Bad parts in bullet trains reveal widening Kobe Steel crisis

In Photo: Kobe Steel Group’s logo is seen in Tokyo, on Wednesday. The Japanese government is urging steelmaker Kobe Steel to clarify the extent of manipulation of data on steel, aluminum and other metals used in a wide range of products, reportedly including rockets, aircraft and cars. A government spokesman on Wednesday criticized the apparently widespread falsification of data as “inappropriate,” saying it could undermine product safety.

Kobe Steel Ltd.’s fake-data scandal penetrated deeper into the most hallowed corners of Japanese industry as iconic bullet trains were found with substandard parts supplied by the steelmaker.

While they don’t pose any safety risks, aluminum components connecting wheels to train cars failed Japanese industry standards, according to Central Japan Railway Co, which operates the high-speed trains between Tokyo and Osaka.

West Japan Railway Co, which runs services from Osaka to Fukuoka, also found substandard parts made by Kobe Steel.

The latest scandal to hit Japan’s manufacturing industry erupted last Sunday after the country’s third-largest steel producer admitted it faked data about the strength and durability of some aluminum and copper.

As scores of clients from Toyota Motor Corp. to General Motors Co. scrambled to determine if they used the suspect materials and whether safety was compromised in their cars, trains and planes, the company said two more products were affected, and further cases could come to light.

“I deeply apologize for causing concern to many people, including all users and consumers,” Kobe Steel CEO Hiroya Kawasaki said at a meeting with a senior official from the Ministry of Economy, Trade and Industry on Thursday.

He said trust in the company has fallen to “zero” and he will work to restore its reputation. “Safety is the top priority.”

Shares in the company rebounded 1 percent on Thursday, after plunging 36 percent over the previous two days. About $1.6 billion of the company’s market value has been wiped out since the revelations were made.

Figures were systematically fabricated at all four of Kobe Steel’s local aluminum plants, with the practice dating back as long as 10 years for some products, the company said last Sunday. Data was also faked for iron-ore powder and target materials that are used in DVDs and LCD screens, it said three days later.

In Central Japan Railway’s bullet trains, 310 of the tested parts were found to be substandard and will be replaced at the next regular inspection, Spokesman Haruhiko Tomikubo said. They were produced by Kobe Steel over the past five years, he added.

Investigations have been completed on about 100 of 200 companies to which Kobe Steel supplied the affected products, Kawasaki said. The company plans to release the findings of safety checks for the products in about two weeks, and the causes of the issue and planned countermeasures within a month.

While there have not been any reports that Kobe Steel products posed safety risks, the company is likely to face lawsuits from investors, customers, consumers and regulators in Japan and US, experts say.

Deputy Chief Cabinet Secretary Kotaro Nogami on Wednesday said the faked data undermined the basis of fair trade, calling it “inappropriate.”

If lenders were to take over Kobe Steel, a break-up of the company along business lines could be beneficial for shareholders and rivals, according to Thanh Ha Pham, an analyst at Jefferies Japan Ltd., who has a “Buy” rating for the company. Kobe’s steel business would fetch roughly ¥200 billion ($1.78 billion), he said.

Japan’s steel industry is dominated by JFE Holdings Inc. and Nippon Steel and Sumitomo Metal Corp., which accounted for about 70 percent of the country’s production in the year ended March.

“I talked with management of JFE, and I think they are very happy to buy Kobe Steel’s steel businesses,” Pham said on Thursday on Bloomberg TV. “That would be a very good scenario, to have further restructuring in the steel industry in Japan.”

JFE said it isn’t actively considering purchasing Kobe Steel’s steel business.

Image Credits: Kyodo News via AP