Supply chain and reputational risk in spotlight as Kobe Steel reels from safety data scandal

If any risk manager needs help convincing their bosses of just how potentially cataclysmic supply chain and reputational risk can be, then they need only advise them to take a look at the experience of Kobe Steel this week as it struggles to deal with revelations about falsified safety information on its core steel products that are used around the world. News agency Reuters reported that the steelmaker admitted at the weekend that it had falsified data about the quality of aluminium and copper products used in cars, aircraft, space rockets and defence equipment. On Wednesday (11 Oct), it said it had found 70 cases of tampering with data on materials used in optical disks and liquid crystal displays at its Kobelco Research Institute Inc, which makes and tests products for the company. It also found one case of falsified data on iron powder products – material used for car parts such as gears – that were shipped to a customer. The company has said it was examining possible data falsification going back ten years. Not surprisingly, when the tampering news broke the value of Kobe Steel’s shares plummeted. The price collapse wiped out about $1.6bn off its market value in two days. The price stabilised on Thursday. Kobe Steel issued a statement on 11 October, which explained how the problems were discovered. It said that in November 2016, Kobe Steel established a Quality Management Section in the MONODZUKURI (Production System Innovation) Planning and Promotion Department. In April 2017, the Quality Management System began quality audits in the group companies. “During that inspection, improper conduct was discovered in the target materials made by Kobelco Research Institute Inc,” stated the company. The company stressed that no real safety problems have been found to date. “With regard to the non-conforming products, Kobe Steel, with the outside law firm, conducted technical verifications with respect to the effect on quality (including safety) of the non-conforming products used in the customers’ products. Verification and investigation to date have not recognised specific problems casting doubts on the safety of any of the non-conforming products. In the event that doubts arise on the safety of the non-conforming products, Kobe Steel will quickly take appropriate action,” stated the company. “At this time, Kobe Steel Ltd deeply apologises again for the considerable trouble caused to suppliers, shareholders and many others about the improper conduct concerning a portion of its aluminium and copper products,” it said. Kobe Steel added that, as described in its earlier announcement on 8 October, it is currently undertaking an investigation of the facts, “pertaining to the improper conduct in the aluminium and copper business”. It continued: “Kobe Steel is also conducting an investigation as to whether or not similar improper conducts exist in its other business units. “In regard to this, the investigation by the outside law firm, which was commissioned by the investigation committee on quality issues, is still not completed. Kobe Steel plans to make a report on the results once the investigation is completed. With respect to a portion of the investigation currently being undertaken, Kobe Steel reports that a similar kind of improper conduct has been confirmed.” The impact on the company and the Japanese business community as a whole has been huge. Reuters reported today that Hiroya Kawasaki, Kobe Steel’s CEO, admitted that the firm’s data fabrication may have spread beyond Japan. This came as Mr Kawasaki was ordered by the government to report on how the misconduct occurred and address safety concerns that have sent supply chain managers around the world scurrying off to check their product sources. Mr Kawasaki told reporters that the scandal has left Kobe Steel’s credibility at “zero”, reported Reuters. “The credibility of Kobe Steel has plunged to zero. We will make efforts to regain trust as soon as possible,” Mr Kawasaki is reported as saying. Reuters added that a senior government official has said managers at Kobe Steel have fabricated data on products used in planes, trains and automobiles. Mr Kawasaki reportedly said that his current priority is to deal with safety checks with its clients. The embattled CEO added that the company has found possible further cases of tampering other than those originally uncovered, including in overseas operations. Reuters said the Japanese Ministry of Economy, Trade and Industry has ordered Kobe Steel to report on the results of safety checks within two weeks and give the reasons for the tampering, along with prevention measures, in less than a month. Mr Kawasaki reportedly said he does not expect to see recalls of cars or airplanes and none of the company’s customers have cancelled orders. Kobe Steel has no plans to sell assets at the moment, he added. Mr Kawasaki clearly felt he needed to make the statement about sales of assets because the Nihon Keizai Shimbun reported yesterday that Kobe Steel had decided to sell its real estate business, presumably to help deal with the financial impact of this crisis. The group issued a statement denying any panic sales of assets to back up Mr Kawasaki’s public words. “There is no fact to that report. In carrying out its Fiscal 2016-2020 Group Medium-Term Management Plan, Kobe Steel is considering and implementing various measures for each of its businesses, including strategic investments in priority areas. In regard to its real estate business, Kobe Steel has started considering optimum measures that could be taken for the future growth of the real estate business and its further development, but at this time Kobe Steel has made no decisions,” stated the group. This latest scandal will not help the Japanese business community and economy in general, as it follows a series of other safety-related scandals that have made life difficult for risk and supply chain managers in various sectors the world over. Nissan Motor, Mitsubishi Motors and Takata, which filed for bankruptcy this year, were hit because of faulty airbags that were blamed for 17 deaths and many injuries. In 2015, it was revealed that Toyo Tire & Rubber fabricated data to secure government approval for materials to absorb shocks from earthquakes. Conglomerate Toshiba Corp, meanwhile, is still battling the fallout of a scandal over reporting inflated profits. The long arm of the supply chain to the global economy has been underlined by this latest scandal, which started in Japan but has quickly spread throughout Asia and worldwide. The Singapore Straits Times reported that Kobe Steel is working with about 200 companies to which it supplies products to deal with the problems. Reportedly, six Japanese carmakers have been directly affected. Toyota confirmed that Kobe Steel supplied materials to one of its Japanese factories, for use in bonnets and rear doors in certain vehicles. A spokesman for Inchcape, which distributes Toyota and Suzuki, reportedly said: "Putting utmost priority on the safety of our customers, we are rapidly working to identify which car models might be subject to this situation, its effect on individual vehicles and precautionary measures that need to be put in place moving forward." Aircraft manufacturer Boeing told The Straits Times that it had been working closely with its suppliers and had undertaken "comprehensive inspections and analysis" through its supply chain. "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," said a spokesman for the US company. Reuters reported that US auto giant General Motors has also confirmed that it is checking whether its cars contain falsely certified parts or components sourced from Kobe Steel. “General Motors is aware of the reports of material deviation in Kobe Steel copper and aluminium products…We are investigating any potential impact and do not have any additional comments at this time,” spokesman Nick Richards reportedly told Reuters.

Supply chain and reputational risk in spotlight as Kobe Steel reels from safety data scandal

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