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Kobe Steel Scandal Reveals Further ‘Made-in-Japan’ Fault Lines

Kobe Steel Scandal Reveals Further ‘Made-in-Japan’ Fault Lines

FILE PHOTO: A man walks past a Kobe Steel sign at the company’s headquarters in Tokyo, Japan, October 10, 2017. REUTERS/Issei Kato/File photo

By Sam Nussey TOKYO (Reuters) – Under the once-vaunted “keiretsu” system of close, trusting ties between manufacturers and suppliers, “Made-in-Japan” has become synonymous with industrial quality and reliability. That reputation has eroded in recent years. Kobe Steel <5406.T> It’s just the latest in a series of corporate scandals involving data manipulation and other fraud schemes aimed at tarnishing Japan Inc.’s seal of quality. It could be a sign that the government’s push for improved corporate governance is driving more disclosures. But the cause is more likely that Japanese manufacturers are failing to meet modern compliance standards as they grapple with a shrinking domestic market and increased global competition. As the focus has shifted to market forces rather than cozy, relationship-based arrangements, Japanese manufacturers have had to compete on price and expand their customer base. “Increasing global competition has forced Japanese manufacturers to cut costs to be more efficient while meeting production quotas that are often difficult to achieve,” said Motokazu Endo, a lawyer at the Tokyo Kasumigaseki Law Office. The “keiretsu” system was the foundation of Japan’s automotive industry. As the market has become more competitive, automakers are now investing less money in their suppliers and spending less time checking what their suppliers’ factories are producing, says Hitoshi Kaise, an automotive consultant and partner at Roland Berger. Japan’s economy has also suffered from anemic growth for decades, mired in deflation due to a shrinking population and growing competition from its Asian neighbors. Those pressures have potentially undermined Japanese companies’ ability to compete, says Hideaki Miyajima, a professor at Waseda University and an expert on corporate governance. ‘IT’S GONE TOO FAR’ The list of rogue manufacturers is long and growing. Nissan Motor Co. <7201.T> had to recall every new car it sold in Japan for the past three years after it faked safety inspections. Both Suzuki Motor Corp <7269.T>as well as Mitsubishi Motors Corp. <7211.T> have faced scandals over fuel economy tests on their vehicles, as well as irregularities by now-bankrupt airbag maker Takata, Toyo Tire & Rubber Co. <5105.T> and Asahi Kasei Corp. <3407.T>. “Although the focus on targets was right at the beginning, it went too far, and companies that can’t achieve their targets resort to fraud,” says Hiroshi Osada, a manufacturing quality expert and professor at Bunkyo University. Compliance regulations have become more stringent over the past 15 years, but many Japanese companies have continued practices common in the past, says Nobuo Gohara, a compliance lawyer who participated in the audit of Olympus Corp. <7733.T> after an accounting scandal in 2011. “A lot of these problems are lying dormant on the shop floor,” he said. Japan risks “losing out as other Asian economies, including China, gradually raise their standards of quality and reliability,” said Professor Thomas Clarke, a corporate governance expert at the University of Technology Sydney. BETTER GOVERNANCES And it’s not just about questionable data. Conglomerate Toshiba Corp <6502.T> is still struggling with an accounting scandal, and in Tokyo Electric Power Co (TEPCO) <9501.T>the operator of the crippled Fukushima Daiichi nuclear complex, has a litany of irregularities. Just this week, Japan’s nuclear regulator found that Japan Nuclear Fuel violated safety regulations at its Rokkasho site by falsifying records to claim that safety inspections had been carried out. The plant’s start-up data was delayed 23 times. Even as steps are taken to strengthen external monitoring of companies, “it’s not possible to conduct inspections day in and day out,” said Osada of Bunkyo University, who sat on an external panel that audited Toyota during the 2010 recall crisis. Companies need to do more to develop a culture in which employees are able to raise concerns and say “no” to their bosses, and in which teamwork is used to help other employees identify irregularities, Osada added. More attention should be focused on Japan’s board members, who are not proactive enough in engaging in scandals when they happen, says Shin Ushijima, a lawyer and president of the Japan Corporate Governance Network, noting a tendency for companies to rely too much on appointing external panels that are not truly independent. Corporate governance reforms are having some impact, Ushijima says. At Toshiba, he said, “the board, while not perfect, has improved since the shakeup.” (Reporting by Sam Nussey, with additional reporting by Naomi Tajitsu, Yuka Obayashi and Aaron Sheldrick; Editing by Ian Geoghegan)