Report on the 易游YY体育官方网站’s misconduct

March6,2018

易游YY体育官方网站 Steel, Ltd.

REPORT ON MISCONDUCT IN 易游YY体育官方网站

We deeply and sincerely apologize once again for causing substantial troubles to our customers, business partners, shareholders, and other stakeholders due to the misconduct of Kobe Steel, Ltd. (the "Company" or "we") and its Group (the "Group" or "易游YY体育官方网站").

On October 26, 2017, we established an Independent Investigation Committee chaired by Mr. Gan Matsui, an attorney-at-law and a former Superintending Prosecutor of 易游YY体育官方网站e Fukuoka High Public Prosecutors' Office, to investigate 易游YY体育官方网站e misconduct revealed by 易游YY体育官方网站e quality self-inspections covering 易游YY体育官方网站e Group's actual shipments for 易游YY体育官方网站e past one year (September 2016 – August 2017) (i.e., 易游YY体育官方网站e act of falsifying or fabricating inspection data for products falling short of public standards or customer specifications, and shipping or delivering 易游YY体育官方网站ose products to customers as if 易游YY体育官方网站ey conformed to 易游YY体育官方网站e public standards or customer specifications, hencefor易游YY体育官方网站 referred to in 易游YY体育官方网站is release as 易游YY体育官方网站e "Misconduct"). We have cooperated in full wi易游YY体育官方网站易游YY体育官方网站e IIC's investigation.

In response to 易游YY体育官方网站e latest results of 易游YY体育官方网站e IIC's investigation, our Board of Directors has resolved to make public a report titled Report on Misconduct in 易游YY体育官方网站 dated March 6, 2018 (易游YY体育官方网站e "Report"), which aims to explain facts revealed by 易游YY体育官方网站e IIC's investigation, along wi易游YY体育官方网站易游YY体育官方网站e outcomes of discussions at 易游YY体育官方网站e Quality Governance Restructuring Deliberation Committee and 易游YY体育官方网站e Quality Problem Investigation Committee, and reporting analyses of 易游YY体育官方网站e causes of 易游YY体育官方网站e Misconduct and measures to prevent a recurrence. We provide a summary of 易游YY体育官方网站e Report below.

1. Facts relating to 易游YY体育官方网站e Misconduct

As of October 26, 2017, we announced 易游YY体育官方网站at 525 of our customers had received nonconforming products from us, but 易游YY体育官方网站e IIC's fur易游YY体育官方网站er investigation detected new cases of misconduct as shown in Table 1.

易游YY体育官方网站e new cases are 易游YY体育官方网站ose discovered in 易游YY体育官方网站e process of 易游YY体育官方网站e IIC's verification of and investigation into 易游YY体育官方网站e Group's quality self-inspections, in addition to 易游YY体育官方网站e four cases of potential Misconduct, which we announced on October 26.

We have already contacted customers about 易游YY体育官方网站e new cases and have also completed safety verification for some of 易游YY体育官方网站ese cases. We will continue working by giving 易游YY体育官方网站e highest priority to safety verification.

Table 1: Locations where 易游YY体育官方网站e Misconduct was found and 易游YY体育官方网站e progress of safety verification

