October 10, 2017 8:13 pm JST

Scandal dents Kobe Steel shares -- and Japan's brand

Country's reputation for quality craftsmanship is on the line

TOMOYA ONISHI, KAZUE YASUHARA and KOJI MURAKOSHI, Nikkei staff writers

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

TOKYO -- Kobe Steel shares ended Tuesday's trading limit down, at 1,068 yen per share, having lost 300 yen, or 21.9%.

It was the first trading day since the materials maker announced that employees had been falsifying data regarding the company's products.

The scandal follows by mere days an announcement by Nissan Motor that it was using uncertified employees to do final safety checks on cars -- then stamping documents with certified workers' seals.

Earlier this year, Takata filed for bankruptcy, buried by a scandal in which it was using unstable air bag inflators that malfunctioned.

The fact is, there has been a long list of manufacturing scandals. Now corporate Japan is wondering if its prestige has suffered an irreparable blow.

The company on Sunday announced that managers and other employees at some factories had been involved in falsifying data regarding the strength of aluminum and copper products for at least 10 years.

In addition, dozens of other employees were found to have kept their mouths shut about the malfeasance.

Kobe Steel apparently failed to learn from its peers' scandals, further shaking international confidence in the "Made in Japan" brand.

In what it called an emergency press conference, Kobe Steel on Sunday admitted to and apologized for falsifying inspection data regarding aluminum and other products over the years.

The Tokyo Stock Exchange was closed on Monday for a national holiday. When it reopened on Tuesday, investors rushed to sell the steelmaker's shares. With sell orders far outweighing buy orders, though, trades failed to be executed.

The company's shares ended Tuesday at their lowest point since late June. The scandal is affecting corporate clients as well. Nissan Motor and Mazda Motor opened lower on Tuesday. Kobe Steel products involved in the data falsification scheme have been used in their vehicles, the two automakers said.

Kobe Steel has shipped products with fabricated data to more than 200 companies. By falsifying data on the quality of its products, the steelmaker has repeatedly violated customer contracts.

A serious aspect to the problem is that no questions had been raised from within Kobe Steel about the quality inspections until the misconduct was discovered in August during a voluntary in-house probe.

There are tens of employees who have been involved in the misconduct in one way or another in the past year alone. The malfeasance dates back at least 10 years. If it goes back further, the involvement of even more employees is likely.

Product data is believed to have been falsified at four domestic factories, all in a similar manner, with employees effectively keeping quiet about the irregularities.

At the bottom of Japan's spate of corporate scandals is the lack of a consumer-oriented mindset.

During the press conference on Sunday, Naoto Umehara, Kobe Steel's executive vice president, said the employees' past experience gave them confidence in the products.

The employees thought customers "will manage to use [the products] well because there were no claims about them," Umehara said.

Umehara also acknowledged that Kobe Steel "has had only a low level of awareness regarding contract compliance in transactions between private companies."

The executive vice president's remarks appear to betray a casual regard for compliance, quality and safety.

The timeline of how the scandal emerged, meanwhile, seems to betray a disregard for end consumers. On Aug. 30, Kobe Steel's management team, including Chairman and President Hiroya Kawasaki, received a report on the issue from managers at the factories where data was being falsified.

Kobe Steel then prioritized discussions with its corporate clients. At the same time, it would conduct safety investigations. Letting the public in on the news could wait.

On Sept. 28, after learning that data was being falsified on many more products than initially thought, Kobe Steel reported the case to the Ministry of Economy, Trade and Industry.

METI ordered the company to go public with the information, and Kobe Steel's corporate clients were applying similar pressure.

Then came a three-day weekend, and Kobe Steel held the press conference in the middle of it.

During the announcement, Kobe Steel apologized only to its manufacturing customers, not mentioning consumers at all.

Supply chains often begin with makers of basic materials, which wind their way to automakers, electronics companies and machinery producers.

An executive at another materials maker said, "We never completely figure out which finished products our company's products go into."

Basic materials suppliers are out of touch with end users because they primarily engage in the business-to-business marketplace.

If autos, aircraft and trains containing the Kobe Steel products in question have any safety problems, their makers might be forced to recall them or replace parts. The consequences for these companies could be dire.

On the edge of crisis mode, Japan's manufacturing industry might want to put its house in order.

Kobe Steel, Ltd.

Japan

Market(Ticker): TKS(5406)
Sector:
Industry:
Non-Energy Minerals
Steel
Market cap(USD): 3,770.02M
Shares: 364.36M

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