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Kobe Steel scandal: ‘look the other way’ culture of corporate Japan, faked data for over a decade

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The Kobe Steel scandal: What we know so far
It’s the latest big scandal to rock corporate Japan.
Kobe Steel (KBSTY), a century-old industrial giant, has admitted to falsifying data on products sold to top customers like Boeing (BA) and Toyota (TM).
It says as many as 500 companies could be affected, including manufacturers of Japan’s famous bullet trains.
Here’s the lowdown on the crisis that’s rippling through major industries around the globe:
What happened?
Essentially, Kobe employees faked reports to make it look as though products met the specifications requested by customers when in fact they didn’t.
The scandal initially concerned copper and aluminum parts, but has spread to steel products, too. It has raised doubts about thousands of tons of material shipped over a period of more than 10 years.
For the aluminum and copper parts, false data was given about their strength and durability.
Which industries?
Kobe steel sells metal to all kinds of different businesses. Some of the main industries to which it has supplied the suspect products include aviation, automobiles, railways and nuclear power.
Who’s affected?
In the aerospace industry, Boeing and Japan’s Mitsubishi (MHVYF) both used Kobe parts made with falsified data in their aircraft. But the two companies insisted they don’t believe the parts present a safety concern.
Japanese automakers Toyota (TM), Honda (HMC) and Nissan (NSANF) acknowledged they had used affected Kobe materials but were still assessing the consequences for their vehicles.
Ford (F) has said it found aluminum parts in the hood of its Mondeo model in China, but can’t confirm if they were sourced during the affected period.
Other big companies — including GM (GM), Mazda (MZDAF) and plane-maker Airbus (EADSF) — said they haven’t found any suspect parts so far but are combing their supply chains regardless.
The future of Kobe Steel is unclear, but it looks bleak right now. Its stock has nosedived 40% since the revelations first emerged.
Some analysts have warned the company could go bust, and others have suggested it could be broken up and sold off to rivals.
Kobe hasn’t put a number on the likely size of the financial hit from the scandal. The firm’s CEO has said it will bear the costs of any product recalls by its customers. He is also leading an internal probe into what happened.
Doesn’t this sound familiar?
Japan Inc has amassed a growing pile of embarrassing scandals in recent years.
They include Takata’s deadly airbags, Mitsubishi Motors’ fudged fuel-efficiency tests and Toshiba’s damaging debacles over its accounting and nuclear power business.
 
Japan’s Kobe Steel May Have Faked Data for Over a Decade
Kobe Steel Ltd. said it will co-operate with the U.S. Department of Justice after the agency requested documents related to the fake data scandal that risks engulfing Japan’s third-biggest steelmaker.
Kobe has said some 500 companies worldwide are in a supply chain tainted by admissions that it falsified certifications on the strength and durability of metals going back to 2007, including automotive giants Ford Motor Co. and General Motors Co. and the U.S.’s biggest plane maker, Boeing Co. The besieged Japanese company said in a statement it can’t yet quantify the impact of the crisis on its earnings.
The DOJ’s involvement means the company is “going to have to go overboard to be cleaner than clean,” said Alexander Medd, managing director of Bucephalus Research Partnership Ltd. in Hong Kong. “This is going to require a complete mental shift and rebuilding of trust.” Japan’s Ministry of Economy, Trade and Industry has also asked the company for a report on the scandal including causes and remedies.
Kobe’s global review of its units will probably reveal that data falsification began even longer than 10 years ago, according to a company executive, asking not to be named as the information isn’t public. The Nikkei newspaper reported Tuesday that irregularities over quality control at Kobe’s plants in Japan date back decades, citing a person it didn’t identify.
As the steelmaker works to contain the fallout, it has briefed analysts that short-term liquidity isn’t an issue as it seeks to generate cash including via asset sales.
Kobe Steel is also considering the sale of its real estate unit, the executive said. Jefferies Japan Ltd. analyst Thanh Ha Pham said that, while the company has enough cash and funding to cover short-term needs, it’s looking to raise money by lowering working capital and through asset sales, according to a note that followed a briefing with Kobe’s management on Monday.
Last week saw Kobe’s stock collapse 41 percent as investors rushed to punish the latest instance of corporate malfeasance in Japan, following similar misconduct around data at companies such as Mitsubishi Motors Corp. and Asahi Kasei Corp. It has since pared those losses, closing 3.1 percent higher in Tokyo on Tuesday for a two-day gain of 6 percent.
Kobe Steel could face losses of as much as 200 billion yen ($1.8 billion) in a worst-case scenario arising from its misconduct, according to Nomura Securities Co., while Japan Credit Rating Agency has placed the company’s A rating on watch for a possible downgrade.
A QuickTake Q&A explainer on the Kobel Steel data scandal
Nomura’s tally assumes customers would be forced to recall products and then have Kobe assume the cost, and that it will have to pay compensation, including to investors, credit analyst Shintaro Niimura said in a report Monday. The bank estimates that about 30 percent of Kobe’s aluminum and copper, two of the metals subject to data falsification, is bought by automakers.
Capital Adequacy
Still, with about 700 billion yen in capital, the worst case would only put a dent in Kobe’s capital-adequacy ratio, which would fall from 30 percent to 23 percent, according to Niimura. He cautioned that losses could widen if evidence comes to light that the scandal has affected more products than reported so far by Kobe, which on Friday added another nine to the list, including core steel products, to make 16.
The units implicated in the crisis make the steel, copper, aluminum and other materials that account for over half the company’s revenue.
Kobe’s property unit, Shinko Real Estate Co., had fixed assets of 89.9 billion yen, according to a March filing. The company is considering a number of sales options for the business, which leases and sells real estate, including a full divestment, according to the executive, although he said the sale isn’t linked to the company’s wider problems.
None of Kobe’s customers has so far raised specific safety concerns or recalled products. Jefferies’ Pham cited management as saying that customer feedback, including from beverage can producers and railway companies, is that no immediate recalls are required and products involved are not a safety concern.
Some of Japan’s biggest automakers — Toyota Motor Corp., Nissan Motor Co. and Subaru Corp. — are investigating whether any car parts contain falsified materials from Kobe, according to company spokespeople. Toyota supplier Denso Corp. is also checking its products, while Tokyo Metro Co. and Seibu Railway Co. are investigating if Kobe’s aluminum parts are used in their trains.
Kobe Steel declined to comment on the details of the analyst meeting on Monday. A spokeswoman said it’s investigating past records to determine the cause of the falsifications.
 
