Steel Scandal Rocks Japan

Kobe Steel has been accused of violating Japan's competition law after the firm admitted it had fabricated the strength and quality data of products sold to hundreds of clients. Japan is a sovereign island country..

Kobe Steel has been accused of violating Japan's competition law after the firm admitted it had fabricated the strength and quality data of products sold to hundreds of clients.

Background

Japan is a sovereign island country in East Asia, located in the Pacific Ocean. Often called the "Land of the Rising Sun", Japan is a stratovolcanic archipelago consisting of about 6,852 islands. It is renowned for its historical and extensive cinema, rich cuisine and its major contributions to science and modern-day technology.

Japan is the third largest economy in the world by nominal GDP after America and China. It has the fourth largest purchasing power parity. It is also considered the world’s second largest developed economy. After the devastation of the World War II, it achieved a steady and significant growth in the second half of 20th century. Its role in the international community as a major aid donor and source of global capital and credit is considerable.

Kobe Steel Ltd., operating worldwide under the brand Kobelco, is Japan’s 3rd largest steel manufacturer. It was founded in September 1905, with its headquarters in the port city of Kobe serving as a crucial importing and exporting location. Currently led by CEO Mitsugu Yamaguchi, it has 208 subsidiary and 62 affiliated companies across Japan, Asia, Europe, the Middle East and the US.  It manufactures and supplies a wide range of products and services such as iron and steel, aluminum and copper, welding, machinery, engineering, water eco-solutions and construction machinery.

Analysis

The company has been charged by Tokyo prosecutors for violating Japan’s Unfair Competition Prevention Act for falsifying quality specifications on products shipped to more than 600 customers at home and overseas, including car makers, airplane makers and nuclear power plants. Four plant officials have been exempted from prosecution on grounds that they were not fully aware of the violations.

In a report released in March this year, Kobe Steel is said to have sent about 300 quality assurance certificates to its clients between September 2016 and September 2017, despite the corresponding products not meeting the requisite standards. Data was manipulated at 23 domestic and overseas plants including plants at Tochigi, Yamaguchi, and Mie prefectures. As per the report, the data fraud has been going on for nearly five decades since the 1970s when the misconduct first began at its Tochigi Plant. The problem was first revealed in October 2017, with 525 cases being announced. The report also states that Kobe Steel has "deep-seated issues" around corporate culture and compliance.

In Japan, major railway operators Central Japan Railway and West Japan Railway have stated that their Shinkansen bullet trains contained aluminum parts sourced from Kobe Steel that did not meet industry standards. Overseas clients like Boeing, Ford and General Motors have been investigating whether they used any of the sub-standard materials but no safety issues have yet been reported.

The company has also admitted that more than 40 employees were involved in the falsification practice. The scandal has led to an overhaul of the company's senior management, including the resignation of its former CEO Hiroya Kawasaki earlier this year. It has led to similar revelations from a number of other companies in Japan.

Kobe Steel’s offices at several locations were raided by police to search for evidence of the company's misdoings and to question staff about the fraudulent activities. “We are taking this matter brought against us very seriously. The entire Kobe Steel Group is working together sincerely and straightforwardly to carry out preventive measures and is making every effort to restore trust. We once again deeply apologize for the considerable trouble we have caused to our customers, suppliers, shareholders and many others concerning the misconduct at Kobe Steel Ltd. and its group companies” the company said in a statement.

Kobe Steel is being investigated by the US Department of Justice and customers in Canada who have sought compensation for receiving substandard products.

Counterpoint

Kobe Steel has maintained that many of their clients have kept their contracts post the emergence of the scandal after confirming the safety of their products.

Assessment

Our assessment is that the scandal has rocked the manufacturing industry both in Japan and across the world. We believe that the company’s indictment might cast serious aspersions over corporate governance in the industry and undermine Japan's once stellar reputation for precision manufacturing. We feel that an exclusive focus on profits among management is to blame for the scandal.

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