Bullet Train Parts Failed Quality Tests: Steel Scandal Deepens

Updated on
  • JR Central, JR West say parts do not pose safety concerns
  • Shares rebound slightly after plunge; CEO apologizes

Kobe Steel Says 'May Find More Fake Data'

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

While there’s no safety risk, two companies operating the high-speed Shinkansen trains said they found Kobe Steel components that failed to meet Japanese industry standards. The chief executive officer of the 112-year old steelmaker apologized for the crisis as compromised materials turn up in everything from cars to DVDs. The affair has wiped off more than a third of the company’s market value and led to speculation it may be broken up.

An N700 series Shinkansen bullet train operated by Central Japan Railway approaches Tokyo Station.

Photographer: Kiyoshi Ota/Bloomberg

The latest scandal to hit Japanese manufacturing erupted Sunday after the country’s third-largest steelmaker admitted it faked data about the strength and durability of some aluminum and copper. As 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. There have been no reports of products being recalled or safety concerns raised.

“I deeply apologize for causing concern to many people, including all users and consumers,” Kobe Steel Chief Executive Officer Hiroya Kawasaki said at a meeting with a senior government official 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.”

Planes, trains and automobiles: a Q&A on how the scandal unfolded

Shares in the company rebounded 0.5 percent Thursday, after plunging 36 percent over the previous two days. About $1.6 billion of Kobe Steel’s market value has been wiped out since the revelations were made.

While shares collapsed, bond risk has spiked. Five-year credit-default swaps insuring the company’s debt against default have jumped 222 basis points to 279, the highest since February 2016, according to data from CMA.

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 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.

Central Japan Railway Co, which operates bullet trains between Tokyo and Osaka, said aluminum components connecting wheels to train cars failed Japanese industry standards. Of the tested parts, 310 were found to be sub-standard 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 said. West Japan Railway Co, which runs services from Osaka to Fukuoka, also found sub-standard parts made by Kobe Steel.

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.

The company supplies nearly 60 percent of the aluminum disc blanks used in the world’s hard drives with production centers in Japan and Malaysia, according to its latest annual report. Kobe Steel is one of only two major suppliers for the market and that means -- at the very worst -- hard drive failures could increase, according to Bloomberg Intelligence analyst Simon Chan.

Hiroya Kawasaki

Photographer: Jeff Kowalsky/Bloomberg

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 U.S., 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 yen ($1.78 billion), he said.

Japan’s steel industry is dominated by JFE Holdings Inc. and Nippon Steel & 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 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.

— With assistance by Kazunori Takada, and Stephen Stapczynski

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