All hail the Kleiner keiretsu--not!

Thanks to its connections, Kleiner Perkins was one reputed to possess the Midas touch. But CNET News.com's Mike Yamamoto says there was a big flaw in its strategy--one made painfully evident when the storied VC firm's marketing voodoo wore off.

Mike Yamamoto
Mike Yamamoto Staff Writer, CNET News.com
Mike Yamamoto is an executive editor for CNET News.com.
5 min read
Given the fall of Excite@Home, the high-tech industry should forever bury the once-fashionable concept of keiretsu that inspired the company's disastrous merger.

Keiretsu is the brainchild of Kleiner Perkins Caulfield & Byers, the powerful venture capital firm that was thought to have the Midas touch in its ability to spot talented companies and make boatloads of money by investing in them.

"Connections made through keiretsu have helped facilitate over 100 strategic alliances and countless business partnerships," the firm says--including Excite@Home, the product of a $6.7 billion merger that many think was doomed from the beginning.

If Kleiner's keiretsu has eluded blame for Excite@Home and other ventures gone awry, perhaps it is because few people outside the investment firm know exactly what the concept means.

Kleiner's own definition offers little help: "We formed this network 20 years ago and named it keiretsu, based on a Japanese business expression that describes the principle of interlocking operating relationships between companies," according to its Web site. "The keiretsu gives emerging start-up companies a unique ability to learn from more established operations, entrepreneurs an opportunity to pool their experiences, and companies an environment to explore synergies."

Who would fall for such gibberish? Unfortunately, a lot of people who lost a lot of money investing in keiretsu-empowered companies.

Making the offense still more insulting, the Kleiner version of the term bears little resemblance to the original concept. Those with only vague knowledge of Japanese economic history (such as myself) can tell you that keiretsu would not translate in American business for two clear reasons--one cultural and the other economic.

Japan's keiretsu was based on a system more than a century old that grew out of that country's feudal society. Originally known as zaibatsu, a cartel of leading family-controlled financial and industrial conglomerates consolidated their power after the Meiji restoration government granted them special tax exemptions to build Japan's economic expansion in the mid-19th century.

The zaibatsu eventually acquired quasi-official status in working on government-sponsored enterprises. In fact, these dynasties became so closely identified with the emperor's palace that they were disbanded during the Allied occupation after World War II. When Western forces turned their attention to fighting communism in Korea and elsewhere, however, they encouraged Japan's economic growth, and the zaibatsu concept was reborn under the new label of keiretsu in the 1950s.

The system worked well in Japan, leading to one of the most remarkable postwar economic turnarounds in modern history for the next 30 years. But the basic principles behind its success are decidedly un-American: True to Japan's isolationist history, industrial leaders of the island nation worked closely with the government to protect their monopolies. Competition was reserved for non-Japanese rivals.

Such blatant oligarchy could never exist in the fiercely independent culture of Silicon Valley, which traditionally has viewed government as a nuisance. Other than a few companies in the military-industrial complex, U.S. businesses have never had the kind of semigovernmental status assumed by keiretsu empires of Japan.

Moreover, the American economy thrives on competition among our own companies, as well as with those abroad. Although the country goes through some protectionist phases of its own from time to time, such as the "Buy American" auto movement in the late 1970s, the U.S. economy has almost always been driven by supply-and-demand forces that transcend national boundaries.

Enter reason No. 2 that the keiretsu concept is wrong for American business--economic evolution. As painful as our Darwinian system may be (think of the dot-com bust), it provides the necessary balances that keep the marketplace healthy.

Japan's keiretsu conglomerates, on the other hand, became sluggishly bloated and have been collapsing under the weight of their own unchecked growth. As Business Week wrote in a March 1999 cover story: "Mitsubishi and the other keiretsu plowed on, until Japan was weighed down with huge overcapacity in a zero-growth economy. The country is now saddled with 11 vehicle manufacturers, 5 integrated steel makers, 10 semiconductor companies and 17 money-center banks."

There is another telling line in that same article: "Plentiful cheap capital from the group's own banks financed a wild dash for global market share in boom times."

Sound familiar? A similar abundance of money in search of investment has been cited as a primary reason for the dot-com debacle--with venture capitalists such as Kleiner Perkins leading the way.

To be fair, Kleiner can't really be faulted for seizing on an idea like an American keiretsu. After all, it is only the latest of many companies that sometimes seem obsessed with the mysterious ways of Eastern cultures.

Two decades ago, U.S. companies fell all over themselves to study and quote Japanese theory after Tokyo-based conglomerates were dominating the world economy and encroaching on uniquely American institutions such as cars and movie studios.

A book called "Theory Z" was on the New York Times best-seller list for four weeks in 1982, describing Japanese work ethic and the cultural ties between companies and family pride. The kind of business practices outlined in the book spilled over from industry to the popular American consciousness, even becoming the subject of movies such as Gung Ho, a 1986 comedy about the culture clashes at a U.S. auto company taken over by a Tokyo multinational. American businesses experimented with such Japanese workplace practices as taking breaks to do jumping jacks and other exercises--a trend that, thankfully, didn't last.

The Eastern fascination understandably waned in the 1990s as Japan slid into a devastating recession, but it was revived by pioneering mavericks of Silicon Valley who seemed to fancy themselves modern-day warriors. The "Art of War," written circa 500 B.C. by Chinese General Sun Tzu, became must reading for any technology executive worth his testosterone.

More recently, Oracle's Larry Ellison has been credited with making the term "opening the kimono" a cliché in high-tech circles, apparently referring to the disclosure of internal company practices. (At least I hope that's what it means.)

There is no small irony in U.S. technology companies looking to copy anything from Japan: For years after World War II, that country was the butt of jokes that all its products were blatant rip-offs of American merchandise, especially consumer electronics.

But I doubt that many companies in America today are truly interested in following Japanese economic models. So-called inspirations such as the Kleiner keiretsu sound like little more than old-fashioned marketing doublespeak.