What Went Wrong at Kobe?

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Few topics, apart from metal prices of course, prompt more debate in the office of MetalMiner than supply chain issues.

So it should come as no surprise that hot on the heels of our article reporting last week’s news regarding Kobe Steel’s admission of falsifying quality data should be a more in depth analysis of what exactly went wrong — and, maybe more importantly, why it went wrong.

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The “what” is still difficult to pin down.

On the one hand, many sources, even highly respected sources like The Economist, say products were certified as having properties – such as a level of tensile strength – that they did not in fact possess.

Yet this does not square with the response of many of Kobe’s customers.

Aerospace firms like Boeing and Mitsubishi Heavy Industries who used affected products on the recent H-2A satellite launch vehicle, and automotive clients like Toyota, Honda, Nissan, Ford and GM, have variously said their preliminary findings are no material exhibiting properties outside of the standards has been used.

If that is the case (and it is still early days), what we could have is a case of incorrect procedures being employed, such as Nissan’s recall of 1.2 million cars after finding unqualified inspectors had been conducting safety checks.

Bloomberg explored the ongoing threat of substitution of steel with aluminum in automotive applications and the transport industry’s relentless pursuit of lower weight – and hence thinner materials – as somehow a reason for Kobe Steel falsifying data. But there is no evidence the quality issue has anything to do with weight reduction, or specifically new, thinner grades of steel.

The Money Argument

One angle in trying to understand why it happened is to follow the money.

There could be an argument that quality control can be the first casualty of a firm struggling for profitability. Kobe has not fared well in the face of a highly competitive international steel market, particularly in Asia.

As this chart courtesy of Morningstar shows, the share price has been in decline since the start of the decade.

Source: Morningstar

Without focusing on the 30% decline in the last week, the firm has been making rising losses in 2015 and 2016, although part of this has been down to provisions against bad debts according to the latest company accounts.

Could cost-cutting have been to blame? Possibly. Bloomberg quotes a spokesman for the company who said pressure to meet delivery deadlines was one reason behind the failure. But as the firm has said the falsification involves only 4% of its shipments, between September 2016 and August 2017.

The fact that there have been no specific reports of defective parts and no carmakers have yet to issue recalls or warnings to stay off the road could be just a case of luck that defective parts have gone to less critical applications or it could be that end users have run their own assessment and concluded chemical and mechanical properties met minimum standards. The period quoted does correspond to the loss-making period at Kobe, but does not square with admissions made by the firm.

A Reuters report article stated “Kobe had fabricated data to show its products met customer specifications” when in fact the material did not. It also quoted the company in saying “The misconduct involved dozens of staff and possibly stretched back 10 years.” That would not have passed multiple audits and inspections, not just by ISO but even more rigorous audits by automotive and aerospace end users. These statements, though, are general admissions and do not specifically state what was hidden or changed.

A Culture Issue?

Back to The Economist, who quote Toshiaki Oguchi of Governance for Owners Japan, a corporate-governance lobby group, who said “Japanese workers are ethical, but tend to hide wrongdoing rather than confront management. Kobe Steel ignored at least one whistle-blower who sounded the alarm over its substandard metal.” Maybe what we have here is a cultural issue, a minor non-conformance was covered up or divergence from the standard procedure was allowed to happen, no one was reprimanded, it happened again and over time so that gradually circumventing proceedures became common practice.

A report in the Japan Times just prior to the weekend supports this position, cataloguing both corporate wrongdoing and quality issues. For example, in 2006, Kobe was involved in a data fabrication scandal after an internal investigation found that data on soot and smoke released by one of its plants had been falsified frequently over a period of 30 years. In 2008, Kobe Steel subsidiary Nippon Koshuha Steel Co. was found to have cheated on steel inspection data. In 2016, shoddy legal compliance led to another quality-control issue at subsidiary Shinko Wire Stainless Co.

Both affiliates were listed among the data falsifiers in this year’s scandal.

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The Japan Times went on to say production units skipped inspections and engaged in unspecified data fabrication because they were under pressure to meet delivery dates and win more orders, leading to compromises on quality.

So much for kaizen and Japan’s much-lauded pioneering adoption of Deming’s principals of quality improvements.

This situation illustrates the clash of two cultures, the open culture of continual improvement which demands a no-blame admission of every failing in the interest of rectifying and improving, coming up against a corporate culture in which executives could not admit failure to meet internal deadlines.

In this clash, quality lost.

Comment (1)

  1. Stuart,

    Regarding your statement: “The ‘what’ is still difficult to pin down.”

    Deming: “…when people and organizations focus primarily on costs,
    costs tend to rise and quality declines over time.”

    Kobe Steel’s issues are typical of many more entities than steel producers in Japan.

    As an industry expert doing “hands-on” diligence work in this space, I cannot agree with your statement “That would not have passed multiple audits and inspections, not just by ISO but even more rigorous audits by automotive and aerospace end users.”

    Plenty of auditors and inspectors miss what is right in front of them. Many don’t know what to look for, and others can’t see it, or find it.

    The root cause of this catastrophe is the subject of my consulting work.

    There’s a much bigger story here than Kobe Steel, their customers, the end users of products made with their materials, and shareholders.

    Care to talk?

    Mac

    David “Mac” McCracken, CMI – CQI – SME
    Metals Manufacturing Expert – Subject Matter Expert – Expert Witness
    Specializing in Metals + Equipment Manufacturing + Supplier Quality Assurance
    Linkedin Profile: http://www.linkedin.com/in/davidmacmccracken

    Metals: Aluminum – Iron – Steel – Titanium – Superalloys – Master Alloys
    Third-Party Inspection (TPI) – Ad-Hoc Source Inspector – Expeditor – Auditor
    ASQ Certified Mechanical Inspector (CMI)
    ASQ Certified Quality Inspector (CQI)

    Founder – CEO – Principal Consultant – Supplier Quality Engineer (SQE) – Inspector
    Manufacturing Assurance Consultants, Inc. (MAC)
    International Supplier Quality Consultants, Inc. (ISQC)
    Website: http://www.SupplierQA.com

    Office: 60 West 57th St., Suite 2-L, New York, NY 10019
    E-mail: SupplierQA@gmail.com
    Mobile: Verizon iPhone (412) 965-6211

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