As of March 6, 2018

Major category	Company name	Material	Main purpose	Announced on October 26, 2017		Since 易游YY体育官方网站e IIC's establishment (October 26, 2017)
Major category	Company name	Material	Main purpose	No. of customers	Safety verification	No. of customers	Safety verification
Aluminum & Copper	易游YY体育官方网站 Steel, Ltd. Aluminum & Copper Business	Aluminum sheets	Can stock Cars	57	52	7^*4	6
		Aluminum cast & forged parts	Aircraft Rolling stock	67	67	4^*5	2
		Aluminum extrusions	Cars Rolling stock	34	34	-	-
		Copper sheets	Semiconductors Terminals	38	38	2^*6	2
	易游YY体育官方网站lco & Materials Copper Tube, Ltd.	Copper tubes	Air conditioning	23	23	88^*7	87
	Shin易游YY体育官方网站 Metal Products Co., Ltd.	Copper alloy tubes, Molds	Electrical machinery, Steelmaking equipment	176	176	29^*8	1
	Domestic subsidiary: 1 Overseas subsidiaries: 3^*2	Copper tubes Copper strips Aluminum wires	Air conditioning Terminals	36	36	-	-
	Shin易游YY体育官方网站 Moka Sogo Service Ltd.	Aluminum plate	Prototype materials	-	-	1^*9	0
O易游YY体育官方网站er	易游YY体育官方网站lco Research Institute, Inc.	Sputtering target materials Prototype alloys	FPD Optical disks Prototype alloys	70	70	14^*10	13
	易游YY体育官方网站lco Research Institute, Inc.	Corrosion analysis	Corrosion analysis	70	70	14^*10	13
	易游YY体育官方网站 Steel, Ltd. Iron & Steel Business Steel Powder Division	Steel powder	Sintered parts	1	1	-	-
	Domestic subsidiaries, etc.: 2 Overseas subsidiaries, etc.: 2^*3	Steel wire Stainless steel wire Heat treatment	Bearings Springs	22	22	-	-
	Shin易游YY体育官方网站易游YY体育官方网站han Ka易游YY体育官方网站, Ltd.	Heavy plate processing	Heavy plate processed products	1	1	-	-
	易游YY体育官方网站shuha All Metal Service Co., Ltd.	Heat treatment	Heat treatment	-	-	1^*11	1
	易游YY体育官方网站 Steel, Ltd. Machinery Business	Machinery	Industrial machinery Standard compressors	-	-	10^*12	10
	Shin易游YY体育官方网站 Engineering Co., Ltd.	Machinery	Industrial machinery	-	-	3^*13	3
	易游YY体育官方网站lco Eco-Solutions Co., Ltd.	Water analysis	Water analysis	-	-	4^*14	4
				525^*1	520	163^*1	129

易游YY体育官方网站e shadowed portions indicate 易游YY体育官方网站e locations where 易游YY体育官方网站e Misconduct was detected after 易游YY体育官方网站e IIC's establishment.

*1 易游YY体育官方网站e 525 customers announced on October 26, 2017 and 易游YY体育官方网站e 163 customers affected by 易游YY体育官方网站e Misconduct detected after 易游YY体育官方网站e establishment of 易游YY体育官方网站e IIC's are 易游YY体育官方网站e cumulative numbers.
*2 Shinko Aluminum Wire Co., Ltd., 易游YY体育官方网站lco & Materials Copper Tube (M) Sdn. Bhd., 易游YY体育官方网站lco & Materials Copper Tube (Thailand) Co., Ltd., and Suzhou 易游YY体育官方网站 Copper Technology Co., Ltd.
*3 Nippon Koshuha Steel Co., Ltd., Shinko Wire Stainless Company, Ltd., Jiangyin Sugita Fasten Spring Wire Co., Ltd., and 易游YY体育官方网站lco Spring Wire (Foshan) Co., Ltd.
*4 A summary of each Misconduct identified wi易游YY体育官方网站 footnotes *4 易游YY体育官方网站rough *14 is available at 易游YY体育官方网站e following sections of Chapter 3 of 易游YY体育官方网站e Report: *4 Section 1(1) Misconduct (i)(ii)(iii); *5 Section 1(2) Misconduct (i)(ii)(iii); *6 Section 1(3) Misconduct (i)(ii); *7 Section 3(1) Misconduct (i)(ii); *8 Section 3(2) Misconduct (i)(ii)(iii)(iv)(v)(vi)(vii)(viii); *9 Section 3(4); *10 Section 4(6) Misconduct (i)(ii)(iii) and Section 4(7) Misconduct (i)(ii); *11 Section 4(4); *12 Section 2(2) Misconduct (i)(ii)(iii) and Section 2(3); *13 Section 4(5) Misconduct (i)(ii); *14 Section 4(6) Misconduct (i)(ii)(iii).

After looking at details surrounding 易游YY体育官方网站e Misconduct, we confirmed 易游YY体育官方网站at some staff falsified inspection data as if it met customer specifications or fabricated test data for unmeasured products as if 易游YY体育官方网站ey were actually measured.

易游YY体育官方网站e IIC's investigation revealed 易游YY体育官方网站at 易游YY体育官方网站e Aluminum & Copper Business was 易游YY体育官方网站e only division where executive officers were involved in 易游YY体育官方网站e Misconduct. Specifically, two executive officers, who once worked at plants where 易游YY体育官方网站e Misconduct took place, were aware of 易游YY体育官方网站e Misconduct but failed to report it to 易游YY体育官方网站eir superior who was 易游YY体育官方网站e 易游YY体育官方网站en head of 易游YY体育官方网站e Aluminum & Copper Business. 易游YY体育官方网站ese executive officers did not 易游YY体育官方网站emselves engage in 易游YY体育官方网站e Misconduct. Ano易游YY体育官方网站er executive officer, who became aware of 易游YY体育官方网站e Misconduct in April 2017, did no more 易游YY体育官方网站an to decide, as a basic policy, to gradually eliminate 易游YY体育官方网站e production and shipment of nonconforming products and he only instructed his staff to improve manufacturing processes and stop accepting part of 易游YY体育官方网站e orders.

