Kobe Steel CEO to quit

On Tuesday, Hiroya Kawasaki, CEO and Chairman of Kobe Steel Ltd announced that he will step down to take responsibility for a widespread data fraud scandal, although doubts remain over the company’s corporate culture and possible fines.

Background

Kobe Steel is a major Japanese steel manufacturer headquartered in Chūō-ku, Kobe. Kobe Steel also has a stake in Osaka Titanium Technologies. The company supplies about half of the global market of the wires used in valve springs of auto engines.

In October 2017, Kobe Steel revealed that it had falsified data that affected 19,300 tons of flat-rolled and extruded aluminium products, 19,400 units of aluminium casting and forgings, and 2,200 tons of copper products. This amounts to 4% of Kobe’s output from September 2016 to August 2017.

Over the years, Japan has built a reputation for quality manufacturing. It has used this as an arbitrage over China and many other countries that offer cheaper alternatives. The Japan Quality Association (JQA) is responsible for ISO certification. It was established in 1958 as the Japan Management Institute (JMI) under Japan's Ministry of International Trade and Industry for the purpose of export inspection.

However, in more recent times, the manufacturing sector has been severely affected due to a series of scandals. One the most damaging scandals was the Takata Corporation admitting to have covered up facts concerning airbags. The airbags were directly linked to a number of deaths and injuries that had occurred across the world. This resulted in legal action against Takata. In 2017, Takata filed for bankruptcy protection in the US and Japan. It is facing billions of dollars in liabilities over its airbags.

Analysis

Hiroya Kawasaki will resign as CEO and Chairman of Kobe Steel on April 1, with his successor to be decided at a board meeting to be held soon, the company said.

“We discovered that inappropriate actions were widespread and were carried out with the knowledge and involvement of many, including management,” it said in a statement published along with results of a four-month probe by external investigators. It also said, “Considering the multiple compliance issues that we’ve had in the past, we must say that there are deep-rooted problems, not only in terms of compliance but also in the corporate culture and mindset of employees and management.”

Kobe Steel also announced the resignation of Executive Vice President Akira Kaneko and temporary pay cuts of up to 80 percent for all internal executive officers.

Reuters, the news agency quoted saying, “The case was one of the country’s biggest industrial scandals in recent memory, which set off a rash of malfeasance revelations by other Japanese heavyweights, hitting the country’s reputation for manufacturing excellence.”

“In the past several months, Mitsubishi Materials Corp, Toray Industries and Ube Industries have also admitted to product data fabrication while automakers Nissan Motor and Subaru Corp have revealed incorrect final inspection procedures” they added.

Assessment

Our assessment is that Kobe Steel is still facing legal and financial risk. The Japanese government had recently revoked its stamp of quality on some of its products. As we had previously mentioned Kobe Steel’s recent announcement may have further dented that the trust international community has placed on the Japanese manufacturing industry. We had earlier remarked that the Japanese companies may be finding it difficult to compete with their exacting standards and now, are being forced to lower the quality benchmarks to remain competitive and profitable.