Made in Japan: Downfall of the Japanese quality regime
Posted on December 28, 2017

The mighty Japanese manufacturers are creating waves of headlines for all the wrong reasons. Its branded “quality” products are being questioned, globalization seems to be giving the economy a good chase and their string of fraudulent activities has the world questioning their celebrated corporate culture. The industry that once used to be the envy of the world for its precise engineering and exacting quality standards is under intense scrutiny. The string of corporate scandals in the recent time just seems to be the beginning of a tumble down the ladder for the country’s economy.

Japan’s third largest steel producer Kobe Steel admitted on October, 2017 that it falsified data of over 20,000 tonnes of metal spanning a period of over 10 years. It has since revealed to manipulation of data regarding the strength and durability of aluminum and copper. Information about iron ore powder and target materials that is used in DVDs and LCD screens were also falsified. With over 500 companies in its global supply chain, the recent revelations have tainted not only the reliability of Kobe but also of the contracting companies which includes automobile leaders such as Ford Motors and General Electric.

On April 2016 Mitsubishi Motors admitted to rigging data about fuel efficiency of some 625,000 cars sold in Japan. Nissan Motor Co. in Oct 2017 recalled more than a million vehicles because unauthorized inspectors signed off on quality checks. In a similar admission in the same month, Subaru said it was preparing to recall 255,000 vehicles to have them reinspected; a process which would cost about USD 44 million, according to BBC reports. Air bag maker Takata filed for bankruptcy in June, 2017 over faulty airbags which were blamed for 17 deaths worldwide according to New York Times, prompting the largest auto safety recall in history, involving tens of millions of vehicles.

The number of improper accounting cases unearthed each year at publicly traded Japanese companies has also nearly doubled. The trend hit a record high of 58 cases in the 12 months through March 2016 according to Tokyo Shoko Research. Toshiba Corp. was charged with an unprecedented USD 66 million fine in December 2015 by Japan’s regulators. It was found that the giant manufacturer of nuclear power plants and semiconductors misled investors by filing false financial statements.

The constant lapse in quality control simply gives way to question the management style of the Japanese companies. The deeply rooted problem in the corporate culture regarding respect for hierarchy and silent acceptance prevents many workers from speaking out. In 2012 Olympus’s British chief executive Michael Woodford was dismissed from his position when he exposed a £1.1 billion fraud. According to Woodford, Japanese executives are willing to compromise their integrity in order to protect the company at any cost, although many times such logic cloaks the real motivation of self interest. Surprisingly, Japan has had a whistleblower protection act since 2006 but it is not seeking its purpose. Though the companies cannot fire employees who tip unethical practices, the law lacks a provision to sanction companies that punish their whistle blowing employees by dismissing or demoting them. The victims have to take their case to the court to get their situation corrected or seek damages.

A research undertaken by the Tokyo Institute of Technology to identify the root of the problem looked at the “quiet life hypothesis” of the Japanese culture. It found that managers avoid making tough decisions like investing in new areas and cutting costs that goes to make their life more difficult. Moreover, the long-serving staffs within the country’s corporations have little incentive to rock the boat since longer tenure is better rewarded with higher pay and tax benefits. Fearful of the loss of job or a demotion Japanese employees stay put for their job security even at the times of acknowledgment of unethical practices.

The crisis here also reflects the approach of these companies towards a globalized economy. With the low rates of population growth in Japan, jobs are being outsourced more than ever and the facilities are being shifted overseas. Emerging nations with low labor cost outperforms in productivity against a mature economy like Japan. With this global struggle, companies are pressured to perform better than the competitors.The paramount pressure has frontline employees forging numbers to live up to the expectations set by the mangers. As was the case in Kobe Steel, where skipped inspections and data fabrication were found to be carried out because each plant was pressured to meet its delivery dates and win more orders, leading to compromises on quality.

The episodes are a fresh blow to Japan’s reputation for scrupulous, dependable manufacturing. Such admissions threaten to damage trust at a time of growing competition from its Asian neighbors such as China and South Korea. Japanese manufacturers should be well aware that their brand and reputation rests on quality. For the sustainability of their businesses, corporate governance and regulatory compliance is essential. To placate the damage, the Japanese government should formulate strict regulations to make companies more accountable and more ethical in their operations without compromising quality, which is their key competitive edge.

Pummy Agrawal, Senior Analyst at A2Z Insights

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