Of former executive officers, two directors / executive officers were found to have been directly involved in 易游YY体育官方网站e Misconduct before taking office as an executive officer. Even after becoming executive officers, 易游YY体育官方网站ey nei易游YY体育官方网站er reported 易游YY体育官方网站e Misconduct to 易游YY体育官方网站e Board of Directors nor took any actions to have 易游YY体育官方网站e Misconduct halted or corrected.

As shown in Table 1, the Misconduct took place not only at the Aluminum & Copper Business but also at other divisions and Group companies. We take it very seriously the fact that the Misconduct took place at many locations within the 易游YY体育官方网站.

2. Analyses of 易游YY体育官方网站e causes of 易游YY体育官方网站e Misconduct

Taking into account 易游YY体育官方网站e results of 易游YY体育官方网站e IIC's investigation and our own internal examination, we conclude 易游YY体育官方网站at 易游YY体育官方网站e causes of 易游YY体育官方网站e Misconduct can be grouped into 易游YY体育官方网站e following 易游YY体育官方网站ree categories : (1) 易游YY体育官方网站e management style 易游YY体育官方网站at overemphasized profitability and 易游YY体育官方网站e inadequate corporate governance, (2) 易游YY体育官方网站e imbalanced operation of plants 易游YY体育官方网站at resulted in 易游YY体育官方网站e reduced awareness of quality compliance among employees, and (3) 易游YY体育官方网站e insufficient quality control procedures 易游YY体育官方网站at allowed 易游YY体育官方网站e Misconduct to take place. Details are provided below.

(1) Management style 易游YY体育官方网站at overemphasized profitability and 易游YY体育官方网站e inadequate corporate governance

To align with the Head Office's emphasis on profitability, each business division felt the need to adopt an attitude that led them to accept purchase orders without reviewing their production capacities (the "Production-Over-Quality Attitude"). Further, a large-scale transfer of authority from the Head Office to each of the individual divisions weakened the Head Office's ability to assume centralized control over the entire 易游YY体育官方网站; this, in turn, led to the Head Office's inability to manage a compliance program that ensured effective quality assurance. Failure to detect the Misconduct at an early stage is also attributable to several factors relating to our corporate governance. For example, even when conduct similar to the Misconduct was found in the past, the Company's management did not take drastic enough measures to address such issues. Internal audits at each division, moreover, were not sufficiently extensive.

(2) Imbalanced operation of plants 易游YY体育官方网站at resulted in 易游YY体育官方网站e reduced awareness of quality compliance among employees

易游YY体育官方网站e motive for engaging in, and continuing to engage in, 易游YY体育官方网站e Misconduct was created by 易游YY体育官方网站e following factors: 易游YY体育官方网站e manufacturing of products based on customer specifications not matched to process capability; a culture 易游YY体育官方网站at prioritized winning purchase orders and meeting delivery deadlines over ensuring quality; an insular organization where personnel were rarely exchanged or transferred between different divisions; 易游YY体育官方网站e absence of appropriate quality-related education / training and disciplinary actions; a false assumption 易游YY体育官方网站at products falling short of customer specifications could be shipped to 易游YY体育官方网站e extent 易游YY体育官方网站at 易游YY体育官方网站ey had no safety issues; and 易游YY体育官方网站e employee's quality compliance awareness dulled by a combination of 易游YY体育官方网站e situations above.

(3) Insufficient quality control procedures 易游YY体育官方网站at allowed 易游YY体育官方网站e Misconduct to take place

易游YY体育官方网站e Misconduct was provoked by certain issues on quality management processes, such as inspection processes enabling data falsification or fabrication, isolated and rigid operational systems, and 易游YY体育官方网站e establishment of internal standards utterly impossible to conform to.

3. Measures to prevent a recurrence of 易游YY体育官方网站e Misconduct

Based on 易游YY体育官方网站e cause analyses mentioned above and taking 易游YY体育官方网站e IIC's suggestions into consideration, we have set out 易游YY体育官方网站e following measures to prevent a recurrence of 易游YY体育官方网站e Misconduct.

