An industrial scandal engulfing Kobe Steel began to reverberate overseas Tuesday as Japan's third-biggest steel-maker said its employees falsified data about the strength and durability of some aluminum and copper products used in planes, trains and potentially a space rocket.
Shares plunged 22 percent, and the cost to insure Kobe Steel debt against default soared as customers including Toyota, Honda and Subaru said they had used materials that were subject to falsification, and Hitachi said trains exported to the U.K. were affected.
One outside estimate put the potential cost of replacing the parts at about $133 million, but the damage to the company -- in the form of harm to its reputation or possible legal challenges -- could be much greater.
"At the moment, the impact is unclear but if this leads to recalls, the cost would be huge," said Takeshi Irisawa, an analyst at Tachibana Securities Co. "There's a possibility that the company would have to shoulder the cost of a recall in addition to the cost for replacement."
Kobe Steel's admission raises fresh concern about the integrity of Japanese manufacturers. Nissan said last week that it would recall more than 1 million cars after regulators discovered unauthorized inspectors approved vehicle quality, while Takata Corp. pleaded guilty this year to misleading automakers about the safety of its air bags. Kobe Steel said the products were delivered to more than 200 unidentified companies, with the falsification intended to make the metals look as if they met client quality standards.
Chief Executive Officer Hiroya Kawasaki is now leading a committee to investigate quality issues. The fabrication of figures was found at all four of Kobe Steel's Japanese aluminum plants in conduct that was systematic. For some items the practice dated back some 10 years, Executive Vice President Naoto Umehara said Sunday. The comments were confirmed by a company spokesman.
Kobe Steel, one of Japan's oldest industrial companies, was founded more than a century ago. Based in the western port city, it made about 7.7 million tons of crude steel in the year to March, as well as aluminum and copper. Its units include Kobelco Construction Machinery Co., which produces diggers.
Toyota said it has found Kobe Steel materials, for which the supplier falsified data, in hoods, doors and peripheral areas. "We are rapidly working to identify which vehicle models might be subject to this situation and what components were used," Toyota spokesman Takashi Ogawa said. "We recognize that this breach of compliance principles on the part of a supplier is a grave issue."
Kobe Steel said it discovered the falsification in inspections on products shipped from September 2016 to August 2017, adding there haven't been any reports of safety concerns. The products account for 4 percent of shipments of aluminum and copper parts as well as castings and forgings.
Based on the assumption that 5 percent of the company's annual sales of aluminum products are nonconforming, JPMorgan Securities Japan Co. estimated that it would cost from $89 million to $133 million for Kobe Steel to replace the entire volume with conforming products, according to a report by analyst Kazuhisa Mori.
Kobe Steel materials were used in Hitachi trains exported to the U.K.'s Agility Trains, according to Hitachi spokesman Masataka Morita. The trains haven't started operation yet. Materials were also used in East Japan Railway Co., Central Japan Railway Co. bullet trains in Japan, he said, adding that the trains were inspected after completion and there was no problems with their strength.
Subaru has produced training planes for Japan's military and wings for Boeing jets such as the Boeing Dreamliner, according to a spokesman, who added that the company was checking which planes and parts used affected aluminum. "Nothing in our review to date leads us to conclude that this issue presents a safety concern, and we will continue to work diligently with our suppliers to complete our investigation," Boeing said in a separate statement.
Honda said it used falsified material from Kobe Steel in car doors and hoods while Mazda Motor Corp. confirmed it uses aluminum from the company. Suzuki Motor Corp. and Mitsubishi Motors Corp. all said they are checking whether their vehicles are affected.
Mitsubishi Heavy Industries spokesman Genki Ono said Kobe Steel aluminum was used in the MRJ regional jet as well as the H-IIA rocket, which was launched by Japan Aerospace Exploration Agency on Tuesday for a satellite. "We perceive that there was no problem as the rocket launch was a success," he said. "Checks are underway, but at this point no large effects have been found in the manufacture of the rocket or MRJ."
Kobe Steel CEO Kawasaki has run the company since 2013, and he has recently overseen moves to expand its presence in aluminum. Earlier this year, the company said it was spending $500 million to increase output of the lightweight metal, including buying a half-stake in a plant in South Korea. Kobe Steel's aluminum and copper operations account for about 20 percent of total sales, according to data for the quarter ended June 30.
"Aluminum is a strategic business for Kobe Steel," said Irisawa at Tachibana Securities. "If the aluminum business doesn't work out well, I question where the company can make money," given the mainstay steel business remains one of low profitability, he said.
The Ministry of Economy, Trade and Industry said Tuesday that it was tracking the case. "We recognize this as an improper act that will shake fair trading," Yasuji Komiyama, director at the metal industries division, told reporters in Tokyo. "We urge the company to make efforts to recover the trust of society as a whole, not just its customers."
This latest scandal threatens to further undermine confidence in the quality of Japanese manufacturing. Shinko Wire Co., a Kobe Steel affiliate, in 2016 said a unit had misstated data on the strength of stainless wires for springs and that it had supplied customers with alloy that failed to meet industrial standards.
In other product-related cases, Takata pleaded guilty in the U.S. in February to one count of wire fraud for misleading automakers about the safety of its air bags. Toyo Tire & Rubber Co. officials were referred to prosecutors in March after the company's 2015 admission it falsified data on rubber for earthquake-proofing buildings.
"With a string of negative surprises at Kobe Steel lately, we believe investors are likely to distrust management even more due to this latest incident, despite emerging signs of earnings improvement in the steel and construction machinery segments," JPMorgan's Mori wrote.
Information for this article was contributed by Kevin Buckland, Nao Sano, Kiyotaka Matsuda, Stephen Stapczynski and Sungwoo Park of Bloomberg News.
Business on 10/11/2017