• Various news outlets reported last week that Kobe Steel, Japan's third-largest producer of steel, had admitted to fabricating data in certain components supplied to up to 500 firms.

• A statement by Kobe Steel said certain products under its Aluminium and Copper business had not complied with standards set jointly with its customers. These standards were for essential elements such as "tensile strength", which measures the ability of metal to take on weight without breaking when it is stretched.

• The "improper conduct" saw products certified as meeting the specifications by way of inaccurate data going into their inspection certifications. The issue had been uncovered through an internal audit. It had not received any reports from its customers.

• The specific batch of products concerned are aluminium flat-rolled products, aluminium extrusions, copper strips and tubes, and aluminium castings and forgings, that were shipped in the one-year period from Sept 2016. Toyota and Nissan confirmed that input from Kobe Steel went towards the hoods and doors of some of its cars, the media reported.

• Kobe Steel said on Friday that similar "inappropriate actions" in its overseas production of steel wire (used in car engines and tires) had also taken place but this had been resolved, Bloomberg reported.

• The immediate concern is to verify if the safety and quality of the final products built by its customers are compromised. The Japanese government had instructed Kobe Steel to address safety concerns within two weeks and report on how the misconduct took place within one month.

• Towards this goal, major Japanese automakers such as Toyota, Honda, Mazda, Mitsubishi, Nissan, Subaru and Suzuki have initiated their own investigations but said this was challenging as it involved going through complex supply chains populated by numerous suppliers.

• We opine that the automakers would need to gather sufficient data to quickly ascertain if any recalls are necessary (if yes, they would be carried out in stages and could extend to various markets). Beyond this, they would need to work with Kobe Steel to ensure a repeat of this does not occur. The impact to reputation would depend on the speed and transparency of this entire process.

• At this stage, all parties are still looking into the matter. Japanese automakers such as Honda, Toyota, Nissan and Mazda form a substantial part of the Malaysian auto market. We maintain our calls and FVs for the affected companies under our coverage, pending clarity on the effect on production and sales.

Source: AmInvest Research - 16 Oct 2017