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The automobile industry probably best illustrates the various control mechanisms that are exercised by Japan’s Corporate Groups. As we have already noted, the

industry has the largest number of keiretsu linkages, with “close ties” and mutual

trust being regarded as important components within these relationships.

However, while such attributes may be a common feature of keiretsu relations, in

terms of corporate governance, neither mutuality nor trust should be equated with equal power in decision-making processes (Sachetti and Sugden, 2000). Indeed, the industry’s pyramidal structure and the nature of interdependency amongst firms, suggests that, in order to further their own objectives, the larger, more dominant players - within the production network - will exploit their position to exert control over their trading partners. In the automobile industry it is the large

OEMs that dominate the keiretsu relationships through a “formal command

structure”, where they often exert direct control over their suppliers (see also Ruigrok and Van Tulder, 1995).

In this respect, equity participation is one mechanism through which Japan’s OEMs can exert direct control over their supply base. The large OEMs typically own substantial shareholdings in their core. First Tier suppliers. For instance, Toyota holds the largest shareholdings in their large suppliers, Denso (23.3%) and Koyo Seiko (21.9%), while Nissan has also, traditionally, held similar shareholdings in their large Group suppliers (e.g. in Calsonic (33.4%) and Unisea Jecs (29.6%)). These core suppliers, themselves, also hold controlling equity stakes in lower tiered suppliers. Reciprocal shareholding arrangements do exist, with some Group suppliers even holding small stakes in their main OEM. However, those firms and sub-contractors lower down the industry’s pyramidal structure have smaller equity stakes in their trading partners (Dodwell, 1997, Ruigrok and Van Tulder 1995)7.

These ownership details are significant since, by holding significant shareholdings within their supply base, Japan’s OEMs and their core suppliers, have been able to exert direct control over the industry. For instance, it has become common practice for the large Japanese OEMs to appoint their former executives into key positions within their supply chains. This has the effect of establishing direct lines of communication and allows for the dissemination of corporate strategy from the OEMs’ hierarchies to core suppliers. Personnel exchanges, supplier associations, and technology sharing are also spheres of influence. In this respect, Piore and Sabel (1984) give the example of how

7 This pattern is also observed in Japan's other machinery industries, where although numerous interlocking share-holding arrangements exist, with reciprocal cross-shareholdings, and equity ownership is relatively dispersed, the major shareholdings are typically concentrated amongst a few large corporate shareholders (Sheard, 1994).

Nissan, in the early post-war period, were able to use such channels to control the rationalisation and re-organisation of automobile production.

Control and influence are also exerted through long-term contractual ties, particularly where suppliers are “locked in” to vertical relationships. In these

cases, an OEM’s insistence upon a JIT delivery system may increase a supplier’s

dependence, and raise the OEM ’s degree of control. It is argued that, in effect, a

JIT delivery system forces the supplier to subordinate their production schedules

entirely to suit the OEM’s requirements. It also shifts the burden of inventories from the OEM to the supplier (Ruigrok and Van Tulder, 1995). A further

consideration is that, for efficiency, the JIT delivery system favours a close

proximity between the OEM and the supplier, which effectively limits the latter’s choice of prime location (Dicken, 1998; see also Chapter (4))8. An insistence

upon kaizen quality control and the use of internal rankings also enhances the

OEM’s position, since if the supplier does not comply then there is a potential loss of custom. A related issue is the practice of open-book accounting where, as we have already noted, the OEM scrutinises the supplier’s costs and imposes a “target price” for components. This “target price” allows the supplier a profit margin, but there is an expectation that the price will fall over time, which forces the supplier to continually reduce costs. The OEM will then accrue most of these productivity gains, while maintaining supplier profit margins above a minimal level - to enable the supplier to re-invest in new capital as directed by the OEM (Ruigrok and Van Tulder, 1995). Ruigrok and Van Tulder (1995, p83) have described open-book accounting as a process where negotiations are such that

' For instance, in Japan, many of Toyota’s suppliers are located within a 70-mile radius of Toyota City.

"the supplier is required to bargain with the assembler, literally with all its cards open on the table”.

