An analysis has been raised that Japanese companies’ wide-ranging business diversification stems from an organisational structure centred on lifetime employment and internal reinvestment, and that this structure instead becomes a weakness in fast-changing industries such as artificial intelligence and electric vehicles.

Gigazine, an online outlet, reported on May 25 that David Oks, a writer covering economics and technology, analysed why Japanese companies run multiple businesses at the same time from a corporate-structure perspective.

Oks said diversification by Japanese companies differs in nature from conglomerates in other countries. India’s big business groups often focus on relatively simple industries, and in Germany broad business expansion is limited to large conglomerates such as Siemens. South Korea’s chaebol have also pursued diversification, but many grew through close ties with the state, he said, differing from Japan where companies broadly expand across the corporate sector.

Oks cited Japan’s employment and capital structure as the main cause. Unlike performance-based management in the United States, Japanese companies have a strong seniority-based character. They have adopted a lifetime employment model that hires large numbers of new recruits and keeps them employed until retirement. Even during management difficulties, they tend to respond through reassignment or transfers to affiliates rather than layoffs. A tenure-based compensation system also supports this structure.

The structure of labour unions, boards and shareholders was also cited as weakening external pressure. Company-based unions are central, the proportion of internal executives on boards is high, and cross-shareholdings among Japanese companies and funding centred on main banks combine to keep pressure for shareholder returns relatively low. As a result, corporate profits often go to business reinvestment rather than to shareholders.

Oks named such companies Japan-style, or J-type, companies. He said J-type companies are characterised by lifetime employment, the absence of individual performance-based pay and a passive attitude toward external fundraising. He classified Western companies that focus on shareholder interests and specialisation as H-type companies.

The difference also appears in shop-floor operations. H-type companies have a vertical structure in which managers and upper levels solve production-line problems, while J-type companies are closer to a horizontal structure in which frontline workers solve problems together. For this, employees must understand a range of tasks rather than being limited to specific jobs, and training and job rotation are essential.

Oks said this structure leads directly to business diversification. “If you have promised lifetime employment, you must create new work even when the current work loses meaning,” he said. “For a company that does not place much importance on profitability and holds many versatile workers, it is rational to reinvest profits in entering new businesses,” he added. He said expanding the business portfolio lengthens a company’s survival and allows it to keep using surplus labour. The logic is that continuous business expansion is unavoidable to keep a company going without reducing staff.

But the strengths of this structure vary by industry. J-type companies can show strength in fields where incremental improvement is important, such as automobiles, machine tools, industrial robots, optics and precision materials. That is because demand is relatively stable and shop-floor improvements directly translate into competitiveness.

By contrast, H-type companies have an advantage in fields such as software, internet platforms, AI and electric vehicles, where market change is fast and top-down strategic decisions are required. Oks concluded that this structural weakness explains why Japanese companies show a strong presence in some manufacturing fields but fail to stand out in other areas.

There are counterarguments. Some point out that Japanese companies are not actually horizontal, and critics also argue that in the software industry seniority, approvals and reporting procedures operate strongly, leaving developers spending a lot of time on approval processes at upper levels.

The discussion shows that Japanese companies’ diversification is not a simple management preference but a structural result of intertwined employment, capital and organisational operations. It also highlighted that the same structure can be a strength in precision manufacturing, but can instead act as a constraint in industries such as AI and electric vehicles that require quick choices and focus.