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Kobe Steel Chairman, President and CEO Hiroya Kawasaki answers questions about the company's data falsification scandal at an Oct. 26 press conference.
Business

Kobe Steel trapped in endless chain of scandals

Diversification strategy and complacency have distracted from efforts to change

TOKYO -- Hiroya Kawasaki, chairman, president and CEO of Kobe Steel, has many frog ornaments in his offices in Tokyo and Kobe. Kaeru, Japanese for "frog," has the same pronunciation as the word for "change."   

The frogs have been there since he became president in 2013, to remind him of his desire to change the company. "Nobody in the company can order the president to do things. Every day, the frogs tell me that I have to change the company, to not be content with the status quo," Kawasaki wrote in a column in The Nikkei this February.  

Maybe the frogs needed to croak louder.

One month after massive falsification of data concerning the safety and quality of Kobe Steel products came to light, the company is facing an uncertain future. The scandal is the latest in a series that have struck the company.

Data fraud appears to have been the norm at four domestic sites involved in the company's aluminum and copper businesses. Past irregularities have also been discovered at some of its steel and machinery units.

Many of the over 500 companies that have bought Kobe Steel products affected by the scandal, including major automakers, have announced that they have confirmed the safety of the products.

But the magnitude of repercussions on the steelmaker's current and future earnings is still unclear.

The false data scandal is only the latest of a series of episodes that have signaled failed corporate governance at the company.

Scandal is nothing new to Kobe Steel, which saw some of its past top executives resign amid such allegations as payoffs to "sokaiya" corporate racketeers or illegal political funding.

The company's long history of misconduct indicates that it has never seriously tackled problems at the root of these scandals.

Every time it has been hit by a scandal, Kobe Steel has announced measures to prevent a recurrence. CEO Kawasaki, who took the top posts in 2013, unveiled in May a code of conduct for employees aimed at rooting out the causes of misbehavior.

The code calls for high levels of ethics and professionalism and declares that each and every employee needs to act properly to help the company regain the trust of the public.

The data-doctoring scandal, however, surfaced only a few months after the code of conduct was announced.

Kawasaki has lamented that the company's credibility has "fallen to zero."

Kobe Steel's mill in Kobe, west of Japan

Large-scale data falsification involving entire units has been occurring for decades. The employees involved did nothing to stop the practices even after they became board members.

In the sokaiya payoff scandal that made headlines in 1999, senior Kobe Steel executives believed to be candidates for the top job were convicted of violating the commercial law.

Sokichi Kametaka, who was then serving as an adviser to the company after many years of managing it as an "autocratic" chief executive, was also questioned about the scandal and stepped down to take responsibility.

In 2006, fabrication of data concerning soot and smoke emitted by the company's steel plants in Kakogawa, Hyogo Prefecture, and Kobe was disclosed.

As a consequence of the latest scandal, Kobe Steel has lost industrial standards certification for some of its copper tube products manufactured at subsidiary Kobelco & Materials Copper Tube's plant in Hadano, Kanagawa Prefecture.

This is not the first time the Japanese Industrial Standards certification for the company's products has been repealed. The Kobe Steel group suffered the same dishonor in 2008 and 2016 as well.

While its main domestic rivals have bulked up through mergers, Kobe Steel has been staying away from the wave of consolidation in the industry.

Instead, Kobe Steel has been diversifying its business operations with a lot of zeal. Consequently, it now has a broad business portfolio including aluminum and machinery operations as well as its core steel business.

Kobe Steel does not claim the leading position in any of the markets it is in. It used to boast the top share in the Japanese aluminum market, but it is now trailing UACJ, which was created through a merger of two aluminum makers.

Kobe Steel has disclosed that at least several dozen of its employees, including those in management posts, were involved in data falsification at its four manufacturing plants of aluminum and copper products.

Despite the serious damage the revelations have done to the company's reputation and credibility, few of its major corporate clients have switched to other suppliers.

Aluminum used in cars is one of Kobe Steel's staple products.

Japanese manufacturers of steel and aluminum products are currently reveling in strong sales to automakers. Kobe Steel's group net profit for the April-September period soared 860% from a year earlier to 39.3 billion yen ($344 million).

The makers are operating their plants at full capacity to meet demand. "We can hardly accept any new orders," said a top executive at a major aluminum maker.

Much the same is true with steelmakers. "We have not even considered the possibility of taking additional orders," said Shinichi Okada, executive vice president at JFE Holdings.

Many of Kobe Steel's businesses are operating in a market dominated by a small number of players.

"I do not see a high possibility of Kobe Steel witnessing a big dent in its share in any market in the short term," said Yuji Matsumoto, an analyst at Nomura Securities.

But the company's decimated credibility could have significant long-term impacts on its bottom line and customer base.

History of diversification

Kobe Steel has its origins in Suzuki Shoten, a major trading house in the early 20th century. The steelmaker started diversification of its businesses even before World War II.

Currently, the company has seven main business units: steel, aluminum and copper, construction machinery, industrial machinery, welding, engineering, and power generation.

It is one of the most widely diversified materials makers in Japan.

Kametaka, who became president in 1987, further expanded the scope of the company's operations by forming alliances with such foreign giants as Alcoa and USX (currently U.S. Steel).

But the 1995 earthquake that flattened the city of Kobe, Hyogo Prefecture, forced Kobe Steel to rethink its expansion strategy. The manufacturer began to pull the plug on unprofitable businesses and focus its resources on strategically important ones.

The strategy shift, however, has done little to lower the barrier between the company's different business arms, leaving many manufacturing and marketing units closed fiefdoms with little exchange or interaction with other sections.

The top executives in charge of individual units are chosen from those who have climbed the ladder within the units, which maintain tight control over their own operations and decisions under a highly compartmentalized structure.

Kawasaki became aware of the irregularities at the aluminum and copper units at the end of August. But he apparently took no effective action in response to the problem.

The company's explanations about the scandal have changed significantly during the weeks in another sign of poor corporate governance.

With the individual business units operating effectively as independent companies, the top management has consistently failed to take control of them.

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