Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Kobe Steel Ltd.'s admission that it falsified quality certificates for metal products sold for cars, aircraft and trains has led to a familiar bout of soul-searching.

"Corporate Japan is wondering if its prestige has suffered an irreparable blow," the Nikkei Asian Review wrote Tuesday. Japanese companies' "brand, their reputation, the sustainability of their businesses rest on quality," a corporate-governance group told Bloomberg News.

If this angst has a familiar ring, it's because Japan has been worrying about losing its peerless quality image for almost as long as it's had it.

"It took us years to build up this reputation," the New York Times quoted a local auto worker as saying in a 2006 article headlined "Japanese Fret That Quality Is In Decline." Now, the worker said, "we see how fast we can lose it."

Since then, there's been evidence to support a narrative of national decadence, from accounting scandals at Olympus Corp. and Toshiba Corp. to issues with airbagsshock-absorbers for buildings, and vehicles made by Mitsubishi Motors Corp., Suzuki Motor Corp., Toyota Motor Corp., and Nissan Motor Co. The latest Nissan setback, prompting the recall of all cars sold in Japan over the past three years, came to light only last week.

One of the difficulties with quality is that nobody really agrees what the term means. If a $16,000 Kia Soul suffers problems half as often as a $75,000 Jaguar XJ, does that mean it's a better car? Did the switch from cheap cathode-ray televisions to expensive plasma ones mean prices went up, or down? Can quality be measured in yards of calf-leather, high-thread-count cotton or hand-stitching?

Take one relatively impartial gauge -- how often new automobiles suffer faults -- and there's evidence that corporate Japan can dial back the malaise a little. While Japanese car marques have fallen from their leadership position in J.D. Power's rankings of new-car reliability over the past decade, they're still far more dependable than they were. The problem isn't one of absolute decline, but of the rest of the world catching up:

Perfect Day
If Japanese leadership in J.D. Power's surveys of new-car quality has been slipping, it's largely because the rest of the world has been catching up
Source: J.D. Power, Gadfly calculations
Note: Shows number of problems reported per 100 vehicles in first 90 days of ownership. Based on cars sold in the U.S. Averages based on marques for which data is available in all years.

Japan is hardly unique in suffering accounting scandals and quality-control problems. The U.K.'s Serious Fraud Office is still carrying out a criminal investigation into the local unit of Tata Steel Ltd., while falsified fuel-efficiency data scandals have swept through all three of Germany's large automakers. Companies can try to minimize manufacturing glitches and cover-ups but they're unlikely ever to eliminate them.

The most important lesson for corporate Japan from the way South Korean and even U.S. manufacturers have encroached on its turf is that quality control isn't a precious national resource to be hoarded, but a series of innovations that can be learned and built upon. More importantly, businesses shouldn't be pursuing quality as an end in itself, but to provide an economic moat against lower-cost competitors and to save warranty and recall costs.

That side of the bargain seems to be misfiring. Returns on equity for industrial companies in Tokyo's Topix index have consistently trailed their peers in other developed markets, with even their recent rise only lifting them to levels that U.S. firms were experiencing in the depths of the 2009 financial crisis.

That's a problem, because making profits is one of the best ways of generating the capital needed to invest in quality. And to the extent that such improvements are worthwhile, they ought to be reflected in returns to shareholders. 

Could Do Better
Returns on equity for Japanese industrial companies consistently trail peers overseas
Source: Bloomberg

That's not to argue that it's not worth striving for the kaizen improvements that launched a thousand business books. Many of the process innovations that led to Japan's reputation for quality leadership had genuine and tangible benefits that have been taken up around the world. But the search for perfection at times can resemble a cult -- one in which Japan's national pride risks clouding the humility that lies at the heart of its manufacturing prowess.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net