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Japan's Kobe Steel says violated statutory standards, losing customers

By Yuka Obayashi and Taiga Uranaka
Kobe Steel Executive Vice President Naoto Umehara attends a news conference in Tokyo, Japan October 20, 2017. REUTERS/Issei Kato

By Yuka Obayashi and Taiga Uranaka

TOKYO (Reuters) - Kobe Steel Ltd <5406.T> sank deeper into crisis on Friday as the embattled company said it had lost some customers to competitors because of widespread data falsification that had extended to its mainstream steel sheet business.

Japan's third-largest steelmaker, which supplies the world's top airline and automobile manufacturers, also said it had violated statutory standards set by the industry ministry, pushing the scandal beyond failure to meet specifications agreed with customers.

Until now, the 112-year-old company had said products it sold with falsified data met safety and other standards but did not meet contract specifications agreed with customers. It had also said the problem was mainly with aluminium and copper products.

Kobe Steel has an extensive role in global supply chains - the company produces engine valve springs found in half the world's cars, according to its website.

Kobe Steel Executive Vice President Naoto Umehara said the company had found a breach of industrial standards at its Hatano copper plant southwest of Tokyo, along with a new case of falsification of data at a unit that cuts and processes steel plate.

"There has been also some impact on our business as we have lost credibility,” Umehara told a news conference, citing cases that the company lost orders and customers switched to its competitors. "But we can’t quantify the impact at the moment."

He said the Hatano plant did not meet Japanese Industrial Standards for quality management after it faked data on tensile strength and other properties of copper and copper-alloy piping.

Kobe Steel has stopped shipping about 43 percent of copper products from the plant over the problems with the statutory standards, a company spokeswoman said.

Two certification companies said on Thursday they were investigating whether the plant is in line with a global standard on quality control.

They could suspend or cancel the "ISO9001" certification of the plant if it doesn't meet the standard, which could affect its business as many global buyers require suppliers to use the benchmark.

Kobe Steel said it also found, as the result of a whistleblower, that a plant in western Japan had been "obstructing company’s voluntary inspection” by concealing data.

After getting a tip that workers at the Chofu plant failed to report data falsification on aluminium extrusion products, the company decided to set up a panel of outsiders, replacing an in-house panel led by the company’s president.

The Ministry of Trade and Industry believes "the data concealment by its employees has hurt the credibility of Kobe Steel’s voluntary investigation," said Yasuji Komiyama, director of the industry ministry’s metal industries division.

The ministry ordered the company on Friday to expedite its probes and report results as soon as possible.

Kobe Steel previously said that it found widespread falsification of data on the strength and durability of copper and aluminium products sent to customers. The falsifications stretch back for more than 10 years, a senior executive told Reuters this week.

JUSTICE PROBE

Global automakers, aircraft companies and other manufacturers have scrambled to identify potential hazards in their products because of the falsification, although four Japanese carmakers said on Thursday they have found no safety issues with aluminium parts supplied by Kobe Steel.

The company is now subject to a U.S. Justice Department probe while checks continue at hundreds of its clients involved in complex supply chains spanning the globe.

No safety problems have surfaced as Kobe Steel attempts to confirm the extent of the data tampering. But in Europe, aviation safety authorities earlier this week issued a directive advising aircraft manufacturers to avoid using Kobe Steel products if they can until checks are completed.

"We are worried about the U.S. Justice Department probe," said a source at one of the company's lenders. "The impact will be very big if the DOJ seeks a criminal case against Kobe and hits it with huge financial penalties."

The company has started selling assets to raise fund, on Friday holding the first round of an auction to sell its most of a property unit, sources told Reuters on Friday, a deal that reportedly could raise over $400 million.

Kobe Steel's fate hangs in the balance while checks are being carried out.

Kobe Steel shares fell 1.6 percent on Friday. They have fallen nearly 40 percent since it revealed the problems on Oct. 8, wiping about $1.60 billion off its market value.

($1 = 113.2300 yen)

(Additional reporting by Aaron Sheldrick and Junko Fujita; Editing by Raju Gopalakrishnan)