As crisis at Kobe Steel deepens, CEO says cheating engulfs 500 firms

(This October 13 story was refiled to clarify attribution in paragraph 23.)

FILE PHOTO: Kobe Steel President and CEO Hiroya Kawasaki (C) and the company officials bow during a news conference in Tokyo, Japan October 13, 2017. REUTERS/Kim Kyung-Hoon/File Photo

TOKYO (Reuters) - The cheating crisis engulfing Kobe Steel Ltd 5406.T just got bigger.

Chief Executive Hiroya Kawasaki on Friday revealed that about 500 companies had received its falsely certified products, more than double its earlier count, confirming widespread wrongdoing at the steelmaker that has sent a chill along global supply chains.

The scale of the misconduct at Japan’s third-largest steelmaker pummeled its shares as investors, worried about the financial impact and legal fallout, wiped about $1.8 billion off its market value this week.

As the company revealed tampering of more products, the crisis has rippled through supply chains across the world in a body blow to Japan’s reputation as a high-quality manufacturing destination.

A contrite Kawasaki told a briefing the firm plans to pay customers’ costs for any affected products.

“There has been no specific requests, but we are prepared to shoulder such costs after consultations,” he said, adding the products with tampered documentation account for about 4 percent of the sales in the affected businesses.

Yoshihiko Katsukawa, a managing executive officer, told reporters that 500 companies were now known to be affected by the tampering.

Kobe Steel initially said 200 firms were affected when it admitted at the weekend it had falsified data about the quality of aluminum and copper products used in cars, aircraft, space rockets and defense equipment.

Asked if he plans to step down, Kawasaki said: “My biggest task right now is to help our customers make safety checks and to craft prevention measures.”


Boeing Co BA.N, has some of the falsely certified products, a source with knowledge of the matter told Reuters, while stressing that the world's biggest maker of passenger jets does not consider the issue a safety problem.

More than 30 non-Japanese customers had been affected by the firm’s data fabrication, the Nikkei newspaper reported on Friday.

A Kobe Steel spokesman said the companies received its products but would not confirm they had any of the falsely certified components.

Nuclear power plant parts are the latest to join the list of affected equipment as Fukushima nuclear operator Tokyo Electric Power 9501.T (Tepco) said on Friday it had taken delivery of pipes from Kobe Steel that were not checked properly.

The pipes were delivered to its Fukushima Daini station, located near the destroyed Fukushima Daiichi plant, but have not been used, Tepco said, adding it was checking all its facilities.

Faulty parts have also been found in Japan’s famous bullet trains that run at speeds as high as around 300 kilometers (180 miles) per hour and a space rocket that was launched in Japan earlier this week. One bullet train operator has already said it will seek compensation from Kobe Steel.

The government has ordered Kobe Steel to address safety concerns within about two weeks and report on how the misconduct occurred in a month.


No safety issues have yet been identified in the unfolding imbroglio.

Kobe Steel shares fell nearly 9 percent on Friday and have fallen more than 40 percent since the scandal broke.

The steelmaker faces a range of legal risks, including compensation sought by clients or their customers, penalties for violating unfair competition laws for false representation, shareholder lawsuits for the fall in the company’s stock price and class lawsuits from overseas customers seeking punitive damages, a lawyer, specializing in corporate laws and risk management, said.

“It is hard to predict the extent of legal costs,” said Motokazu Endo, a lawyer at Tokyo Kasumigaseki law office.

“We cannot rule out the possibility that this will shake Kobe Steel to its foundation.”

The company has forecast a profit for the year through March 2018 after two successive annual losses.

Kobe Steel was founded in 1905 and has been a pillar of Japan’s manufacturing sector. Such are its establishment bona fides that Shinzo Abe, the prime minister and scion of a political dynasty, worked at the company decades ago, before entering politics, the New York Times reported.

But those credentials have been shattered, a point amplified by CEO Kawasaki who earlier said the credibility of the firm “has plunged to zero.”

Kobe Steel said it was examining possible data falsification going back 10 years - a familiar echo of a string of other cheating scandals involving Japan inc.

The corrosive business practices have raised broader questions over corporate governance in Japan, and cast doubt on the integrity of a manufacturing industry once the envy of the world.

Previous cases in Japan involving falsified data included Nissan Motor 7201.T, Mitsubishi Motors 7211.T and Takata Corp., which filed for bankruptcy this year over faulty airbags that were blamed for 17 deaths and scores of injuries.

In 2015, it was revealed that Toyo Tire & Rubber 5105.T fabricated data to secure government approval for materials to absorb shocks from earthquakes. Conglomerate Toshiba Corp 6502.T is still battling the fallout of a scandal over reporting inflated profits.

SMBC Nikko Securities said in a note to clients that investors in Kobe Steel face a prolonged period of uncertainty.

“It will likely continue to be extremely difficult to make judgments on creditworthiness and investment until the safety of the products and the extent of damages are clarified.”

Additional reporting by Ayai Tomisawa, Chang-Ran Kim and Kaori Kaneko; Writing by Aaron Sheldrick; Editing by Shri Navaratnam