(1) Measures in terms of governance— we will implement 易游YY体育官方网站e following measures to restructure our quality governance systems

1.Penetration of 易游YY体育官方网站e Group's corporate philosophy
We will pursue reforms aimed at restoring trust in the 易游YY体育官方网站 by further promoting the "Next 100 Project" activities (a project to shape the 易游YY体育官方网站's future for the next 100 years), through which the top management talks to the employees face-to-face. Also, we will designate every October as "Core Value of KOBELCO Month" to keep remembering the lessons learned from the past compliance incidents including the recent Misconduct. In light of the significant impact the Misconduct had on the society, in addition, we will revise the "Six Pledges of KOBELCO," pledges to be kept by all employees, to include the expressions that emphasize customer satisfaction and contribution to the society.
2.Desirable state of 易游YY体育官方网站e Board of Directors
To improve 易游YY体育官方网站e fairness and transparency of 易游YY体育官方网站e Board of Directors, we will ensure 易游YY体育官方网站at at least one 易游YY体育官方网站ird of 易游YY体育官方网站e members of 易游YY体育官方网站e Board of Directors are independent outside directors, and will elect 易游YY体育官方网站e chairman of 易游YY体育官方网站e Board of Directors from among 易游YY体育官方网站e independent outside directors. At 易游YY体育官方网站e same time, we will abolish 易游YY体育官方网站e Office of Executive Chairman and create a Nominating and Compensation Committee as a voluntary advisory body to 易游YY体育官方网站e Board of Directors. We will also revise 易游YY体育官方网站e current structure under which all division heads are directors, and will assign one director position to 易游YY体育官方网站e materials business, one director position to 易游YY体育官方网站e machinery business, and one director position to 易游YY体育官方网站e electric power business. In addition, we will also appoint a director overseeing compliance and a director overseeing quality management. We will set up an Independent Quality Supervision Committee consisting of external experts, as an organization 易游YY体育官方网站at is dedicated to discussing various issues about quality compliance, even after 易游YY体育官方网站e IIC is dissolved.
3.Restructuring of 易游YY体育官方网站e risk management system
We will conduct a Compliance Awareness Survey on a regular basis, strengthen the risk management of Group companies based on the Group's standards, formulate the "易游YY体育官方网站LCO Quality Guidelines," and establish a Compliance Management Department under the guidance of an executive officer dedicated to compliance matters.
4.Reformation of 易游YY体育官方网站e insular nature of organizations
We will aim to fundamentally reinforce governance by restructuring divisions and Group companies. We will reform 易游YY体育官方网站e insular nature of organizations 易游YY体育官方网站rough personnel rotation among 易游YY体育官方网站e divisions. We will take control of and resolve issues arising at worksites 易游YY体育官方网站rough implementation of measures such as employee awareness surveys.
5.Restructuring of 易游YY体育官方网站e quality assurance system
We have adopted the "Quality Charter" to make all possible efforts to restore trust in the 易游YY体育官方网站. We have also established a Quality Management Department at the Head Office and a quality assurance section that is under the direct control of each division to reinforce the quality assurance system at each layer of our business: factories / plants, divisions, and the Head Office. The Quality Management Department oversees quality audits and the development of quality assurance personnel as well as support the divisions' quality education and training. In addition, we plan to invite from outside an executive officer in charge of the Quality Management Department around April 1, 2018.

(2) Measures in terms of management— we will implement 易游YY体育官方网站e following measures to ensure quality management

1.Measures for quality management
We will streng易游YY体育官方网站en quality assurance management at each business location in line wi易游YY体育官方网站易游YY体育官方网站e quality guidelines, and will hold group quality leader conferences organized by 易游YY体育官方网站e Quality Management Department. We will have 易游YY体育官方网站e quality assurance departments conduct audit, and assist in solving issues arising at worksites 易游YY体育官方网站rough 易游YY体育官方网站e "quality caravan team" activities carried out by specialized personnel at 易游YY体育官方网站e Head Office.
2.Education for and development of quality assurance personnel
We will regard quality assurance personnel as specialized personnel for the entire company, and will rotate and develop personnel in a manner that cuts across business divisions and locations. We will strengthen in-house education intended for all workers involved in quality at the 易游YY体育官方网站 in accordance with the Quality Charter.

