The Kobe Steel Scandal Is An Indictment Of The Entire Auto Industry

If you haven’t been paying attention to the Kobe Steel scandal, I’d recommend doing so. History is being made as we speak.

Here’s a synopsis of what we know right now: Japanese steel magnate Kobe Steel (also known as Kobelco) was recently caught lying about the quality of various metals they produced to its wholesale customers for over a decade. Most notably, Kobelco claimed to many of its customers that its steel was of higher quality that what it really was. You can find this steel being used on critical components of the Japanese shinkansen bullet train, the Boeing 787 Dreamliner, and millions of automobiles around the world.

On this information alone, it would seem that the Kobelco scandal is already of epic proportion. Since Kobe Steel is the world’s 3rd-largest steel manufacturer, the potential scope of this fraudulence becomes difficult to fathom; even when looking at just the automotive sector. Perhaps the most disturbing aspect of the whole ordeal, however, is the fact that it seems to have gone unnoticed for a very, very long time.

It’s not clear if the safety of vehicles built with the falsely-graded steel has been compromised. If they have, the end result will be nothing short of an engineering disaster. Although it’s easy to place the blame squarely on Kobe Steel, there are still burning questions that need to be answered. What kind of corporate culture allowed Kobe Steel to defraud its customers without opposition from several layers of management? What will happen to used vehicle values, now that millions of them are potentially unsafe? And why wasn’t anyone else in the chain of manufacturing able to detect that they were using sub-par steel?

We can all form our own conjectures, but there’s no doubt that there is no single answer to these questions. The financial motive for the Kobe Steel scandal is fairly straightforward—the company could create a perceived advantage over its competitors. The economics of the steel business hasn’t been great over the past few years, forcing many steel manufacturers to sell lower-quality steel. By lying about the quality of their steel, Kobe Steel could also sell their product at a price that, while not high enough to drive away customers, would allow carmakers to justify spending a bit of extra money for a premium product.

Lying about product quality is nothing new in the world of business. Earlier this month, Nissan recalled over 1.2 million vehicles sold in Japan in the past three years. The reason? They hadn’t undergone final inspections before being shipped to dealers. For a car maker that was, at one point, the paragon of quality in the industry, this is a pretty embarrassing blunder. We’ll give them the benefit of the doubt and say it was an unfortunate oversight for now. But we can’t do the same for the executives who knowingly put millions of Pintos and Explorers out to market with blatant safety issues.

However, the Nissan incident does call into question the business practices of the Japanese auto industry. Between Nissan and Kobe Steel, the attitude towards quality control seems to be lackadaisical at best, and egregious at worst. Serious incidents have slipped by several layers of management for years. Can the same be said for companies like Toyota, Honda, Mazda and Subaru? At this point, we just don’t know.

What we do know is that the reputation of the auto industry will be forever different, particularly in Japan.