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Business

Blame mismanagement for tarnishing the 'Made in Japan' label

Kobe Steel CEO expected workers to boost production with grit alone

TOKYO -- Trust in Japan's manufacturing industry is eroding. In one of the latest revelations of corporate malpractice, Nissan Motor has admitted that unqualified workers routinely conducted safety inspections of its vehicles. In another, Kobe Steel has apologized for falsifying data on the strength of its products.

These cases raise a question about industries that for decades convinced the world that "Made in Japan" was synonymous with quality craftsmanship: What went wrong on corporate Japan's factory floor?

Take Kobe Steel's Daian plant in Inabe, Mie Prefecture, western Japan. It is something of a state-of-the-art aluminum-processing facility. Inside, one aluminum sheet after another gets pressed into auto suspensions. Next to the line, workers pour aluminum into molds made of sand. The molds are created by workers using metal objects, files and brushes according to specifications provided by customers. The skillfully carved sand molds look like works of art.

Kobe Steel President and CEO Hiroya Kawasaki attends a press conference in Tokyo on Oct. 13. (Photo by Ken Kobayashi)

Kobe Steel has the know-how to develop special materials for aluminum alloy based on customer requests, then mold them into complicated shapes with high precision. The technology has been well-received around the world by automakers, aircraft builders, railway companies, arms producers and other manufacturers.

Yet the company has been in the red for two consecutive fiscal years, largely due to a global iron glut and high raw materials costs. A reckless push to produce more construction machinery has also added to its losses.

Chairman and CEO Hiroya Kawasaki bet on aluminum products, expecting demand from an auto sector that is eager to find a way to make its cars lighter. He ordered production be significantly boosted. But he did little to invest in new production systems to reduce the workload. He just counted on grit.

Pressure mounted on front-line workers. Delivery dates had to be met no matter what. Gradually, workers got out of step with management teams that were sending in orders from afar. It was in this dysfunctional setting that workers began falsifying data.

Another problem endemic to corporate Japan is  the keiretsu -- vertical networks of companies that include manufacturers.

Japanese materials makers have developed longstanding ties with customers, working closely with them to meet their needs. Clients often make requests that are more demanding than the official Japan Industrial Standards. Close relations between materials makers and their customers have allowed manufacturers to produce quality products at competitive prices.

But, in the case of Kobe Steel, the strength of aluminum used in the chassis of the N700A shinkansen bullet trains was found to fall short of industry standards. This raises suspicions the steelmaker took advantage of its cozy relationship with customers to sell substandard products. Kobe Steel apparently did not learn the lesson of a 2008 scandal, in which rival JFE Steel and others were found to have shipped steel pipes to customers without conducting the required inspections.

It is fair to label as inherently corrupt a system in which complacent steelmakers sell to customers who put unquestioned faith in products they have been told exceed industry standards.

Similarly, Nissan paid a steep price for its heavy reliance on skilled front-line workers at its plants. The automaker has a global alliance with Renault, and the partnership uses a unified benchmark to measure the performance of all its factories. Production is shifted across plants depending on productivity. The Nissan plant in Kyushu, southern Japan, has even had some production transferred out of Japan. The alliance's factory vs. factory competition helped reduce costs but also had a side effect: It exhausted workers.

Quality inspection certificates have been tampered with at four Kobe Steel plants including this one in Moka, Tochigi Prefecture.

The Kobe Steel and Nissan cases suggest structural problems. The more mature a market becomes, the more desperately companies try to cut costs. Front-line workers get put in a vice that they have to cheat their way out of. To management, today's technology-filled factories can look like black boxes. Workers clique, sectionalism spreads, lines get crossed.

At the dawn of the 20th century, Japanese manufacturers began making continuous efforts to catch up with their Western rivals. Toyota Motor learned from U.S. rivals. State-run Yawata Works, though it was born with the help of German experts, became world-class with sophisticated technology of its own. Fuel-efficient "Made in Japan" cars were well received in the U.S., one of the world's biggest auto markets. Japan shipped easy-to-use appliances across the globe.

Unlike in the West, where technological innovation often comes from a single genius, industrial Japan traditionally hammers out new ideas with input from numerous employees. Under the system, each and every employee is responsible for making improvements -- a spirit known as kaizen -- and then they collectively try to cut costs by a yen or even by a sen, a hundredth of a yen.

Kaizen, however, appears to have reached its limit. Countries with low labor costs have emerged as alternative manufacturing bases, and digitization has advanced significantly, greatly changing the way things are made.

Corporate Japan must dramatically shift its thinking away from incremental kaizen improvements. The management of Japan's leading companies has failed to do this.

And it is not only scandals that is making this plain. Data tells a similar story. According to the Japan Productivity Center, Japan in 2000 had the second-highest productivity in the industrialized world, after the U.S. In 2014, Japan had slipped to 11th, overtaken by Germany, the U.K., France and others.

Western rivals passed Japan by partly because their factories adopted information technology. German companies did so under the slogan of "Industry 4.0." Bosch, a major auto component maker, has streamlined its plant in southwest Germany, where 200 parts are made, from seven production lines to one. Every product made at the plant has an electronic tag, and workers are monitored by a radio system. Thanks to this digitization, overall productivity improved by 10%.

In Bosch's case, executives pointed in a new direction, then made the necessary investment to take the company where they wanted it to go.

Yes, similar things are happening in Japan. Fanuc, the leading industrial robot maker known for its "isolationism," has asked Cisco Systems of the U.S. and NTT, or Nippon Telegraph and Telephone, for help in building a smart factory. Toyota, meanwhile, has teamed up with Hitachi to put internet-of-things technologies in its factories.

Yet much of the rest of Japan's manufacturing sector needs to reform. And for this, it will need strong management.

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