In the latest in a series of quality-related scandals, Japanese company Toray Industries Inc. (TYO: 3402), has revealed that one of its subsidiaries has been providing clients with false product-test reports for many years, resulting in 149 cases of falsification.
Toray is the world's largest producer of carbon fiber composite materials and viewed as a high-tech manufacturer across the globe. The falsified reports involved products like tire-strengthening cords, which were sold to 13 clients by Toray Hybrid Cord Inc.
Rumors of Toray's dishonesty have been making the rounds online, with leaked reports presumably posted by disgruntled employees who either had some hand in the falsification or were able to witness it firsthand.
Akihiro Nikkaku, Toray's Chief Executive, said he preferred to "announce [the fraud] publicly," rather than allow rumors to circulate. Nikkaku also said that part of the pressure exerted on Toray to go public stemmed from the recent disclosures of fraud at Kobe Steel (TYO: 5406) and Mitsubishi Materials (TYO: 5711), revealing a systemic and problematic trend towards dishonesty in Japanese business culture.
"There were no legal violations or safety problems; this was between us and our customers, and so there was no need to disclose it," remarked Nikkaku when probed about why Toray did not disclose the reports earlier.
Toray's shares plunged more than 8% right after the announcement and closed at 5.3% in a flat broader market. This reflects investor concerns about other possible issues of dishonesty, and a general decrease in faith in the company.
When quality inspections revealed that products from Toray Hybrid Cord Co. fell short of standards, workers sometimes faked inspection data to make it seem that products met them. No deaths or product failures have been attributed to the false data.
Nissan (TYO: 7201) and Subaru (TYO: 7270 ) also admitted last month that they had been allowing workers who lacked certifications required by Japanese regulators to inspect vehicles produced for the Japanese market, further amplifying concerns about questionable business ethics across Japan.
Two quality control managers have been implicated in the falsification, both motivated primarily by mounting pressure to meet product delivery targets. The two managers responsible were promptly transferred to different positions.
Combined revenue of the 149 cases amounted to 150 million yen, or $1.35 million, which would have a big earnings impact, Nikkaku said. But the more deep-rooted rattling of investor confidence associated with such a scandal is more likely to have a long-term effect, and Toray should take immediate steps to remedy the situation as well as its image.