Scandal-hit Kobe Steel has a 'look the other way' culture, they say in hometown

By Taro Fuse

KOBE, Japan (Reuters) - The fresh university graduate, eager to make a good impression on the job at one of Kobe Steel Ltd's main plants in Japan, punched the wrong measurements into machines making steel pipes, causing a large batch to come out too short.

"I thought I was going to be fired," recalled the former employee nearly 40 years later. But Shinzo Abe, now Japan's prime minister, stayed on the job at Japan's third-largest steelmaker for three years before entering politics in 1982.

Abe has called the steel industry the backbone of the nation. Kobe Steel, a 112-year-old company in south-central Japan's Hyogo prefecture, has risen from wartime devastation and natural disaster but its past is littered with examples of corporate misconduct.

Its admission last month that workers had tampered with product specifications for at least a decade is the latest in a string of scandals that has battered Japan's reputation as a manufacturing powerhouse.

Clients around the world, including top carmakers and airplane manufacturers, have been scrambling to check whether the safety or performance of their products have been compromised.

Workers, executives and shopowners in Kobe, a gritty, industrial city bordered by sloping hills where cattle are bred for the famed Kobe beef, said they were concerned but not surprised by the scandal.

Kobe Steel, which has apologised for the tampering, declined comment for this article.

"The corporate culture was to look the other way even while you saw what was going on," said a retired employee who worked at the company's flagship steel plant, Kobe Works - a symbol of the city's quick recovery from a 1995 earthquake that killed more than 5,000 people. The company's other main plant in the area is Kakogawa Works, in the nearby city of Kakogawa.

"They were supposed to be instilling a culture that paid attention when improprieties were discovered," the former employee said. "In the end they didn't create such a corporate culture. That's management's responsibility."

The company initially said some workers had falsified data on contract specifications for a relatively small amount of aluminium and copper products, but it later admitted the problem had spread.

In 2006, Kobe Steel admitted falsifying soot-emissions data from the blast furnaces at Kobe Works and Kakogawa Works.

The latest scandal reflects "exactly the same set-up", said Shoichi Tarumoto, who was then mayor of Kakogawa. "It looks like nothing has changed at Kobe Steel."

PAST PROBLEMS

Kobe Steel has admitted taking part in bid-rigging for a bridge project in 2005, and failing to report income to tax authorities in 2008, 2011 and 2013. The company exceeded established limits for ground and water pollution in 2006.

Illegal political funding to candidates in local assembly elections in 2009 prompted the resignations of the then CEO and chairman. And last year Kobe Steel admitted a subsidiary falsified data on stainless-steel products.

A senior official in local government who has dealt with the company for years said: "Kobe Steel always scouts the backstreets for shortcuts. That's their nature."

Although its local dominance has waned, Kobe Steel remains one of only two Kobe-based companies, along with Kawasaki Heavy Industries Ltd, that have revenues over 1 trillion yen ($9 billion) a year. The Kakogawa Works is that city's biggest company, vital as a local taxpayer and employer.

More than a third of the Kobe Steel group's 6,123 domestic customers are concentrated in Hyogo or neighbouring Osaka, according to credit-research firm Teikoku Databank. More than half its customers are small and midsize Japanese companies.

The other clients are spread around the world and include top automobile manufacturers, airplane makers, railways and nearly any industry that uses steel, aluminium or copper in any form.

No safety issues have been found so far because of the tampering, but Kobe Steel has withdrawn its forecast for its first annual profit in three years. Whatever the eventual economic impact, the scandal is already affecting morale in Kobe city.

"If Kobe Steel suffers a blow, this is the area that will be most affected," said Tsuyoshi Matsuda of Teikoku Databank's Kobe office.

Kobe Steel acknowledges some customers have shifted orders to other suppliers. Major banks are instructing their Kobe area branches to keep close watch on the credit management at companies that do business with the steelmaker, bankers say.

"HEAVY MOOD"

The scandal "isn't an open topic on the job," said a worker in his 30s, finishing the night shift around 8 a.m. at Kobe Works, a hulking jumble of rusting pipes, risers and tanks.

"Nobody says it out loud, but I think people are worried," he said. "It's a heavy mood."

Shinzaike, the local train station closest to Kobe Works, is home to several bar-restaurants that count the company's employees among their best customers. Since the latest scandal erupted, business has dried up, traders said.

"Looks like they're holding back from going drinking," said a pub owner.

Reservations for year-end parties would normally be starting now, but there haven't been any yet, he added.

Abe, who worked at both the Kobe and Kakogawa works, has called his years at Kobe Steel "the starting point of my adult life."

Last year, according to media reports, he urged young people entering the workforce to follow his example of learning from mistakes at Kobe Steel.

"I got through it without incident," he said. "I want you not to be discouraged by a few mistakes but rather do the best you can."

($1 = 114.1700 yen)

(Reporting by Taro Fuse; Additional reporting by Yuka Obayashi and Ritsuko Shimizu in Tokyo; Writing by William Mallard; Editing by Raju Gopalakrishnan)