Big manufacturers of cars, aircraft and bullet trains have long relied on Kobe Steel to provide raw materials for their products, making the steel-maker a crucial, if largely invisible, pillar of the Japanese economy.
Now, Kobe Steel has acknowledged falsifying data about the quality of aluminium and copper it sold, setting off a scandal that is reverberating through the global supply chain and casting a new shadow over the country’s reputation for precision manufacturing. The fallout has the potential to spread to hundreds of companies.
Big multinationals — including automakers like Toyota, General Motors and Ford, as well as aircraft manufacturers like Boeing and Mitsubishi Heavy Industries — are investigating. The companies are trying to determine if substandard materials were used in their products and, if so, whether they present safety hazards.
It is a daunting task, since multinationals source from various suppliers and producers. The scandal hits a tender spot for Japan. The country relies on its reputation for quality manufacturing as a selling point over China and other countries that offer cheaper alternatives. But its reputation has been marred by a series of problems at some of Japan’s biggest manufacturers.
Nissan Motor said unqualified staff members had carried out inspections at its factories, prompting the carmaker to recall 1.2 million vehicles, though it was not clear if the quality of the vehicles had been affected. Mitsubishi Motors and Suzuki Motor both admitted last year that they had been exaggerating the fuel economy of their vehicles by cheating on tests.
Biggest blow
Perhaps the biggest blow to Japan’s reputation for quality has come from Takata, the airbag maker that was at the centre of the largest auto safety recall in history, involving tens of millions of vehicles. Its faulty air bags have been blamed for more than a dozen deaths.
Takata declared bankruptcy in June.
Toshiaki Oguchi, director of Governance for Owners Japan, a corporate watchdog, said that Japanese companies were generally diligent about quality, but that when cheating occurred — because of competitive pressure or other factors — it could too easily go unchecked. Japanese companies, he said, tend to discourage thorough examination or criticism, either from employees or from independent outsiders.
“When something goes wrong, companies always hire a committee of outsiders to examine what happened,” Oguchi said. “But why not be proactive? Why not have people reviewing procedures all the time?”
The extent of the problems at Kobe Steel are still unfolding. Kobe Steel said that employees at four of its factories had altered inspection certificates on aluminium and copper products from September 2016 to August this year. The changes, it said, made it look as if the products met manufacturing specifications required by customers — including for vital qualities like tensile strength, a measure of stiffness — when they did not.
The company said it was investigating possible data falsification involving another product, powdered steel, which is used mostly to make gears. The company said the powdered steel it was examining had been sold to one customer it did not name.
Other episodes of falsification
Kobe Steel added that it was examining other possible episodes of data falsification going back 10 years. The company did not provide significant details on the discrepancies, making it difficult to immediately determine if they posed a safety threat.
No deaths or safety incidents have been attributed to Kobe Steel. The company’s share price dropped sharply on the first day of trading and had lost about one-third of its value since.
“The falsification problem has become an issue that could destroy international faith in Japanese manufacturing,” the Japanese financial newspaper Nikkei said.
Even as Japan has given up its lead in technologies like televisions, cell phones and computers, it still excels in highly valued products used behind the scenes, including precision machinery, speciality chemicals, sensors and cameras. Quality helps Japan preserve its markets overseas despite intense competition.
Although China is the world’s largest steel-maker, Japan still exports large amounts of iron and steel there, for use in industries like auto manufacturing. One of the products at the centre of the scandal, rolled aluminium, is widely used in the transportation industry because it is light. The lighter a car, train or aeroplane, the less fuel required to propel it.
Assessing exposure
Global manufacturers are now trying to assess their exposure, as they dig through an extensive supply chain. A big car company like GM buys millions of tonnes of steel a year from a dozen or two dozen producers, in a variety of grades and forms. Steel can be sourced from different mills and shipped to any number of plants worldwide.
GM, for example, has 12 vehicle assembly plants and six stamping plants in the US alone, all of which take deliveries of steel from many different producers. All of Japan’s major carmakers — Honda, Mazda, Mitsubishi, Nissan, Subaru, Suzuki and Toyota — are looking into their use of Kobe Steel materials.
Toyota called the data falsification a “grave issue” and said it was looking into the problem and considering how best to respond, a statement echoed by other carmakers. Both Ford and General Motors are trying to determine whether they have used the company’s products.
Kawasaki Heavy Industries, which makes equipment for Shinkansen high-speed trains in Japan, said it was investigating. JR Tokai, a railway company that operates the busiest Shinkansen route in Japan, between Tokyo and Osaka, said that the data discrepancies “do not present a problem in terms of design standards,” but that it was nonetheless considering whether to replace certain train components.
Mitsubishi Heavy Industries uses aluminium from Kobe Steel in a mid-size aircraft it is developing, the Mitsubishi Regional Jet, as well as aircraft components it supplies to Boeing. Mitsubishi Heavy said it was investigating.
Boeing said in a statement, “Nothing in our review to date leads us to conclude that this issue presents a safety concern, and we will continue to work diligently with our suppliers to complete our investigation.”
Common organisation issue
Kobe Steel’s problem points to “a common organisation issue,” said Shin Ushijima, a lawyer who serves as president of the Japan Corporate Governance Network. He drew parallels between Kobe Steel and Takata and Mitsubishi, as well as with financial-reporting improprieties at Toshiba, which admitted to overstating profit in 2015.
“Boards aren’t doing their jobs,” he said. “This isn’t an issue that can be solved by the president resigning. There needs to be wholesale change.”
He added, “The Kobe Steel case is a test of whether we’ve learnt anything from Toshiba and these other issues.”
Kobe Steel said it had confirmed data falsification affecting roughly 19,300 tonnes of flat-rolled and extruded aluminium products, 19,400 units of aluminium casting and forgings, and 2,200 tonnes of copper products. The amount was about 4 per cent of the company’s output of those products from September 2016 to August.
The company said that it had received no reports from customers of problems with the affected products, and that the falsification had been discovered during an internal review. The improperly certified metals had been shipped to about 200 companies, but Kobe Steel declined to reveal their names.
It said “tens” of employees and managers had been directly involved in the falsification, although no penalties against the employees were immediately announced. The company is still investigating.
— New York Times News Service
