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Scandals put Japan firms’ integrity at stake

TOKYO

Big manufacturers of cars, aircraft and bullet trains have long relied on Kobe Steel to provide raw materials for their products, making the steel maker a crucial, if largely invisible, pillar of the Japanese economy.

Now, Kobe Steel has acknowledged falsifying data about the quality of aluminum and copper it sold, setting off a scandal that is reverberating through the global supply chain and casting a new shadow over the country’s reputation for precision manufacturing.

The fallout has the potential to spread to hundreds of companies. Top Japanese automakers said on Wednesday they were scrambling to assess the safety of vehicles containing products from Kobe Steel, which has admitted falsifying quality data in a growing scandal.

Toyota, Nissan, Honda, Mitsubishi Motor, Subaru and Mazda joined aviation firms and defence contractors Mitsubishi Heavy Industries, Kawasaki Heavy Industries and IHI that have used the steelmaker’s products.

Kobe Steel’s admission raises fresh concern about the integrity of Japanese manufacturers. Nissan last week said it would recall more than 1 million cars after regulators discovered unauthorised inspectors approved vehicle quality, while Takata pleaded guilty this year of misleading automakers about the safety of its air bags. Kobe Steel said the products were delivered to more than 200 unidentified companies, with the falsification intended to make the metals look as if they met client quality standards.

Japan’s famous “Shinkansen” bullet trains also used Kobe Steel’s aluminium, as did high-speed trains in Britain, according to engineering firm Hitachi.

“Products used (for both Japanese and British trains) met safety standards. But they did not meet the specifications that were agreed between us and Kobe Steel,” a Hitachi spokesman said.

Honda spokesman Tamon Kusakabe said: “As to safety, we are still studying (a possible) impact.”

“At this point, we don’t see a critical problem as we have our own safety inspection on materials we use. But we are still investigating and it’s premature to say” if recalls will be necessary.

Auto giant Toyota has already said Kobe Steel supplied materials to one of its Japanese factories, which used them in hoods, rear doors and surrounding areas of certain vehicles.

The industry ministry has pressed Kobe Steel to work with its clients, spread over a wide range of industries, to conduct urgent safety analysis. Kobe also admitted on Wednesday that it was in talks with one client who received steel powder that did not match specifications.

However, it declined comment on a media report that materials used in semiconductors were also impacted by the scandal.

The Kobe Steel scandal broke on Sunday when the manufacturer first admitted falsifying data linked to the strength and quality of products. An internal probe has revealed that data were fabricated for about 19,300 tonnes of aluminium products, 2,200 tonnes of copper products and 19,400 units of aluminium castings and forgings shipped to clients between September 2016 through August 2017.

The stock dived 22 per cent on Tuesday to finish at 1,068 yen ($9.50), its maximum daily loss limit — wiping almost one billion dollars off the firm’s market value.

The company said the fabrications, which might have started a decade ago, could affect products sent to as many as 200 companies but it remained unclear whether the scandal affected product safety.

Kobe Steel, one of Japan’s oldest industrial companies, was founded more than a century ago. Headquartered in the western port city, it made about 7 million metric tonnes of crude steel in the year to March, as well as aluminum and copper. Its units include Kobelco Construction Machinery, which produces diggers.

Kobe Steel CEO Kawasaki has run the company since 2013, and has recently overseen moves to expand its presence in aluminium. Earlier this year, the company said it was spending $500 million to boost output of the lightweight metal, including buying a half-stake in a plant in South Korea. Kobe Steel’s aluminum and copper operations account for about 20 percent of total sales, according to data for the quarter ended June 30.

“Aluminum is a strategic business for Kobe Steel,” said Irisawa at Tachibana Securities. “If the aluminum business doesn’t work out well, I question where the company can make money,” given the mainstay steel business remains one of low profitability, he said.

The Ministry of Economy, Trade and Industry said late on Tuesday it was tracking the case. “We recognise this as an improper act that will shake fair trading,” Yasuji Komiyama, director at the metal industries division, told reporters in Tokyo. “We urge the company to make efforts to recover the trust of society as a whole, not just its customers.”

This latest scandal threatens to further undermine confidence in the quality of Japanese manufacturing. Shinko Wire, a Kobe Steel affiliate, in 2016 said a unit had misstated data on the strength of stainless wires for springs and that it had supplied customers with alloy that failed to meet industrial standards.

The problems at Kobe Steel are an additional headache for Nissan, which has already announced a recall of more than a million vehicles in the domestic market over a certification issue.

And it is just the latest in a series of affairs to embarrass Japanese industry. Airbag maker Takata went bankrupt after defective products were linked to 16 deaths and scores of injuries worldwide. Mitsubishi Motors last year admitted that it had been falsifying mileage tests for years.

And electronics giant Toshiba has admitted that its executives had pressured underlings to cover up weak results for years after the 2008 global financial meltdown. Toyo Tyre and Rubber officials were referred to prosecutors in March after the company’s 2015 admission it falsified data on rubber for earthquake-proofing buildings. “With a string of negative surprises at Kobe Steel lately, we believe investors are likely to distrust management even more due to this latest incident, despite emerging signs of earnings improvement in the steel and construction machinery segments,” JPMorgan’s Mori wrote.

Agencies