Report on the Kobe Steel Group’s misconduct

March 6, 2018

Kobe Steel, Ltd.

We deeply and sincerely apologize once again for causing substantial troubles to our customers, business partners, shareholders, and other stakeholders due to the misconduct of Kobe Steel, Ltd. (the "Company" or "we") and its Group (the "Group" or "Kobe Steel Group").

On October 26, 2017, we established an Independent Investigation Committee chaired by Mr. Gan Matsui, an attorney-at-law and a former Superintending Prosecutor of the Fukuoka High Public Prosecutors' Office, to investigate the misconduct revealed by the quality self-inspections covering the Group's actual shipments for the past one year (September 2016 – August 2017) (i.e., the act of falsifying or fabricating inspection data for products falling short of public standards or customer specifications, and shipping or delivering those products to customers as if they conformed to the public standards or customer specifications, henceforth referred to in this release as the "Misconduct"). We have cooperated in full with the IIC's investigation.

In response to the latest results of the IIC's investigation, our Board of Directors has resolved to make public a report titled Report on Misconduct in Kobe Steel Group dated March 6, 2018 (the "Report"), which aims to explain facts revealed by the IIC's investigation, along with the outcomes of discussions at the Quality Governance Restructuring Deliberation Committee and the Quality Problem Investigation Committee, and reporting analyses of the causes of the Misconduct and measures to prevent a recurrence. We provide a summary of the Report below.

1. Facts relating to the Misconduct

As of October 26, 2017, we announced that 525 of our customers had received nonconforming products from us, but the IIC's further investigation detected new cases of misconduct as shown in Table 1.

The new cases are those discovered in the process of the IIC's verification of and investigation into the Group's quality self-inspections, in addition to the four cases of potential Misconduct, which we announced on October 26.

We have already contacted customers about the new cases and have also completed safety verification for some of these cases. We will continue working by giving the highest priority to safety verification.

Table 1: Locations where the Misconduct was found and the progress of safety verification

As of March 6, 2018

Major category Company name Material Main purpose Announced on
October 26, 2017
Since the IIC's
(October 26, 2017)
No. of customers Safety verification No. of customers Safety verification
Aluminum & Copper Kobe Steel, Ltd. Aluminum &
Copper Business
Aluminum sheets Can stock
57 52 7*4 6
Aluminum cast & forged parts


Rolling stock
67 67 4*5 2
Aluminum extrusions


Rolling stock
34 34 - -
Copper sheets


38 38 2*6 2
Kobelco & Materials Copper Tube, Ltd. Copper tubes Air conditioning 23 23 88*7 87
Shinko Metal Products Co., Ltd.

Copper alloy tubes,

Electrical machinery, Steelmaking equipment 176 176 29*8 1

Domestic subsidiary: 1

Overseas subsidiaries: 3*2

Copper tubes
Copper strips

Aluminum wires

Air conditioning

36 36 - -
Shinko Moka Sogo Service Ltd. Aluminum plate Prototype materials - - 1*9 0
Other Kobelco Research Institute, Inc.

Sputtering target materials

Prototype alloys

Optical disks

Prototype alloys
70 70 14*10 13
Corrosion analysis Corrosion analysis

Kobe Steel, Ltd.
Iron & Steel Business

Steel Powder Division
Steel powder Sintered parts 1 1 - -

Domestic subsidiaries, etc.: 2

Overseas subsidiaries, etc.: 2*3

Steel wire
Stainless steel wire

Heat treatment


22 22 - -
Shinko Kohan Kako, Ltd. Heavy plate processing

Heavy plate processed products

1 1 - -
Koshuha All Metal Service Co., Ltd. Heat treatment Heat treatment - - 1*11 1

Kobe Steel, Ltd.

Machinery Business

Industrial machinery

Standard compressors
- - 10*12 10
Shinko Engineering Co., Ltd. Machinery Industrial machinery - - 3*13 3
Kobelco Eco-Solutions Co., Ltd. Water analysis Water analysis - - 4*14 4
525*1 520 163*1 129

The shadowed portions indicate the locations where the Misconduct was detected after the IIC's establishment.

  • *1 The 525 customers announced on October 26, 2017 and the 163 customers affected by the Misconduct detected after the establishment of the IIC's are the cumulative numbers.

  • *2 Shinko Aluminum Wire Co., Ltd., Kobelco & Materials Copper Tube (M) Sdn. Bhd., Kobelco & Materials Copper Tube (Thailand) Co., Ltd., and Suzhou Kobe Copper Technology Co., Ltd.

  • *3 Nippon Koshuha Steel Co., Ltd., Shinko Wire Stainless Company, Ltd., Jiangyin Sugita Fasten Spring Wire Co., Ltd., and Kobelco Spring Wire (Foshan) Co., Ltd.

  • *4 A summary of each Misconduct identified with footnotes *4 through *14 is available at the following sections of Chapter 3 of the Report: *4 Section 1(1) Misconduct (i)(ii)(iii); *5 Section 1(2) Misconduct (i)(ii)(iii); *6 Section 1(3) Misconduct (i)(ii); *7 Section 3(1) Misconduct (i)(ii); *8 Section 3(2) Misconduct (i)(ii)(iii)(iv)(v)(vi)(vii)(viii); *9 Section 3(4); *10 Section 4(6) Misconduct (i)(ii)(iii) and Section 4(7) Misconduct (i)(ii); *11 Section 4(4); *12 Section 2(2) Misconduct (i)(ii)(iii) and Section 2(3); *13 Section 4(5) Misconduct (i)(ii); *14 Section 4(6) Misconduct (i)(ii)(iii).

