great helpful to multinational companies when they try to go into or compete or cooperate with Japanese or Korean or Chinese markets. Understanding the formation and adaptation of business groups in the auto industry in different institution environment is the importance for the research. Business groups are a dominant economic force in many developed and developing economies. Research has come to no clear consensus regarding an Asian way of business groups utilized in different settings. It is cautious that generalizing any one type business group to other contexts. This issue is
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