Scandal-hit Kobe Steel has a ‘look the other way’ culture, they say in hometown
KOBE, Japan (Reuters) – The fresh university graduate, eager to make a good impression on the job at one of Kobe Steel Ltd’s (5406.T) main plants in Japan, punched the wrong measurements into machines making steel pipes, causing a large batch to come out too short.
“I thought I was going to be fired,” recalled the former employee nearly 40 years later. But Shinzo Abe, now Japan’s prime minister, stayed on the job at Japan’s third-largest steelmaker for three years before entering politics in 1982.
Abe has called the steel industry the backbone of the nation. Kobe Steel, a 112-year-old company in south-central Japan’s Hyogo prefecture, has risen from wartime devastation and natural disaster but its past is littered with examples of corporate misconduct.
Its admission last month that workers had tampered with product specifications for at least a decade is the latest in a string of scandals that has battered Japan’s reputation as a manufacturing powerhouse.
Clients around the world, including top carmakers and airplane manufacturers, have been scrambling to check whether the safety or performance of their products have been compromised.
Workers, executives and shopowners in Kobe, a gritty, industrial city bordered by sloping hills where cattle are bred for the famed Kobe beef, said they were concerned but not surprised by the scandal.
Kobe Steel, which has apologized for the tampering, declined comment for this article.
“The corporate culture was to look the other way even while you saw what was going on,” said a retired employee who worked at the company’s flagship steel plant, Kobe Works – a symbol of the city’s quick recovery from a 1995 earthquake that killed more than 5,000 people. The company’s other main plant in the area is Kakogawa Works, in the nearby city of Kakogawa.
“They were supposed to be instilling a culture that paid attention when improprieties were discovered,” the former employee said. “In the end they didn’t create such a corporate culture. That’s management’s responsibility.”
The company initially said some workers had falsified data on contract specifications for a relatively small amount of aluminum and copper products, but it later admitted the problem had spread.
In 2006, Kobe Steel admitted falsifying soot-emissions data from the blast furnaces at Kobe Works and Kakogawa Works.
The latest scandal reflects “exactly the same set-up”, said Shoichi Tarumoto, who was then mayor of Kakogawa. “It looks like nothing has changed at Kobe Steel.”
PAST PROBLEMS
Kobe Steel has admitted taking part in bid-rigging for a bridge project in 2005, and failing to report income to tax authorities in 2008, 2011 and 2013. The company exceeded established limits for ground and water pollution in 2006.
Illegal political funding to candidates in local assembly elections in 2009 prompted the resignations of the then CEO and chairman. And last year Kobe Steel admitted a subsidiary falsified data on stainless-steel products.
A senior official in local government who has dealt with the company for years said: “Kobe Steel always scouts the backstreets for shortcuts. That’s their nature.”
Although its local dominance has waned, Kobe Steel remains one of only two Kobe-based companies, along with Kawasaki Heavy Industries Ltd (7012.T), that have revenues over 1 trillion yen ($9 billion) a year. The Kakogawa Works is that city’s biggest company, vital as a local taxpayer and employer.
More than a third of the Kobe Steel group’s 6,123 domestic customers are concentrated in Hyogo or neighboring Osaka, according to credit-research firm Teikoku Databank. More than half its customers are small and midsize Japanese companies.
The other clients are spread around the world and include top automobile manufacturers, airplane makers, railways and nearly any industry that uses steel, aluminum or copper in any form.
No safety issues have been found so far because of the tampering, but Kobe Steel has withdrawn its forecast for its first annual profit in three years. Whatever the eventual economic impact, the scandal is already affecting morale in Kobe city.
“If Kobe Steel suffers a blow, this is the area that will be most affected,” said Tsuyoshi Matsuda of Teikoku Databank’s Kobe office.
Kobe Steel acknowledges some customers have shifted orders to other suppliers. Major banks are instructing their Kobe area branches to keep close watch on the credit management at companies that do business with the steelmaker, bankers say.
“HEAVY MOOD”
The scandal “isn’t an open topic on the job,” said a worker in his 30s, finishing the night shift around 8 a.m. at Kobe Works, a hulking jumble of rusting pipes, risers and tanks.
“Nobody says it out loud, but I think people are worried,” he said. “It’s a heavy mood.”
Shinzaike, the local train station closest to Kobe Works, is home to several bar-restaurants that count the company’s employees among their best customers. Since the latest scandal erupted, business has dried up, traders said.
“Looks like they’re holding back from going drinking,” said a pub owner.
Reservations for year-end parties would normally be starting now, but there haven’t been any yet, he added.
Abe, who worked at both the Kobe and Kakogawa works, has called his years at Kobe Steel “the starting point of my adult life.”
Last year, according to media reports, he urged young people entering the workforce to follow his example of learning from mistakes at Kobe Steel.
“I got through it without incident,” he said. “I want you not to be discouraged by a few mistakes but rather do the best you can.”
 
