Keiretsu and Chaebol, both are the terms basically used to refer to a type of corporation in Japan and South Korea, respectively. Both South Korea and Japan were able to grow their economies because of the presence of such corporations. Both Chaebol and Keiretsu refer to business groups or conglomerates. Also, both conglomerates consist of several independent firms under one umbrella company or administration. Often people use these two words interchangeably, but the two are very diverse in their nature and characteristics from each other. To better understand these terms, we need to understand the difference between Keiretsu vs Chaebol.
Keiretsu vs Chaebol – Differences
Following are the differences between Keiretsu vs Chaebol:
Before World War II, the Japanese business groups were called Zaibatsus. After the war, due to the involvement of Americans in the Japanese administration, the Zaibatsus were dispensed. Also, this American involvement led to the development of Keiretsu.
Chaebols, on the other hand, may owe their existence to Japan. Their origin is during the period of the Japanese occupation of South Korea, i.e. between 1910 and 1945. So, in a way Chaebols are also the successor of Zaibatsus or Zailbastsus likes.
Chaebols enjoy the support of the federal government. After the Korean War, the government used Chaebols to rebuild and boost the economy by providing them with loans, subsidies, and tax incentives.
Relation to Predecessor
Zaibatsus seems to be the predecessor of both Keiretsu and Chaebol. However, Keiretsu now has a totally different form than Zaibatsus, primarily because of American involvement. On the other hand, Chaebol still has the same characteristics as Zaibatsu. That is why experts often refer to Chaebol as a Zaibatsu-like conglomerate.
Both Keiretsu and Chaebol are essential for the all-round growth of the Japanese and Korean economies, respectively. However, in terms of numbers, Chaebol seems more dominant. This is because, in 1995, the top 5 Chaebols accounted for 50% of Korea’s GDP. The same dominating status is not there of Keiretsu in Japan.
Ownership and Control
Chaebols are usually family-owned groups. Also, to qualify as a Chaebol, a certain percentage of group ownership must be with the family. Keiretsu, on the other hand, don’t have family or blood ownership. Rather, the ownership is dispersed among the members and the dominant bank.
Moreover, a significant portion of Chaebols’ executive officers is the family members. This results in the concentration of power in the hands of the family. On the other hand, the control in the Keiretsu is participative or collective. The executive officers in Keiretsu are primarily on the basis of merits. As per one survey, about 35% of key officials of these Chaebols are family members and relatives.
Chaebols usually have a top-down decision-making approach primarily due to robust autocratic leadership. Chaebols usually have a great level of vertical integration. The supporting companies in the vertical integration mainly produce for the business divisions, or for other firms in the group. Diversification is also common among such companies.
Keiretsu’s structure could be both horizontal and vertical. A horizontal or inter-market keiretsu includes conglomerates in different or related industries. A vertical Keiretsu include a vertically-integrated conglomerate that operates in the same industry.
Even though both (horizontal and vertical) types of Keiretsu are mutually exclusive, some conglomerates may be common in both horizontal and vertical Keiretsu’s. A vertical conglomerate can be part of horizontal Keiretsu.
In Chaebol, the ownership and control rests with the families. Among these families, there is one family, the founder family, that is the most dominant. Also, Chaebols are relatively less transparent primarily because of the nature of their cross-shareholding and managerial structures.
For Keiretsu, the control rests with an authority, called the Presidential Council. This council includes the heads or presidents of the biggest or core firms within a Keiretsu. These executives meet at regular intervals to discuss relevant matters.
A point to note is that the Presidential Council doesn’t create policies, rather it talks on the matters of mutual collaborations, such as joint venture, research and development, and more. Along with the Presidential Council, there may also be bank that can exert influence over Keiretsu. This is the bank that provides finance to the company.
Usually, in a Chaebol, the directors’ positions go to the allies of the management. On the other hand, in a Keiretsu, management decides the directors on the basis of performance. The monitoring role of the bank plays a major role to ensure this.
Owing to such features, we can say that Keiretsus are more stakeholders oriented, while Chaebols are more shareholders oriented.
Keiretsu vs Chaebol – Advantages and Disadvantages
Following are the advantages and disadvantages of Keiretsu and Chaebol:
- In times of crisis, Chaebols are quick to respond. This is primarily because of the “militaristic” command structure that such organizations have. Since Keiretsus have a participative command structure, they are relatively slow to respond during a crisis.
- Chaebols are also more aggressive in coming up with new products and foraying into new markets.
- The chances of management making poor decisions are more in Chaebols because of the concentration of the decision making powers. Since Keiretsu have a more open approach to decision making and are more professionally managed, they are less likely to make a poor decision.
- Chaebols are also more likely to make decisions unrelated to core business activities. For example, creating a new company to ensure the power remains with the family.
- Executive or management positions are given to the favorites of the controlling family in Chaebols. In Keiretsu, the management decides the positions on the basis of merit and performance.
- Management may overlook stakeholders’ interest in Chaebol. There are no such concerns with Keiretsu.
Keiretsu vs Chaebol – Examples
Sony and Samsung are a good example of Keiretsu and Chaebol, respectively.
Sony, a Japanese company, is vertically integrated. The electronics giant offers TV, Mobile, Gaming devices. To complement it, the company offers content, i.e. Movies, Music. Also, it offers Networks – TV and digital. Foreign organizations and personnel own more than 50% of the company. JP Morgan Chase owns a significant portion of the company. Other major Keiretsu are Daiichi-Kangin, Mitsubishi, Sumitomo, and more.
Samsung is a major South Korean company. One can trace the origin of the company to 1938, the same time when Chaebols got popular. It was initially a trading company, but it now operates in several industries. Lee Byung-Chull is its founder.
Even though Lee’s family owns a small amount of Samsung’s stock, they control the company via cross-shareholdings. Lee Kun Hee, who is the founder’s son, controls the whole group. The group has also faced several accusations of overlooking stakeholders’ interests.
Along with Samsung, there are more than 20 big Chaebols in South Korea, including Hyundai, SK Group, and LG. These Chaebols account for over 50% of Korea’s export.
For Japanese and South Korean, Keiretsu and Chaebol respectively, are a national pride. These organizations are not just crucial players in the local market, but they also represent the country in the overseas market. However, the two types of organizations have also been criticized for their traditional structures, leadership style, as well as closeness to the government.