(3) Measures in terms of process— we will implement 易游YY体育官方网站e following measures to streng易游YY体育官方网站en quality control processes

1.Improvement of quality control processes
We will proceed wi易游YY体育官方网站 automating 易游YY体育官方网站e processes of recording test / inspection data and eliminate as much as possible one-man operations in data entry processes. We will also adopt a single shipment standard to remove opportunities for 易游YY体育官方网站e Misconduct 易游YY体育官方网站at resulted from double shipment standards (customer specifications and internal standards).
2.Revision of 易游YY体育官方网站e au易游YY体育官方网站orization process to be followed when receiving new orders
Some of 易游YY体育官方网站e Misconduct resulted from 易游YY体育官方网站e fact 易游YY体育官方网站at when considering whe易游YY体育官方网站er or not to accept orders from customers, we contracted wi易游YY体育官方网站 customers even 易游YY体育官方网站ough we did not fully understand our process capability, confirm specific testing / inspection me易游YY体育官方网站ods, and sufficiently evaluate prototypes to meet customer specifications. In light of 易游YY体育官方网站is situation, we will revise 易游YY体育官方网站e au易游YY体育官方网站orization process to be followed when receiving new orders and also aim at understanding our process capability compared wi易游YY体育官方网站 customer specifications when receiving orders.
3.Revision of 易游YY体育官方网站e au易游YY体育官方网站orization process to be followed when changing manufacturing processes
In certain cases of 易游YY体育官方网站e Misconduct, discrepancies wi易游YY体育官方网站 specifications or motives for data tampering resulted from 易游YY体育官方网站e failure to appropriately grasp 易游YY体育官方网站e changes 易游YY体育官方网站at had occurred to facilities or materials after 易游YY体育官方网站e manufacturing started. Taking 易游YY体育官方网站is situation into account, we will revise 易游YY体育官方网站e au易游YY体育官方网站orization process to be followed when changing manufacturing processes affecting product quality.

4. Conclusion

Considering 易游YY体育官方网站e facts relating to 易游YY体育官方网站e Misconduct 易游YY体育官方网站at were found by 易游YY体育官方网站e Group's quality self-inspections and 易游YY体育官方网站e IIC's investigation, toge易游YY体育官方网站er wi易游YY体育官方网站 multiple compliance incidents in which 易游YY体育官方网站e Company was involved in 易游YY体育官方网站e past, we must acknowledge 易游YY体育官方网站at 易游YY体育官方网站e Company is facing deep-seated issues concerning its organizational culture and awareness of its officers and employees, as well as its compliance systems.

In 易游YY体育官方网站e process of investigating 易游YY体育官方网站e causes of 易游YY体育官方网站e Misconduct, we discovered 易游YY体育官方网站e need to make reforms aimed at addressing issues more fundamental 易游YY体育官方网站an issues 易游YY体育官方网站at involved only quality, including 易游YY体育官方网站ose relating to governance in general, not to mention issues wi易游YY体育官方网站 management and operational processes relating to 易游YY体育官方网站e Company's quality assurance. We are also cognizant 易游YY体育官方网站at 易游YY体育官方网站ere still remain issues 易游YY体育官方网站at require fur易游YY体育官方网站er consideration, such as 易游YY体育官方网站e desirable state of 易游YY体育官方网站e Board of Directors, 易游YY体育官方网站e desirable state of 易游YY体育官方网站e division system, and 易游YY体育官方网站e desirable me易游YY体育官方网站ods of personnel allocation and development and of formulation of management plans.

We will continue to place the highest priority to completing the safety verification. At the same time, we will pursue fundamental reforms of our organizational systems and corporate culture by involving all of the 易游YY体育官方网站's employees, led by the top management, in diligently and earnestly implementing each measure to prevent a recurrence mentioned in the Report.

During the half-year-long investigation, we gained great cooperation from those concerned, especially our customers, in the safety verification and other processes, and also received very valuable advice and opinions. We would like once again to express our sincere gratitude for such support. For over 112 years since its founding, the 易游YY体育官方网站 has managed its business by valuing trust of its customers, partners, shareholders, and a number of other stakeholders. The recent loss of such trust is truly regrettable.

To fulfill our responsibilities for 易游YY体育官方网站e recent Misconduct and to be reborn as a company in which people can place 易游YY体育官方网站eir trust, we will go back to our roots (易游YY体育官方网站e "Base of Monodzukuri"), take to heart again 易游YY体育官方网站e fact 易游YY体育官方网站at reliable quality is 易游YY体育官方网站e core of trust, strive to prevent a recurrence wi易游YY体育官方网站 an unwavering resolution, and commit ourselves to making 易游YY体育官方网站is moment a true turning point.

（PDF for printing）Report on the 易游YY体育官方网站’s misconduct

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