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Kobe Steel President Hiroya Kawasaki announced the findings of the internal review at a Tokyo news conference.   © Reuters

Kobe Steel, focused on performance, overlooked quality scandal

Internal probe blames 'closed organizational culture' stifling whistleblowers

| Japan

TOKYO -- A closed-door culture that favored meeting deadlines over independent oversight led to the widespread quality data scandal at Kobe Steel, the company said Friday. But because they lack alternatives, many of its customers will likely stay.

Cheating its way to the top

The company's aluminum and copper segment, which sits at the epicenter of the scandal, exemplifies how the falsification took root, an internal probe revealed. Up until the mid-2000s, the operation had perennially posted weak earnings that dragged down the rest of the group. The situation reached the point where "a merger with another company was considered," said a Kobe Steel insider.

In fact, the report on the misconduct Kobe Steel published Friday notes how the segment's "plants and locations involved in inappropriate cases appear to have historically suffered the inability to contribute to the entire group's profit."

Fighting for its life, the aluminum and copper business focused on landing orders -- much of which were completed by manipulating quality data. "The management applied pressure," President and CEO Hiroya Kawasaki added at Friday's press conference.

Staff who dirtied their hands in the data cheating employed a Japanese industry term, tokusai, which refers to shipping products that do not meet ordinary client specifications. But tokusai also denotes the willing acceptance of such deliverables by customers, and the practice is believed to be in play at other industries.

But Kobe Steel's aluminum and copper segment skipped the client consent part of the equation to move falsely certified product and scramble its way to profitability. Because the customers did not see past the con, the organized deception became a new norm.

Organizational silos

Top domestic peers Nippon Steel & Sumitomo Metal and JFE Holdings have been busy upgrading their steel business through reorganization and offshore operations. Unable to directly compete against the two industry giants, Kobe Steel stepped up its diversification.

The result is a hodgepodge enterprise made up of seven segments stretching from aluminum and copper all the way to construction machinery and electric power. But top-level executives were unable to get a full grasp of the various production facilities and processes that went into the mix.

Each segment took increasing authority over areas like earnings, personnel, and quality assurance. The top brass effectively delegated all management decision-making to the factory floor.

With the formation of organizational silos at the aluminum and copper business, those who committed misconduct "could move between the manufacturing department and the quality department," according to Kobe Steel's report. As a result, quality assurance failed to serve as an independent check against manufacturing, the document finds.

No room for whistleblowers

Those circumstances went on for such a long period of time that the staff developed a habit of neglecting specifications regarding testing or product strength as long as "no complaints over quality come from customers," says the report.    

All the while, Kobe Steel's head office took a see-no-evil approach to these business affairs.  "As long as the plants were profitable, management did not do enough to try to look into whether" there was improper conduct "or grasp various issues that occurred during production activities at the plants," the report states.

Because the pressure from the top to perform was so stifling, employees within the "closed organizational culture" found themselves in a poor position to raise their voices as whistleblowers. "Even if there is a voice, nothing will change," the document declares.

Hard to lose customers

Even so, Kobe Steel says the problematic materials were otherwise found to be safe at over 90% of clients who received the shipments. That is not stopping some of those customers from considering other suppliers, but the choices are limited.

Mitsubishi Heavy Industries used Kobe Steel material in its H-IIA rocket, which launches satellites into space. "We've confirmed the safety [of the components] but we will continue analyzing strength levels," said Kouki Nimura, an executive fellow at Mitsubishi Heavy.

Kawasaki Heavy Industries, which has employed fraudulent Kobe Steel's parts in shinkansen bullet train cars and aircraft engines, is moving to take action against the scandalized supplier. "Of course, we wish to make a claim for the costs we've incurred," said Kawasaki Heavy President Yoshinori Kanehana.

But no company has officially announced it is dropping Kobe Steel. "If Kobe Steel reforms its product quality management structure, we will continue to procure shinkansen material," said Central Japan Railway President Koei Tsuge.

UACJ, the biggest producer of flat-rolled aluminum in Japan, has said it received contacts from clients regarding orders. But the company says it has little leeway to meet those demands since it is already operating near full capacity.

Though it appears Kobe Steel has avoided a hemorrhaging of clients, the company is still not out of the woods on the financial front. Net cash flow is expected to go negative for the third fiscal year in a row. The company is encountering trouble issuing new bonds over questions about its earnings.

Investigations conducted independently by the group still have to be endorsed by an outside panel of lawyers. A separate review compiling interviews with executives and alums is also due out in mid-December, a date that could coincide with any decisions by President Kawasaki or others to step down.


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