Is implementing a Keiretsu possible in Indian context?

For too many, the term “Keiretsu” sounds more like the name of a cartoon character but in reality it’s a business structure strategy which originated in Japan and is most widely adopted there. Japanese players do seem to always come up with business solutions unheard of like the most famous “Total Quality Management.” It is really important to acknowledge the fact that the strategic solutions brought about by the Japanese are often a reflection of their culture, traditions, and their core beliefs – which play monumental role in the success rates of their proposed solutions.

So, what exactly is “Keiretsu”?

Basically, “Keiretsu refers to a business network made up of different companies, including manufacturers, supply chain partners, distributors, and occasionally financers. They work together, have close relationships and sometimes take small equity stakes in each other, all the while remaining operationally independent. Translated literally, keiretsu means headless combine." (D., 2019)

The underlying principle of Keiretsu is what can be as called as “Collaborative growth” meaning the principle of growing not individually but all together as a whole, which is also pretty much significantly enshrined in the ideologies of the Japanese culture.

So, one would stereotypically ask, why us (India)? Is it relevant or is it even possible to think if it’s even possible in current scenario (from Indian standpoint) where we see blood-thirsty brothers (and relatives) just wanting to take away the entire share in the ancestral property? Or where one cannot confide in thy neighbour or friend? Seemingly, it shall raise many eyebrows to even think about something of such sort where people can just come up together and co-operate with each other and collaborate business to grow sustainably?

Well, to say the least, we do have an Indian example of Keiretsu! The TATA Group.

One would contest against it by saying that it is a family owned business undertaking and technically one would be right too, but here the principle of the example taken matters, inspite of being from the same family tree, the business heads of the TATA groups were not always from the main trunk of the family like J.R.D. Tata and Ratan Tata himself, so basically the argument here is that the leadership was handed over to the one who was best suited to be in command of the gigantic empire, whether or not the decision of forming a sort of Keiretsu was a conscious decision or not is a matter of discussion for future.

There could have been internal rifts but still the family managed to remain as one for over 150 years. But the lesson here to take home is that it is possible to work in some form of Keiretsu. Now, one would ask what potential benefits underlie by adopting it?

Few critical advantages of Keiretsu structure are:

4  Decreased chances of take-over by competitors

4  Better and long-lasting relations with suppliers and in some cases even with user companies (who use the final product of one business as raw material for another)

4  Easy and quick funding availability

4  Diversified portfolio

4  Easy and quick achievement of other strategies such as TQM or Just in Time (JIT) for inventory controls

4  A central bank coexists within the structure which actively looks after the funding requirements of the participating businesses

4  Due to the strong interconnected network, the chances of bankruptcy are lowered substantially.

Implementing a Keiretsu might not be so difficult either in India context (atleast theoretically) as we are well conversant with the Hindu Undivided Family (HUF) business which have been around since centuries. A simple, beginning can be initiated by creating a consortium of HUF’s and making them investing in each other and forming business arrangements. The selection of which HUF’s should form a consortium depends solely on the business objectives and the growth strategy of the family’s coming together.

Traditionally 2 forms of Keiretsu’s are in practice:

1.    Horizontal Keiretsu:

It is characterized by an alliance of different companies from various sectors, including a bank, which is the centre-piece of the network and is responsible for providing the others with financial services. (D., 2019)

2.    Vertical Keiretsu:

It refers to manufacturers, suppliers, and distributors partnering up. With a common goal, they work together to cut costs and become more efficient. (D., 2019)

In the Indian scenario, however, certain caveats are to be taken into consideration like the existence of a stringent Competition Act, 2002 which could actively work as a big hindrance for entering into such an arrangement, due to the obvious reasons of avoiding collusions to come in play; also on account of lack of any Regulation in hand to actively monitor such an arrangement formally, the dispute resolution mechanism as well as many other operational aspects might become a nightmare, if in case the arrangement goes haywire.

Besides the potential advantages in hand, it is too good to be true if it doesn’t have any disadvantages inherent to this, couple of potential drawbacks of the arrangement are:

4  Presence of high level of bureaucracy in decision-making

4  Lack of flexibility which acts as a big deterrent at times of business process reengineering implementation

4  Due to reduced competition levels, it might act as potential restrain and discourages the players in investing in advanced technologies and practices

In India, we do have a “Keiretsu Forum” which is actively started operations in 2015. “Membership to the Keiretsu Forum is by invitation and the Chennai chapter has signed up 10 investors since a soft launch in December, including Chand Das, Chief Executive – ITC Education and Stationery; Biji Kurien, former CEO, Berger Paints; and S Gopal, former Managing Director, Chemplast Sanmar. The forum also has members from academic institutions and those who provide affiliated services to the entrepreneurship ecosystem, such as lawyers, merchant bankers, accounting, and HR professionals.” (N, 2015)

Overall, it is possible to develop and adopt such a structure in the Indian context which can become the back-bone of a sustainable and effective business environment, maybe certain tweaks might be required at the time of actual adoption of the such a structure especially in the Indian context.

References

4  D., L. (2019, July 31). Keiretsu. Retrieved from Investopedia: https://www.investopedia.com/terms/k/keiretsu.asp

4  N, R. (2015, January 19). Keiretsu Forum to start its India journey on February 6. Retrieved from The Hindu Business Line: https://www.thehindubusinessline.com/news/keiretsu-forum-to-start-its-india-journey-on-february-6/article6802542.ece