A new word for U.S. firms: keiretsu

BRYAN T. JOHNSON

December 31, 1991|By Bryan T. Johnson

WITH memories of Pearl Harbor in the air, sniping at Japan is being raised to an art form.

Old charges that Japanese businesses are in cahoots with one another, freezing out competition from the United States, are being revived. Trade protectionists are particularly critical of Japan's keiretsu, or "business groupings." Unlike the trust arrangements that are illegal in the United States, keiretsu are cooperative arrangements between companies involved in activities that are indirectly related: suppliers, manufacturers, distributors, marketing specialists, financiers, even insurers.

Under great pressure from the United States, the Japanese reluctantly agreed as part of the last year's Structural Impediments Initiative to use antitrust legislation to help break up the keiretsu. U.S. trade officials, perennially concerned about sagging American competitiveness, now are asking Tokyo to step up this antitrust enforcement.

But if improving the competitive position of U.S. firms is the goal, an appropriately American version of the keiretsu could be the solution. With minor modification of antitrust law, such cooperation would be possible.

Ironically, the Department of Commerce wants to reform America's antiquated antitrust laws to allow for joint production measures, called strategic alliances. Thus, while one arm of the U.S. government is trying to widen the field for business alliances, another arm, mainly the U.S. trade representative's office, is blasting Japan for such activities.

Economists long have argued that America's "single corporate" mentality -- every company for itself -- puts many U.S. firms at a disadvantage. It's not hard to see why: American companies tend to purchase their supplies from the cheapest source, which keeps short-term costs down and profits up.

In the long run, however, it dampens competitiveness. This happens because U.S. suppliers and producers fail to develop the sorts of long-term relationships that spur innovation. Many suppliers have resisted spending large amounts of capital on modernizing their products and production process because they are unsure of future business. Meanwhile, producers have found it difficult to convince suppliers to manufacture the components necessary for newer generations of products. One look at our consumer electronics industry bears this out.

Such limited relationships have caused many producers to maintain large inventories of parts to avoid price increases and shortages. This has been especially acute in the consumer appliances industry -- refrigerators, air conditioners, washing machines -- and has proven costly.

By contrast, the Japanese system of cooperation has spawned "just-in-time" manufacturing, allowing manufacturers to order components when they are needed, not months ahead. This reduces inventories and allows the Japanese to better respond to the market. It also encourages suppliers to invest in improved production techniques, knowing they can count on continuing business.

Such linkages in the Japanese automobile industry, for example, have resulted in suppliers participating in the design process of new automobile models. This has enabled Japanese auto companies to develop newer styles faster than their U.S. competitors.

Some U.S. companies are beginning to emulate the Japanese. Ford Motor Co., for example, recently entered an alliance with Excel Industries, a glass manufacturer. This has allowed Ford to develop more state-of-the-art exterior designs, since Excel participates in the design process. IBM and Apple computer announced an alliance that will integrate the companies and make them more competitive by combining technology to produce new kinds of computers, software and components.

The U.S. government should stop providing excuses for American firms competing internationally. Bashing the Japanese will neither solve our trade deficits nor our foreign competitiveness problems.

Instead, policy-makers should focus more of their efforts on making it easier for American firms to compete. Strategic alliances, though no panacea, give American businesses the option of joining forces in a way that can boost their efficiency and make them more competitive. Laws that continue to restrict these arrangements should be amended or scrapped.

Bryan Johnson is a policy analyst specializing in international trade issues at the Heritage Foundation.

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