Kobe Steel blames data scandal on focus on profit, lack of controls
TOKYO (Reuters) – Kobe Steel Ltd said on Friday a lack of quality controls and a focus on profits was behind the widespread data tampering that has shaken up the supply chains of car and plane makers around the world.
Japan’s third-largest steelmaker, which has posted losses in the last two business years, promised to automate more of its operations and reorganize its quality control systems to recover from one of the nation’s biggest corporate scandals.
The 112-year-old company admitted last month that workers had tampered with product specifications, causing global automakers, aircraft manufacturers and other companies to check whether the safety or performance of their products had been compromised.
No safety issues have so far been identified from the data cheating, which mainly involves falsely certifying the strength and durability of products.
Kobe Steel was ordered last month by the Ministry of Economy, Trade and Industry (METI) to provide a detailed explanation of the data cheating and say what steps it would take to prevent future abuses.
“Improving our management and corporate governance and instilling a culture where employees can say anything are imperative,” Chief Executive Officer (CEO) Hiroya Kawasaki said at a press briefing after submitting its report to the government. “This is my utmost priority and I will work on these with unflagging resolve,” he said.
Kawasaki said his “ultimate management responsibility” will be decided after recently appointed outside investigators report back to the company.
“Given the magnitude of the scandal, we expect upper management to get the boot,” Thanh Ha Pham, an analyst at Jefferies in Tokyo, wrote in a note on Friday, without saying when that might happen.
Multiple workers and managers at nine production sites were involved in tampering data on specifications of products, the company said in its internal report.
Some of the fabrication of data went on for 10 years, Managing Executive Officer Koji Yamamoto said, though he could not say when exactly it started.
The company is in talks with fewer than 10 customers who want to recover the costs of safety inspections, Managing Executive Officer Yoshihiko Katsukawa said.
“Clarifying your company’s thinking on the causes of this incident is a meaningful step towards restoring trust,” Akihiro Tada, director general of METI’s manufacturing industries bureau, told Kawasaki as he arrived to deliver the report.
Kobe Steel, also subject of a U.S. Justice Department inquiry as well, has had a Japanese government-sanctioned seal of quality revoked on some of its products and lost customers.
As of Friday, the company said 474 out of 525 affected customers found no safety issues or their products were deemed safe by Kobe Steel, up from 470 earlier this week.
The company has said it cannot yet fully state what impact the tampering will have on its finances. Last week, it pulled its forecast for its first annual profit in three years for the 12 months through next March.
Kobe Steel’s shares have fallen by nearly a fifth since it revealed the data fabrication a month ago.
The company’s shares rose nearly 2 percent on Friday, while the Nikkei 225 fell 0.8 percent.
 
