Kobe Steel Scandal Deepens

Published October 21, 2017 by Carl De Luna

For decades now Japanese made goods have been known for their quality, integrity, reliability and workmanship. The Made in Japan brand has been among the most trusted in the world. However, their reputation is beginning to show cracks. An increasing amount of Japanese companies have admitted to fraud and misconduct in recent years and it does not bode well in maintaining the high trust toward Japanese made products. Japan Inc.’s Kobe Steel added further questions when a scandal spewed from nowhere, and we are just learning how widespread the problem is. Furthermore, the allegations bring doubt over the safety and worthiness of products made from their steel.

Kobe Steel employees were falsifying data about their aluminum and copper products durability and strength. The investigation found that several seamless copper pipes made by Kobe Steel and Materials Copper Tube Co. did not meet national safety standards. This harrowing revelation cast doubt on a wide variety of products made from these materials over a span of ten years. Further details from the investigation also revealed that employees hampered the internal probe launched by Kobe Steel. Kobe Steel Vice President Naoto Umehara added that some members of management were in on the act. Kobe Steel, Japan’s third-largest steelmaker, is currently allowing the Japan Quality Assurance Organization to inspect their products to ensure their products are up to par with Japanese Industrial Standards.

This scandal affects more than 500 companies from various industries and sectors. The internal investigation by Kobe Steel of its Kobelco Research unit revealed 70 cases of data tampering. Boeing, the world’s largest maker of passenger jets, used Kobe Steel products for their planes, but they do not consider it a safety concern. Other manufacturers such as General Motors and Toyota are investigating if it used any of Kobe Steel’s substandard products. Car manufacturers Honda and Mazda have come out saying they used Kobe aluminum parts in some of their car hoods. Bullet train maker Central Japan Railway also said they used Kobe steel parts for their bullet trains, and although some of them did not pass Japanese industrial standards, there were no safety issues. Hitachi also used Kobe Steel for their British trains but these had passed rigorous examinations. Among those involved are aircraft manufacturer Airbus and car manufacturer Daimler. Airbus has denied directly buying materials from Kobe Steel but they are still investigating their supply chain. Japanese automaker Nissan also acknowledged that it used Kobe materials in the same manner as fellow automaker Ford, which had aluminum parts on its hood of the Mondeo model sold in China, but they are still investigating if they were sourced during the affected time frame. The hood was not designed to protect those inside, so they have no safety concerns. Perhaps the most affected was Subaru, who used aluminum hoods extensively on its major models.

Recent updates from the investigation show more harrowing numbers. A new case involving fabricated steel thickness were delivered to customers. One customer received 3793 tons of steel plates which had incorrect measurements. Its Hatano plant near Tokyo has also stopped shipping more than 40% of their copper products after these were discovered to have violated Japanese Industrial Standards regulations.

Kobe Steel’s stock nosedived as the scandal grew. It lost $1.8 billion USD in market value, representing 40% of their value, last week alone. Future troubles lie ahead for them as the United States Justice Department is mulling potential legal action against Kobe Steel. Potential recall costs are also pending, if ever the scandal reaches newer heights.

In North America, Japanese products were already under a great unspoken suspicion that they might be radioactive thanks to the Fukushima Daiichi nuclear disaster. This is a terrible self-inflicted black eye for the Japanese reputation for high-quality manufacturing. Last June, I reported on auto parts manufacturer Takada who filed for bankruptcy following a scandal involving faulty airbags were blamed in at least 17 deaths, 12 of those in the United States. Takada was guilty of producing faulty airbags which could “explode violently and spray shards of metal at occupants”. They also concealed and falsified data regarding the problem. They agreed to pay $875 million USD in recall compensation costs to automakers and $125 million for the victims of the faulty airbags. Last year, Mitsubishi Motors and Suzuki Motors also revealed that they have been cheating on gas-mileage tests which overstated the results of their vehicle’s fuel economy. Toshiba has also faced troubles such as its accounting scandal and nuclear power business.

Japan Macro Advisors managing director and chief economist Takuji Okubo attributes the decline in Japanese quality to changes in the market atmosphere. Originally, large companies were the way to do business in Japan as they were well diversified and always managed to remain “stable, predictable and growing”. But now, large companies are unable to adapt to rapidly changing market demands. Fujitsu Research institute senior research fellow Martin Schulz also mentioned adjustments which large companies had to make. Back in the 90s, large Japanese corporations were primarily focused on growth, but in the current zero interest rate economy, growth could never be what it was in the past. They had to focus their efforts on cost-cutting, extreme efficiency and restructuring. Schulz even described that improving efficiencies has led to management stretching the limits of quality control and key employees and managers being pushed to the breaking point, which results in incidents of misconduct and overwork.

These sources of pressure create Japanese corporate scandals and should be a cause for concern in the Japanese government. Some safeguards are already in place such as the law to protect whistle blowers and the Japanese Consumer Affairs Agency. But these are not enough to provide the environment for whistle blowers to reveal the wrongdoing being hidden by large Japanese firms. There should be greater protection as there is no penalty for companies who punish staff by either demoting or firing whistle blowers. There should be a more pro-active regulatory agency testing and setting a standard for products made by Japanese firms. They should be able to test the specifications of products and see if they are not tampered or falsified. They would need sophisticated equipment as some cases such as fuel efficiency can be tampered with using a software. Companies should also have external auditors which test products to see if it is up to par.

Greater effort should be exercised by buyers to test raw materials before using them as a main part of another product. They should be wary about quality as injuries or even deaths due to their products will not bode well for their brand and their future. Kobe Steel has a big job on their hands as they potentially could face the same fate as Takata. They should be prepared for any eventuality from this scandal. But if they weather the enormous storm which they are facing, they should redeem themselves by firing responsible personnel and implementing stricter quality control mechanisms to avoid future troubles.

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