Kobe Steel's board of directors bow during a press conference after admitting data fraud © PA Images
Kobe Steel's board of directors bow during a press conference after admitting data fraud © PA Images

'Made in Japan' label on trial

24 January 2018

For the manufacturing industry, the last four months of 2017 will be remembered as the time when a flood of respected Japanese companies admitted to decades of systemic fraud, which started in the boardroom and went right down to the factory floor. 

The admissions, made at press conferences across Tokyo, were accompanied by obligatory bows of contrition from CEOs. Each scandal rippled through the global manufacturing industry, generating a rush of questions about the reliability of Japan’s products.

Kobe Steel, Mitsubishi Materials and Toray Industries – all suppliers to global manufacturers – admitted to selling products which did not meet clients’ specifications. Nissan Motor and Subaru admitted to using unqualified staff to carry out final inspections for their domestic market vehicles.

The subsequent supply chain fallout mirrored the gravity of the situation – materials used in everything from nuclear plants and rockets to aircrafts and car tyres had to be recalled, checked and rechecked.

The scandals

The first quality scandal was revealed in September after Nissan Motor was found to have been using uncertified workers to carry out new car inspections at their domestic plants as far back at 1979. Around 1.2m vehicles were recalled.

A month later, Subaru confessed to doing the same for more than 30 years, sparking the recall of 395,000 vehicles, including 19,000 Toyota 86s manufactured by Subaru. 

The revelations quickly spread to the nation’s third-largest steel maker. Kobe Steel admitted it had sold products with fraudulent data to 525 manufacturing companies domestically and internationally since 2007.

In November, Mitsubishi Materials disclosed that three of its subsidiaries had, for at least a year, falsified data about the quality of products shipped to 229 customers in Japan, the US, Taiwan and China.

Less than a week later, Toray Industries, the global leader in carbon fibre and supplier to Boeing and 12 other high-profile customers, also admitted to falsifying quality-related data from 2008. 

However, no safety problems or recalls were issued for Kobe Steel, Mitsubishi Materials or Toray Industries.

Culture of deception

While some have been keen to frame the scandals as isolated cases, several of Japan’s top politicians and business leaders have openly issue warnings over the threat to the country’s reputation for high standards. 

Keiichi Ishii, minister for land, infrastructure and tourism, said the scandals had “damaged” and “shaken” the country’s manufacturing credibility, while chief cabinet secretary Yoshihide Suga said the Japanese industry had “betrayed the high trust in Japanese products”. 

Japan has been no stranger to reputational breakdowns. From 2012, Takata engaged in a massive cover-up over its faulty air bags, which caused casualties and in 2015, while Toshiba was involved in a $1.2bn company-wide accounting scandal. 

However, before the revelations, the “Made in Japan” label had thrived in the face of pressure from low-cost rivals such as China, thanks to a global perception that Japanese firms produced higher-quality products.

It was that pressure that analysts and academics say played a major part in why these companies turned to deception.

Diego Oliva-Velez, an analyst at BMI Research, told Bloomberg that most of that pressure was self-inflicted, with companies setting unrealistic high product-quality standards for themselves to meet the global perception.

However, Thomas Clarke, director of the Center of Corporate Governance at the University of Technology Sydney, attributes the poor oversight by senior managers, which allowed the deception to continue for so long, to deeper issues associated with Japan’s workplace culture.

Long-term workers climb up the corporate ladder and are rewarded with tax benefits, so long as they show loyalty to the company. This, he said, made workers “reluctant to blow the whistle for fear of losing their job or being demoted”.

The fallout

These latest scandals, on paper, appear less serious than the previous ones involving Takata and Toshiba. Although hundreds of products were affected, no safety issues have arisen from the products. Nissan Motor and Subaru cars, shipped without the stamp of a fully certified inspector, all exceeded international standards anyway.

However, the scandals have hit the pockets of those companies. Nissan Motor’s domestic sales fell by more than 50% in October from a year earlier after the revelations prompted the company to halt production. Subaru also suffered a setback in sales. Analysts however, expect a gradual recovery in the coming months. 

Kansai Electric Power is seeking repayment from Kobe Steel after delaying the restart of its nuclear reactor by a few months to carry out checks. Four individuals in Canada who own cars that contain Kobe Steel materials are suing for an unspecified amount in damages.

What next for Japan Inc.

David Litt, a professor at Keio University Law School in Tokyo, told Reuters that most of the companies that buy products from the firms involved have kept quiet and appear to be sticking with their suppliers.

Akihiro Tada, director-general of the manufacturing industries bureau at the Ministry of Economy, said the numbers showed that Japan’s brand had not yet suffered as much as previously predicted. 

“It’s not like the entire Japanese stock market has declined. I haven’t seen any news that lots of orders from Japanese manufacturers have been cancelled.” 

The silver lining to all this is that these scandals have catalysed better behaviour. Most of the companies involved have used third-party investigators to compose reports on the extent and causes of the errors, as well as measures to improve governance.

Reforms have seen company boards say they are tweaking their organisational structures to prevent the recurrence of bureaucratic tunnel vision. Most have now employed at least two independent directors as a result.

Meanwhile, Japan’s authorities have sprung into action. 

The Financial Services Agency has encouraged companies to expand into new markets and offered buyouts and early retirement to senior managers in order to let younger leaders take over.

The Ministry of Economy, Trade and Industry also announced a series of steps aimed at preventing falsification, including a proposal to raise fines for breaking the Industrial Standards Law and encouraging manufactures to use information technology to ensure quality control. 

The shake-up of corporate Japan has started. Rising profits and the reforms are signs that things just might be working to restore faith in Japan Inc.

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