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Business trends

Crumbling and empty plants led Japan Inc. astray

Scandals shine spotlight on labor crunch and limits of 'kaizen'

Subaru conducted improper inspections of vehicles at its main plant in Gunma Prefecture, Japan.

TOKYO -- The series of quality compliance scandals that has rocked Japanese manufacturing has unmasked the sobering truth that workers were often tempted to take shortcuts in quality testing as they struggled to keep up production at decaying and short-handed plants.

"Aging buildings and air conditioning systems made it impossible to create required humidity conditions for mileage and emissions tests," according to a report on faulty testing at Subaru. "Testers would surreptitiously adjust the level of humidity using the steam from electric kettles," the report added. 

Mitsubishi Materials subsidiary "shipped out substandard aluminum products because the space to store products for retesting would fill up in a day," its report said. The company covered its tracks by falsely labeling the quality data on the metal.

Reports compiled by lawyers who investigated faulty testing have revealed a reality far removed from the stellar quality reputation that has made Japanese products competitive in the world. As parent companies poured money into overseas plants with access to cheap labor, domestic workers, increasingly fearful that their plants would be shut down, became obsessed with meeting delivery deadlines.

Subaru, recently forced to recall about 100,000 vehicles due to improper inspections, has been using testing facilities built in the 1960s at its main Gunma Prefecture plant . At Nissan Motor's Tochigi plant, the air conditioning equipment at the emission testing site dates from 1977. Nissan failed to follow correct procedures for checking emissions as well as fuel economy.

Both car companies derive most of their group sales offshore: Nissan 60% and Subaru 70%. While capital spending has been devoted mostly to moneymaking operations overseas, domestic plants have had to settle for one round of repairs after another. Overall, equipment at large corporations is now 50% older than in fiscal 1990, according to the Ministry of Economy, Trade and Industry.

Investment on talent has lagged as well. After Nissan was bailed out by Renault in 1999, the Japanese automaker pursued layoffs under the reign of Carlos Ghosn, currently the chairman. That deprived Nissan of needed technicians, its report concluded.

The lack of manpower has become a common theme in the quality scandals. KYB, which shipped faulty earthquake shock absorbers, had just eight inspectors. At times, only one person would check the material.

The amount of work involved in the testing procedures contributed to KYB's cheating. "It takes five hours to take apart and rectify a product that fails to meet standards," said Shigeki Hirokado, president of Kayaba System Machinery, the subsidiary implicated in the scandal.

Japanese manufacturers have positioned domestic plants as "mother factories" where they kaizen, or perfect, efficiency. They then transfer that know-how to offshore facilities. But establishing cutting-edge plants in emerging nations, where labor costs are cheaper, ended up hurting competitive advantage on the domestic front. With Japanese plants compared unfavorably to sister installations overseas, the fear that domestic production will shrivel up has started to take root on the factory floor.

Nissan picks global production hubs based mainly on production capacity and local labor costs. In 2007, the automaker transferred production of the March compact from Japan to Thailand, and sent many surplus engineers overseas.

Kobe Steel, which falsified quality data on aluminum products, employed similar tactics. "There was a fear that plants whose sales have declined will have their operations shut down," said an employee.

Japanese companies are hardly alone in deceptive practices, as Volkswagen's large-scale emissions cheating proves. But while scandals at Western companies usually feature the top brass ordering the misconduct, "many of the scandals at Japanese companies are the result of workers trying to deliver what their bosses wanted," said Mayumi Prevost at Deloitte Tohmatsu Financial Advisory.

In other words, lower-level personnel engaged in wrongdoing without specific orders from above. Japanese manufacturers often leave site staff in charge of solving problems, all in the name of kaizen. According to the investigative reports, the staff shirked compliance to cut costs and meet deliveries.

Nissan plans to spend 180 billion yen ($1.58 billion) over six years on testing equipment, and to hire 670 inspectors. Subaru will invest 150 billion yen over five years on updating equipment. 

Germany's Industry 4.0 initiative seeks to modernize plants with robotic technology, and repatriate production capacity. Last year, Adidas fired up a heavily automated "speedfactory" in Germany, marking the first time in 24 years the company has made shoes at home.

Japan looks to copy that success. Canon, for one, is building its first domestic plant in roughly a decade, which will churn out digital cameras largely through labor-saving technology.

But burdened with a quickly shrinking working-age population, the country's manufacturing base faces an uphill climb as it hurries to reform to stay relevant. 

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