Scandals tarnishing Japan Inc.
Nation’s reputation for quality is taking a beating
Japan’s flagship companies were once held in awe as fierce competitors that revolutionised business with innovations such as flexible manufacturing and kaizen, or continuous improvement.
These days, Japan Inc. is turning heads for a less exalted reason: a string of scandals that have destroyed shareholder value, enraged consumers and incurred the wrath of regulators.
Kobe Steel raised fresh concern about the integrity of Japanese manufacturers after disclosing last weekend that it falsified strength and durability data on aluminium used in products ranging from cars built by Toyota to bullet trains made by Hitachi. The metal maker’s chief executive, Hiroya Kawasaki, is now leading a committee to probe quality issues.
Last week, Nissan recalled more than 1 million vehicles because unauthorised inspectors signed off on quality checks. Takata, the bankrupt Japanese maker of airbags linked to at least 17 deaths worldwide, expanded the biggest recall in automotive history after regulators concluded in July that its inflators could still explode in a crash even after new safety measures.
“These problems are coming to light pretty regularly,” says Keita Kubota, an investment manager at Aberdeen Investment Management K.K. in Tokyo. “It’s not fair to single out Japan, but investors need to be looking very carefully to make sure they’re putting their money into companies that take governance and compliance seriously.”
Since Prime Minister Shinzo Abe took over in 2012, there’s been a push to improve corporate governance, but the focus has been mainly on improving profitability, rather than policing bad behaviour. Share buybacks and dividends have surged. So have the
num- bers of scandals. In the five years after a US$1.7 billion accounting fraud was uncovered at medical equipment maker Olympus, the number of improper accounting cases unearthed each year at publicly traded Japanese companies has nearly doubled.
The trend hit a record of 58 cases in the 12 months to the end of March 2016, says Tokyo Shoko Research, which provides data on corporate bankruptcies.
Japan’s regulators imposed an unprecedented 7.4 billion yen ($93 million today) fine against Toshiba in December 2015 after finding that the giant manufacturer of nuclear power plants and semiconductors misled investors by filing false financial statements. The scandal claimed the jobs of three presidents, led to record losses and prompted the company to cut staff and sell businesses.
The fact that more cases of fraud are coming to light might actually be a sign that corporate Japan is doing better at ferreting out abuses, according to Jesper Koll, chief executive of WisdomTree Japan, an investment firm in Tokyo.
“I find it hard to believe that the system is falling apart any more than it always has,” he says. “The Japanese take this stuff extremely seriously. They’re sticklers for rules and precision. I’m more scared of the fact that at US industrial companies, we haven’t heard about any of these errors coming through.”
Still, fraud has a particularly strong power to damage Japanese corporations because so many have for years banked on their reputation for quality, says Nicholas Benes, a representative director of the Board Director Training Institute of Japan, which offers courses on corporate governance for executives.
“Japanese manufacturers are very aware that their brand, their reputation, the sustainability of their businesses rest on quality,” he says. “So lots of people are thinking, ‘we should clean up our act, if we have something to clean up.’ Those that don’t could get into a lot of trouble.”
One reason that more problems are being unearthed, Benes says, is a Japanese law adopted in 2006 protecting whistleblowers from being fired. Another reason is the simple fact that so much data is digital now, which means companies like Kobe Steel can analyse it, and workers can email it to regulators.
Kobe Steel says its own internal inspections brought the fabricated data to light, but the scandal has already proven expensive. Shares plunged after the breaches were revealed, and the company might also have to foot the bill for any recalls that follow, says Takeshi Irisawa, an analyst at Tachibana Securities in Tokyo.
Naoto Umehara, executive vicepresident at the maker of high-end alloys, said at the weekend that workers at all four of its domestic aluminium plants had systematically fabricated inspections data in conduct that went back about a decade in some instances. No safety issues have been reported, the company said in a statement.
Carmakers including Toyota, Nissan and Honda said they used the materials in car doors and bonnets. Subaru, which makes plane parts for Boeing, said it put them into aircraft wing sections.
The aircraft maker said in a statement that its own reviews so far suggest there are no safety issues.
“The main impact is probably reputational,” says Yi Zhu, a metals and mining analyst at Bloomberg Intelligence in Hong Kong.
“It does send a message to the market that their products may not be perfect and it may open a door for producers in other countries like China.”