It may be argued that institutions, such as the state funded Public Testing and

Research Centres (PTRs), or "kosetu shiken kenkyu kikan ", could offer smaller

suppliers the opportunity to diversify, innovate and become more independent from their main OEM. However, even these institutions - which are exclusively designed to encourage independence and innovation amongst Japan’s small firms - are manipulated to suit the OEMs’ strategic interests. Toyota’s involvement, at the Aichi PTR centre, is a particular example. Rather than being used as a centre for Toyota’s smaller suppliers to advance their own research programs, the Aichi

PTR centre has, in the words of Ruigrok and Tate (1996, p.397), become "a tool

to help subcontractors meet Toyota’s stiff demands". The authors’ find that activities at the centre are heavily weighted towards test inspections, with suppliers’ processes and components being subject to close scrutiny. Ruigrok and Tate (1996), argue that Toyota have been able to direct the PTR centre’s activities to the extent, that certification by the PTR centre is now an integral part of the company’s domestic production system. They conclude that the Aichi PTR centre has played a major role in sustaining Toyota’s ability to exert control over its domestic supply chain.

The degree of control over suppliers does vary between the different Japanese automobile manufacturers. According to Ruigrok and Tate (1996, p.398), the concentration of Toyota’s domestic production in the Aichi prefecture, has allowed the company to establish unrivalled control over its large supply base.

Similarly, the authors point out that Nissan also rely upon a large supply chain, and have also secured a high degree of control over their suppliers. Indeed, according to Adio Kodani, a former Nissan executive who was appointed, in 1990, as the President of Nissan’s core First Tier supplier Ikeda Bussan, the

“keiretsu has served to create a comfortable vertical supply structure fo r Nissan, rather than as a structure to make affiliates stronger" (Nikkei Weekly, 21/8/2000). In contrast, to both Toyota and Nissan, Ruigrok and Tate (1996,

p.395-396) note that Honda have only “limited control" over their domestic

suppliers. This partially reflects the fact that Honda was a late entrant to automobile production and has consequently found it difficult to establish a large, exclusive domestic supply network.

It is important to appreciate that control is an important factor and a significant competitive advantage for Japan’s OEMs. Through their various control mechanisms, Japan’s OEMs have been able to direct operations and reduce costs to an internationally competitive level. This is obviously important, since the OEMs produce the final product and are primarily responsible for the industry’s profitability. It should be noted that the Japanese situation contrasts sharply with that of the OEM-supplier relations that existed - in the 1970’s and 1980’s - between the then (loss-making) State owned, UK manufacturer, British Leyland (BL), and its core UK suppliers. According to Cowling (1981), BL was in a vulnerable position, in relation to its UK transnational suppliers, such as Lucas and GKN. The latter dominated the UK components industry and were able to

exploit their market position, to the detriment of the heavily subsidised BL (and the tax-payer)9.

Finally, in addition to exercising control over their suppliers, it is also argued that Japan’s large (automotive) firms exert control over their workforce. For instance, Ruigrok and Van Tulder (1995) point out that the Japanese corporation’s involvement in labour unions, as exemplified by Toyota, reduces the union’s independence and effectively nullifies its bargaining power. In addition, corporate management may also use the individual incentive system as a strategy to discourage worker collectivisation (Dicken, 1998). Naruse (1991) has also argued that the Japanese production process, with its emphasis upon continuous improvement and allegiance, is also designed to place great pressure and co­ operation from the workforce. Furthermore, the Japanese notion of “lifetime employment” and long-term contracts only appear to apply to core workers in the major companies; the remaining workforce, who are employed by sub­ contractors, are often regarded as peripheral and have no job security (Naruse,

1991, Ruigrok and Van Tulder, 1995).

Drawing upon these perspectives, the suggestion that the Japanese firm is "run in

the interests o f the workforce” and that employees participate in corporate decision-making appears to be misplaced. In terms of decision-making, it is probable that the Japanese firm may accommodate a greater delegation of decision-making. However, it is likely that these refer to operational decisions;

9 Cowling (1981, p. 10) argues that in effect, these highly profitable suppliers “w e re b e in g s u p p lie d w ith a s s e m b ly s e r v ic e s a t o r b e lo w c o m p e titiv e ra te s b y a n in d e p e n d e n t d o w n s tre a m su p p lie r (B L )" .

decisions that concern the daily operations of the firm. These are not strategic decisions, which affect the firm’s broad direction. Furthermore, the nature of the incentive schemes discussed by Aoki (1990, p. 11-13), would also suggest that employees are subordinated to comply with management authority. The management themselves are also monitored through the main bank system, and poor corporate performance can lead to their removal (Aoki, 1990, p.15-16).