Kobe Steel Blames Plant Managers for Quality Control Scandal
TOKYO — When a roll of aluminum produced at a Kobe Steel factory fell short of customers’ exacting demands for qualities like strength, plant managers were supposed to make a painful but necessary decision: Start again and make a new, better roll of metal, even if it cost the company time and money.
But for at least a decade, according to an internal company report released on Friday, those managers took an easier way out, manipulating test data on some products to avoid expensive do-overs.
The report by the Japanese steel maker is its first public accounting of the causes of a data falsification scandal that has shaken the company and prompted around 500 of its customers around the world — including manufacturers of cars, trains and aircraft — to scramble to verify their products’ safety.
The report, produced by Kobe Steel without input from regulators or other outside parties, concluded that the company had erred by elevating the pursuit of short-term profit over the maintenance of scrupulous quality standards. That failing, it said, was exacerbated by lax oversight by senior executives and an “insular” corporate culture that discouraged employees from questioning improper but long-established practices.
“There was a climate where employees on the ground couldn’t speak up. Even if they did speak up, it wouldn’t make a difference,” Kobe Steel’s chief executive, Hiroya Kawasaki, said at a news conference. “As long as the revenue was coming in, management wasn’t interested.”
Mr. Kawasaki said that the practice of misrepresenting not-quite-perfect metals was at least a decade old but that, because records going back further than that were incomplete, it might have been going on longer.
A second report on the scandal, by a commission of outside experts, will be completed by the end of December, he said.
In a series of announcements beginning last month that have rattled corporate Japan, Kobe Steel acknowledged faking data about the quality of aluminum, copper and other products to make it appear as though they met standards promised to customers when in fact they did not.
The metals still met basic safety requirements, according to the company and customers who have reviewed their purchases from Kobe Steel. Nonetheless, the episode has reverberated through global supply chains and dealt a fresh blow to Japan’s reputation for scrupulous, dependable manufacturing.
The report published on Friday outlined several changes the company plans to make to prevent cheating, including automating record keeping for product tests and requiring multiple employees to verify that test results are accurate.
The report faulted what it said was Kobe Steel’s excessively segmented structure, saying that the company’s seven separate divisions — which produce products ranging from aluminum used by automakers to steel for the construction industry — had become insulated fiefs where problems could fester.
Top managers escaped direct blame for the scandal: The report said there was no evidence that they were aware of the data falsification, though it criticized executives for setting unreasonable production targets and then failing to scrutinize how subordinates met them, or at least appeared to meet them.
“The fact that management did not grasp what was happening on the front lines is in itself a major problem,” it said.
 
Kobe Steel quality scandal driven by pursuit of profits and demanding corporate culture
Scandal-hit Kobe Steel’s troubles were driven by a relentless focus on profits and the company’s regimented corporate culture, which led to more than decade of faked quality guarantees on its products.
Japan’s third largest steel-maker said it “sincerely and deeply apologised for the enormous amount of worry and trouble we have caused” as the findings of an investigation into its problems emerged.
A 27-page document detailing what went inside Kobe – which has been loss-making for the two years – said failed quality controls were behind testing data being altered.
The report said that “a severe management environment” with demanding profit targets had contributed to the scandal.
The investigation into the issues which affected more than 500 customers – including those in the aerospace, transport and nuclear industries – was ordered by Japanese government.
Customers of Kobe included Toyota and Nissan, along with international clients such as Boeing, General Motors and Daimler. The scandal – which affects aluminium, copper and steel products – has sent Kobe’s customers racing to check components acquired from the company, though no safety problems have yet been identified.
In the wake of the report, Kobe has promised to transform itself with more automation and better quality controls.
In an update on checks into the affected products on Friday, Kobe said 474 of the 525 affected customers had not identified problems or Kobe had satisfied itself the products were safe.
News of the scandal saw shares in Kobe plunge as much as 40pc and Hiroya Kawasaki, president of Kobe, admitted that “trust in our company has fallen to zero”.
Customers have been deserting the business, causing Kobe to scrap financial forecasts. Naoto Umehara, executive vice-president, signalled the scandal could kill the company, warning Kobe “may incur extraordinary losses”.
Reports of the malfeasance at Kobe is just the latest of a string of scandals that have rocked corporate Japan, with companies including Nissan, Toshiba and Olympus also having been revealed to have suffered huge issues. 
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November 30, 2017 - Posted by | Japan | ,

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