Japan’s third largest steelmaker is embroiled in a sizable industrial scandal.
Kobe Steel Ltd. (OTC: KBSTY) has said its staff falsified data regarding the strength and durability of some aluminum and copper products used in planes, trains, possibly a space rocket, and in cars by some of the world’s most popular car manufacturers.
By market close on Tuesday, the stock had dropped 48%, and the cost to insure Kobe Steel debt against default skyrocketed as customers like Toyota, Honda, and Subaru said they had used materials that were subject to the data falsification, while Hitachi Ltd. said its trains exported to the U.K. were also affected.
According to one outside estimate, the potential cost of replacing the parts is over $133 million, but the damage to the company’s reputation—as well as possible lawsuits—could be far greater.
“At the moment, the impact is unclear but if this leads to recalls, the cost would be huge,” said Takeshi Irisawa, an analyst at Tachibana Securities Co. “There’s a possibility that the company would have to shoulder the cost of a recall in addition to the cost for replacement.”
The Kobe Steel scandal reignites concern over the integrity of Japanese manufacturers. Last week, Nissan Motor Co. said it would recall more than 1 million vehicles after regulators discovered vehicle quality approvals were done by unauthorized inspectors. This comes after Takata Corp. pleaded guilty to misleading automakers about the safety of its airbags earlier this year.
For its part, Kobe Steel claimed the affected products were delivered to over 200 unidentified companies. They said the falsification was intended to make the metals appear as if they met their clients’ quality standards.
Kobe Steel CEO Hiroya Kawasaki has launched a committee to probe quality issues. So far, the falsification was found at all four of the company’s plants. The fabrication of figures was systematic, and for some products, the practice has been going on for more than 10 years, according to Executive Vice President Naoto Umehara.