A little over a month after the original story broke, Kobe Steel continues to make headlines for falsifying data on its products, and the problems continue to reach ever deeper. This scandal is just the latest in a long line to blacken the once-touted prestige of “Made in Japan” in recent years. Against such a backdrop of wavering trust, Kobe Steel’s systemic concealment of falsified data pertaining to the quality, strength and durability of some of its metal products has cast significant doubt on the reliability and reputation of the Japanese market.
The pursuit of unrealistic profits and a “closed organizational culture” is often suspected of being at the heart of many of Japan’s corporate scandals. In the case of Kobe Steel, given that data for over 20,000 tonnes of metal spanning a period of over 10 years was falsified, the practice seems to have been embedded within its operations. Over this period, reports allege that memos on how to conceal data were being passed between managers and employees. It appears that a corporate culture of “follow the leader” and obeying the instructions of superiors may have created an environment that made it difficult for employees to blow the whistle concerning these improper practices. The systematic way in which the data was falsified and these practices concealed is a concerning matter, opening the door to further questions about the governance of Japanese companies.
The company’s shares have plummeted 42% since the scandal came to light, wiping $1.8 billion from its market value, and the company’s woes are only beginning. Decades of litigation are expected in relation to the scandal. Kobe executives have acknowledged the possibility of a customer exodus and “extraordinary losses”. The European Aviation Safety Agency have advised against using Kobe Steel products, while the U.S. Justice Department is seeking documentation from the company. Just this week, the company lost its last industrial quality badge.
The wider effect on the global economy is still unclear, with Kobe’s transgression affecting supply chains around the world, and sending the likes of Boeing, Toyota, Honda and Nissan scrambling to ensure the integrity of their products. While several Japanese carmakers were quick to confirm that aluminium plates provided by Kobe did not affect car safety, given the sheer range of materials enmeshed in the scandal, Toyota confirmed “we do not regard this matter as closed”.
Ultimately, investors may find themselves looking at Japan and asking, “when is it all going to end?” Safety concerns over Takata’s airbags which came to light in 2008, resulting in countless recalls and ultimately the bankruptcy of Takata, continue to beleaguer the automobile industry. Toshiba’s ongoing accounting and regulatory troubles, which led to the biggest recorded loss in Japanese corporate history, appear to have been deeply ingrained in its corporate framework. Many reviews of Toshiba’s malpractice, including a third-party investigation, point to a corporate culture of “achieving target numbers” and “pleasing your superiors” that often led to instances of improper practices by employees. Similarly, the revelations that quality testing at Nissan and Subaru’s factories was being carried out by unqualified individuals also seemed to stem from a high-pressure corporate environment where employees are encouraged to hit their targets and not ask too many questions. In this context, it is hard not to wonder what other issues yet to be uncovered are lurking just around the corner.
Johnathon is an analyst covering the Japanese market.