Kobe Steel's continuing scandals raise major compliance issues

Kobe Steel Ltd.’s data fabrication scandal is the latest problem to stain the firm since the 1990s, raising serious questions about its compliance.

“I deeply feel sorry and apologize,” Kobe Steel Chief Executive Officer Hiroya Kawasaki said at a news conference in Tokyo Friday, five days after it emerged that Japan’s third-largest steel maker had falsified data about many of its products — including aluminum and copper — for a decade.

But he denied that irregularity is now part of the corporate culture.

“I don’t think Kobe Steel as a whole is so (full of problems),” Kawasaki said, vowing to improve legal compliance.

It is not the first time Kobe Steel executives have performed the public apology ritual.

Kobe Steel, one of Japan’s biggest corporations, was established in 1905 by trading firm Suzuki Shoten, one of the companies that led Japan’s industrial revolution in the late 19th and early 20th centuries. The steel maker is also known as the owner of a competitive rugby team and the company where Prime Minister Shinzo Abe worked when he was in his 20s.

Hit hard by the 1995 Great Hanshin Earthquake, which devastated the port city of Kobe and its vicinity, Kobe Steel became a symbol of the region’s restoration after bouncing back. But a string of scandals ensued.

In 1999, the company was found to have paid off a sōkaiya (corporate racketeer).

In 2006, it was ensnared by a data fabrication scandal after an internal investigation found that data on soot and smoke released by one of its plants had been falsified frequently over a period of 30 years.

In 2008 Kobe Steel subsidiary Nippon Koshuha Steel Co. was found to have cheated on steel inspection data.

In 2009 the head of Kobe Steel resigned over illegal donations linked to local assembly elections.

In 2016 shoddy legal compliance led to another quality-control issue at subsidiary Shinko Wire Stainless Co.

Both affiliates were listed among the data falsifiers in this year’s scandal.

In late September, Kawasaki showed he had no sense of the impending crisis by painting a rosy picture of Kobe Steel’s aluminum business, telling reporters he was “confident the usage ratio of aluminum in cars will rise.” Kobe Steel was informing its clients about the data falsification scandal at the same time.

Kobe Steel’s business has been far from rosy. The company fell into the red for the second consecutive year in fiscal 2016, hit by rising material costs for steel. It posted a pretax loss of ¥29.5 billion ($263 million) and a ¥31.3 billion loss in its construction machinery business.

To shore up its finances, Kobe Steel has been trying to turn its aluminum business into a growth driver, expecting stronger demand from automakers trying to improve fuel efficiency by using aluminum instead of steel.

But that plan will likely fail now that four of its domestic aluminum plants have been implicated in the data-falsification scandal. The quality issues also extend to the steel used in car components, but the company’s board members in effect covered up the problems even after they were briefed about them.

“The country relies on its reputation for quality manufacturing as a selling point over China and other countries that offer cheaper alternatives. But its reputation has been marred by a series of problems at some of Japan’s biggest manufacturers,” The New York Times reported Wednesday in its top story of the day, mentioning Kobe Steel together with bankrupt air bag maker Takata Corp., which has caused the largest recall ever in the auto industry.

It also mentioned Nissan Motor Co., which recalled nearly 1.2 million cars in Japan earlier in the month after regulators discovered that unauthorized inspectors had approved their quality. The BBC is repeatedly covering the Kobe Steel scandal as well.

The skipped inspections and data fabrication were carried out at Kobe Steel because each plant was pressured to meet its delivery dates and win more orders, leading to compromises on quality. But Kobe Steel’s executives have said the decisions to falsify the data were made by the plants “on their own.”

Doshisha University professor Hajime Ota, a specialist in organizational theory, said the scandal stems from “a peculiar Japanese system that lacks responsibility as a group.”

Ota said such missteps will only increase and its liabilities will remain unquestioned if Kobe Steel continues to be an organization where workers on the front line make assumptions about their superiors’ intentions. When these assumptions lead to decisions that impair quality, top management will just claim ignorance when each new blunder comes to light.