What’s happening to Kobe Steel?
Inside arc furnace. Photo: Payton Chung. Source: Wikipedia
Kobe Steel is a metals refiner based in Japan. They have almost 40,000 employees, and they produce aluminum, copper, and titanium as well as steel wire, rod, and rolled products. Most of their sales are to Japanese customers, but they have been expanding globally, especially in China.
But that expansion may be over for a while. Last week the company disclosed that they have been falsifying data about the strength and durability of some of their copper and aluminum products used in cars, planes, and trains, as well as iron ore powder and other materials used in DVDs and LCD screens. For some items, the fake data goes back 10 years or more. The dodgy materials were used in bullet trains in Japan and in car hoods and doors.
Kobe Steel stock price. Source: Bloomberg
Needless to say, the company’s share price has plummeted, down over 40% since the revelations. They face lawsuits from customers, investors, and regulators in Japan, the US, and elsewhere, No one has flagged any serious safety concerns, yet. But they sold substandard materials to some 500 companies. This scandal is going to be in the news for a while.
How can something like this happen? Everyone wants lighter, stronger, more durable products. Steelmakers have spent a fortune trying to develop new, innovative materials to meet these demands. Despite the increasing use of carbon fiber and aluminum, two thirds of the weight of most vehicles is still steel. Nothing can match its low cost and high versatility. And like the problems at textile and airbag-maker Takata, sometimes the corporate pressures can lead to corner-cutting, inadequate quality control, and fake data. And it’s not just manufacturing. Accounting scandals have been on the rise in Japan as well.
Japan, Inc. used to be held in awe as they revolutionized management with innovations like just-in-time inventory control and continual process improvement. But now they’re turning heads with a string of scandals that’s destroying shareholder value and leaving their reputation for precision and quality in tatters. It won’t take long for global competitors like China and Korea to sweep in and try to capitalize on these errors.
Tokyo skyline. Photo: Morio. Source: Wikipedia
Japan’s corporate leaders need to clean up their act – while there’s still something left to clean up.
Douglas R. Tengdin, CFA