After looking at details surrounding the Misconduct, we confirmed that some staff falsified inspection data as if it met customer specifications or fabricated test data for unmeasured products as if they were actually measured.

The IIC's investigation revealed that the Aluminum & Copper Business was the only division where executive officers were involved in the Misconduct. Specifically, two executive officers, who once worked at plants where the Misconduct took place, were aware of the Misconduct but failed to report it to their superior who was the then head of the Aluminum & Copper Business. These executive officers did not themselves engage in the Misconduct. Another executive officer, who became aware of the Misconduct in April 2017, did no more than to decide, as a basic policy, to gradually eliminate the production and shipment of nonconforming products and he only instructed his staff to improve manufacturing processes and stop accepting part of the orders.

Of former executive officers, two directors / executive officers were found to have been directly involved in the Misconduct before taking office as an executive officer. Even after becoming executive officers, they neither reported the Misconduct to the Board of Directors nor took any actions to have the Misconduct halted or corrected.

As shown in Table 1, the Misconduct took place not only at the Aluminum & Copper Business but also at other divisions and Group companies. We take it very seriously the fact that the Misconduct took place at many locations within the Kobe Steel Group.

2. Analyses of the causes of the Misconduct

Taking into account the results of the IIC's investigation and our own internal examination, we conclude that the causes of the Misconduct can be grouped into the following three categories : (1) the management style that overemphasized profitability and the inadequate corporate governance, (2) the imbalanced operation of plants that resulted in the reduced awareness of quality compliance among employees, and (3) the insufficient quality control procedures that allowed the Misconduct to take place. Details are provided below.

(1) Management style that overemphasized profitability and the inadequate corporate governance

To align with the Head Office's emphasis on profitability, each business division felt the need to adopt an attitude that led them to accept purchase orders without reviewing their production capacities (the "Production-Over-Quality Attitude"). Further, a large-scale transfer of authority from the Head Office to each of the individual divisions weakened the Head Office's ability to assume centralized control over the entire Kobe Steel Group; this, in turn, led to the Head Office's inability to manage a compliance program that ensured effective quality assurance. Failure to detect the Misconduct at an early stage is also attributable to several factors relating to our corporate governance. For example, even when conduct similar to the Misconduct was found in the past, the Company's management did not take drastic enough measures to address such issues. Internal audits at each division, moreover, were not sufficiently extensive.

(2) Imbalanced operation of plants that resulted in the reduced awareness of quality compliance among employees

The motive for engaging in, and continuing to engage in, the Misconduct was created by the following factors: the manufacturing of products based on customer specifications not matched to process capability; a culture that prioritized winning purchase orders and meeting delivery deadlines over ensuring quality; an insular organization where personnel were rarely exchanged or transferred between different divisions; the absence of appropriate quality-related education / training and disciplinary actions; a false assumption that products falling short of customer specifications could be shipped to the extent that they had no safety issues; and the employee's quality compliance awareness dulled by a combination of the situations above.

(3) Insufficient quality control procedures that allowed the Misconduct to take place

The Misconduct was provoked by certain issues on quality management processes, such as inspection processes enabling data falsification or fabrication, isolated and rigid operational systems, and the establishment of internal standards utterly impossible to conform to.

3. Measures to prevent a recurrence of the Misconduct

Based on the cause analyses mentioned above and taking the IIC's suggestions into consideration, we have set out the following measures to prevent a recurrence of the Misconduct.

(1) Measures in terms of governance— we will implement the following measures to restructure our quality governance systems

(2) Measures in terms of management— we will implement the following measures to ensure quality management

(3) Measures in terms of process— we will implement the following measures to strengthen quality control processes

4. Conclusion

Considering the facts relating to the Misconduct that were found by the Group's quality self-inspections and the IIC's investigation, together with multiple compliance incidents in which the Company was involved in the past, we must acknowledge that the Company is facing deep-seated issues concerning its organizational culture and awareness of its officers and employees, as well as its compliance systems.

In the process of investigating the causes of the Misconduct, we discovered the need to make reforms aimed at addressing issues more fundamental than issues that involved only quality, including those relating to governance in general, not to mention issues with management and operational processes relating to the Company's quality assurance. We are also cognizant that there still remain issues that require further consideration, such as the desirable state of the Board of Directors, the desirable state of the division system, and the desirable methods of personnel allocation and development and of formulation of management plans.

We will continue to place the highest priority to completing the safety verification. At the same time, we will pursue fundamental reforms of our organizational systems and corporate culture by involving all of the Kobe Steel Group's employees, led by the top management, in diligently and earnestly implementing each measure to prevent a recurrence mentioned in the Report.

During the half-year-long investigation, we gained great cooperation from those concerned, especially our customers, in the safety verification and other processes, and also received very valuable advice and opinions. We would like once again to express our sincere gratitude for such support. For over 112 years since its founding, the Kobe Steel Group has managed its business by valuing trust of its customers, partners, shareholders, and a number of other stakeholders. The recent loss of such trust is truly regrettable.

To fulfill our responsibilities for the recent Misconduct and to be reborn as a company in which people can place their trust, we will go back to our roots (the "Base of Monodzukuri"), take to heart again the fact that reliable quality is the core of trust, strive to prevent a recurrence with an unwavering resolution, and commit ourselves to making this moment a true turning point.

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