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Abu Dhabi, UAESunday 16 December 2018

Corporate scandals drag Japan Inc's reputation through the mud

'Once the Japanese way of manufacturing won the praise of the world. But now jobs are being outsourced and factories are sent overseas'

Hiroya Kawasaki, the president and chief executive of Kobe Steel, bows in contrition as he leaves a news conference in Tokyo, Japan. Shiho Fukada/Bloomberg
Hiroya Kawasaki, the president and chief executive of Kobe Steel, bows in contrition as he leaves a news conference in Tokyo, Japan. Shiho Fukada/Bloomberg

Embarrassing scandals at Kobe Steel and Nissan have tarnished the reputation of Japan Inc for quality, as once-mighty industrial world-beaters battle fierce global competition and shrinking profit margins.

Once again, the image of a corporate boss bowing deeply in apology before the cameras has been splashed across Japan's newspapers and sparked a fresh bout of national soul-searching.

Kobe Steel's chief admitted his firm had falsified quality data in products shipped to about 500 clients, including the car maker Toyota, aircraft manufacturers and defence contractors.

The news that the affected parts were also used in Japan's "Shinkansen" bullet trains deepened the humiliation for the "Made in Japan" brand that was once a byword for quality.

The revelation wiped US$1.8 billion off its share price over the past week - a drop of more than 40 per cent - as the scandal deepened and widened to other products such as steel wires, a key company product.

The Kobe Steel news came just days after Nissan recalled more than one million vehicles in Japan after admitting that staff without proper authorisation conducted final vehicle inspections before shipping them to dealers.

"Once the Japanese way of manufacturing won the praise of the world. But now jobs are being outsourced and factories are sent overseas. Things have changed," says Koji Morioka, a professor emeritus at Kansai University.

The admissions came as the global industry landscape goes through sweeping transformations, experts say.

Of course, corporate scandals are not limited to Japan - neighbouring South Korea has been home to some of its own, for instance.

At the weekend, the Samsung Electronics vice chairman and chief executive Kwon Oh-hyun said he was stepping down after more than three decades at the company, amid a corruption trial surrounding the de facto chief.

“As we are confronted with unprecedented crisis inside out, I believe that time has now come for the company start anew, with a new spirit and young leadership to better respond to challenges arising from the rapidly changing IT industry,” Mr Kwon said.

Mr Kwon is one of the two vice chairmen at Samsung with Jay Y Lee, who was sentenced to five years in prison in August for bribing a presidential confidante in return for help in succeeding his hospitalised father, the chairman Lee Kun-hee. The younger Lee has appealed, denying charges.

Mr Kwon's decision came even as Samsung reported operating income almost tripled to a record $12.8bn in the three months ended September, according to preliminary results.

He will resign from the management board in March, the company said.

For Lee junior, prison certainly has not dented his wallet. Samsung has reported record profit every quarter since he was jailed initially in February before being sentenced, making him even richer.

Detained over charges that he bribed former president Park Geun-hye, Lee has since missed the launch of two new flagship phones and three record-breaking quarterly earnings, including the latest July-September earnings guidance.

His Samsung Electronics stake, albeit below 1 per cent, is now worth $2bn. Lee also received at least $10.5 million in dividends from Samsung during his detention, and 837m won (Dh2.7m) in pay during the first half of 2017. He owns stakes in other Samsung affiliates.

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Read more:

Japanese steel major admits falsifying quality data

Samsung hunts for new leader after CEO resigns

Samsung heir sentenced to five years on corruption charges

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Lee will miss another record earnings announcement expected in the fourth quarter as he is expected to stay in prison at least until next February, when the appellate court hearing his case is likely to try to rule on the bribery suit.

Intensifying global competition and an unending drive to cut costs have resulted in a situation in developed countries like Japan and Korea where workers keep quiet to protect themselves even if they see wrongdoing, says Prof Morioka.

"As globalisation continues, companies are expanding local production, and emerging economies are becoming ever more competitive," he says.

Costly workers in mature economies such as Japan are directly pitted against cheap factory staff in emerging markets in a competition for jobs.

Experienced workers with stable contracts are being replaced by temporary novices, while management demands higher productivity from all employees.

Meanwhile, industry newcomers are taking market share away from traditional corporate juggernauts.

In the steel making sector, for example, Indian and Chinese majors have steadily expanded, pressuring their Japanese rivals.

And the Japanese car manufacturing behemoths have expanded overseas production, rather than exporting vehicles from Japan.

The Kobe Steel and Nissan scandals are the latest in a string of negative headlines for Japanese industry that used to be the envy of the world.

The airbag maker Takata went bankrupt this year after spending years dealing with defective products that were linked to 16 deaths and scores of injuries worldwide.

Mitsubishi Motors last year admitted that it had been falsifying mileage tests for years.

Sadayuki Sakakibara, the chairman of the powerful Keidanren business lobby, said that "global confidence and trust in Japanese manufacturing were based on unrivalled quality that overwhelmed other countries".

"These acts were so serious that it could have an impact" on trust in Japanese manufacturing.

But Asia is not alone regarding major scandals. The 2015 "dieselgate" affair, where Volkswagen admitted to equipping its diesel cars with devices to evade emissions tests, caused great embarrassment for German industry, also a watchword for quality. It also cost VW billions in fines, with more to come.

General Motors in 2014 also started recalling millions of vehicles over ignition defects that were linked with 124 deaths, after hiding the problem for more than a decade.

But analysts said that, ironically, super-stringent quality controls in Japan could be part of the problem.

Eyebrows were raised in the Nissan scandal when it emerged that checks by more qualified officials were required for the domestic market but not for vehicles destined for exports.

Nobuo Gohara, a corporate compliance lawyer who has helped to restore a number of firms after serious scandals, said many such affairs stem from excessive safety or quality standards.

Misconduct begins when employees consider that meeting these standards is a mere formality rather then a requirement and start hiding it from internal audits, he said.

Such a culture can spread like "mould" through an organisation, Mr Gohara says.

"If you leave these situations untreated, the organisation as a whole becomes numb to regulations," he says.

Younger employees in Japan tend to be more sensitive to compliance requirements, Mr Gohara says, adding that repeated surveys of workers by outside experts can encourage whistle-blowing.

But whistle-blowing does not function properly when the misconduct is routinely and systematically conducted by many people, including potential whistle-blowers themselves, he points out.

In addition, there is no formal protection for whistle-blowers in Japan and a culture of respect for hierarchy prevents many workers from speaking out, observers say.

"I suspect many small acts of misconduct happen in many places," Mr Gohara says.