JEI's Spin on the News

Chiyoda Tie-Up Raises Keiretsu Question

Tuesday, March 9, 1999

Chiyoda Corp., a major Japanese plant engineering company, will accept an equity infusion and other forms of assistance from Kellogg Brown and Root according to Nihon Keizai Shimbun, Japan's leading economic daily. Since the report has not been confirmed by officials of either company, it must be regarded as still tentative, however.

The tie up, if it develops as reported, would give Kellogg Brown and Root a 7 percent share of the Japanese company. On the face of it, the step would appear to represent a partial dismantling of Japan's famed keiretsu system. Chiyoda is a member of the Mitsubishi keiretsu, and had sought the group's help in overcoming heavy losses.

In fact, however, the keiretsu relationship remains and may even end up stronger after the American firm's capital infusion. Mitsubishi Corp., the giant trading company, already is Chiyoda's top stockholder and will boost its equity to 12 percent from the 6.3 percent it currently holds. Moreover, past relationships among Mitsubishi companies and foreign-owned enterprises have not always worked out well. Some analysts have suggested that conflicts between loyalty to the Mitsubishi group and the foreign partner have been a problem.

Although Chrysler held a much larger block of stock in Mitsubishi Motors for years, the relationship gradually has weakened. Daimler Chrysler, the result of a merger between Daimler Benz and Chrysler, reportedly is now on the prowl for an Asian partner, but Mitsubishi Motors, its bad economic health notwithstanding, probably will end up outside.

Even if KBR and Chiyoda hit it off, the keiretsu system is likely to be around for a while. Although the Japanese press lately has taken to proclaiming the reduction of the equity cross-ownership that provides the glue to such link-ups, at recent rates it would take roughly 40 years to liquidate such cross-holdings completely. Moreover, as the Chiyoda example illustrates, bad economic conditions sometimes serve to increase such holdings.

"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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