TORAY, MITSUBISHI MATERIALS, KOBE STEEL, NISSAN – SAME OR DIFFERENT FROM VOLKSWAGEN?

 

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The question is simple and straight-forward. Do the recent falsification scandals at Toray, Mitsubishi Materials, Kobe Steel, Nissan and Subaru resemble the major misconduct by Volkswagen over emission manipulations? Or are there complete different forces at play?

The short answer is “these are different beasts”. But there are so many parallels that we need to take a closer look for arriving at a meaningful answer.

Having advised on several corporate scandals in Japan I know a bit about the background and forces at play during such scandals in Japan. But I have no special insights regarting the companies mentioned above as I was not involved in any of these cases. And if I had I could not comment on those here for obvious reasons.

Let us start with arguments for the same root cause existing both in Japan and Germany.
Global competition has been heating up for all manufacturers. Cost and time pressure has been building up over the years and passed down to the production lines in both countries.

Be it in automotive, steel or material industries. Japanese and German makers are often directly competing in the same industries and facing the same cost and time pressure not only from each other but also from emerging competitors from Korea, China or elsewhere.

Finally, Japanese and German engineers and production and quality experts belong to the finest in the world and certainly share the common characteristic of being rather serious and well-structured.

In other words: There are few eco-systems better prepared than the German and Japanese ones to install a systematic falsification process that can run over years without being detected.

Do not laugh! Prof. Kusonoki of my alma mater Hitotusbashi University already made this point over the emission cheating of Mitsubishi Motors when he compared it to the misconduct at Volkswagen. He rightly described both firms to be equally “majime” (serious) in designing such systems.

But there is also a major structural difference between Japan and Germany that I personally see as the major root cause for the string of recent falsification scandals that have engulfed Japan’s material manufacturers as well as Nissan and Subara.

Put in one term, it is the unwillingness or inability of Japanese manufacturers to implement a proper headcount reduction.

Let me stretch this line of thought. I claim the Japan falsification scandals are the result of insufficient shop-floor personnel because Japanese companies in general keep too many employees and not too few.

This runs counter to intuition and needs explanation. It is actually the sad and bitter irony of a former pillar of Japanese strength, the ideal of life-time employment.

We all know that big Japanese firms shy away from reducing headcount and try every opportunity to keep staff, at least the white-collar regular employee crowd.

And this is where the crux starts. Facing increasing global competition and more and more cost and time pressure, many manufacturers have excessively reduced personnel at the factory floor including functions of quality checks and certification processes. Because they avoided major job cuts at headquarters and other administrative functions, many companies had to reduce headcount even more at the “gemba” level to bring about some cost savings.

In other words and very simplified: Shop-floor staff had to be reduced because headquarter staff had to stay high.

The August 2016 report that followed an investigation into Mitsubishi Motors’ cheating on fuel efficiency clearly stated: Offending departments told higher-ups on several occasions that their targets were impossible to meet but stopped the reporting and started to hide problems after their protests were largely ignored.

Prof. Kikuzawa of Keio University, a corporate governance specialist, notes “When top and middle management order subordinates to do something those workers know to be impossible, they find themselves backed against a wall and turn to misconduct. Silence becomes the reasonable response in that organization.”

Do not look for the culprit at the shop-floor level but up in the supervising ranks up to the board members turning a blind eye on shop-floor demands. It is them who are responsible but often unable to implement a healthy overall employment structure with sufficient manpower at the core of operations.

Each year, over 1 percent of Japan’s 3,500 listed companies experience some sort of major scandal.

According to Tokyo-based accounting company Farsight, about 50 independent committees and investigative panels have been set up at Japanese companies to look into corporate misconduct annually since 2015, a doubling from earlier years.

It remains to be seen whether the recent string of scandals serves as a wake-up call.

I seriously doubt that any internal investigation committee will be able to address the fundamental issue of a mismatch in headcount allocation.

As long as Japanese big firms will refrain from seriously dealing with necessary headcount adjustments in the white-collar sphere, we will continue witnessing scandals brought up by people on the shop-floors implicitly forced to cut corners by their very bosses.

This does not say that Volkswagen is any better or worse than Mitsubishi Motors, Nissan, Kobe Steel, Mitsubishi Materials and Toray. But there are very specific HR factors at play that we must not forget when looking at these recent scandals in Japan.

Jochen Legewie

Jochen Legewie

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