Actually this could be so much worse than the Takata scandal. Kobe Steel’s data falsification on its products – especially to Subaru Corp – could raise the risk of insolvency of the former. Subaru is responsible for the MOST crucial part of the Boeing 787 – the centre wing box (CWB). While Boeing has assured us that there is no imminent safety risk, the question is one of determining the fatigue of the substandard materials supplied to Subaru by Kobe are part of the CWB. What many fail to realize is that commercial aircraft approval by the regulators makes getting drugs approved by the FDA as easy as shelling peanuts. Every time a plane is in the air it has to be as near as makes no difference 100% safe. Drugs that give you a side effect of drowsiness is not a big deal to the FDA. In fact for aircraft it gives “do not operate heavy machinery” a whole new meaning.
The CWB effectively is the piece that connects the wings to the body. It is without doubt the most important structural piece on the plane. Worse, it is perhaps the most difficult part to replace in terms of man hours. Effectively the plane would have to be broken apart and reassembled. The sheer logistics of this would also be mind boggling. The retrofit (if even feasible) would be a $20-30mn per job including the parts, labour and time out of service (compensation to airlines) and recertification. That’s per aircraft. So that would cost around $10-15bn.
The question then becomes of the 500 odd 787s in service what the FAA decides to do. Perhaps the planes’ useful 25 year life are reduced to 15 years. That would smack residual values and airlines would demand compensation for the gap and the potential for lost revenues. So were 500 aircraft to lose 40% of the serviceable life at $150mn a copy that is $75bn.
While this is worst case scenario analysis for Kobe Steel which would be liable for the lot, we are staring at the risk of a wipe out. Kobe Steel has $1.8bn in cash. Somehow it’s $8bn market cap may fall much further.
Hardly any of this is priced because the FAA doesn’t take things lightly until it has all the facts.
This article is not intended to be sensational rather highlight the potential for a huge weight from the US (not Japanese) regulator to push for a safety recall of epic proportions. We won’t know yet but buyer on dips beware.
If the referee caught Kobe Steel’s (5406) rugby team up to such foul play it is likely that players would be red carded. While unconfirmed speculation at the moment, it would appear that since September 21st Kobe Steel shares came under heavy selling pressure in what a seasoned market punter might suspect looks like insider trading via aggressive short selling. 7 straight negative candle sticks. Kobe Steel spilled the ball on its data manipulation on October 8th.
This would not be the first time that a broker conspired with a fund to short sell a stock ahead of a negative release on insider information where several weeks later news broke and sent the shares collapsing. This is the current action of Kobe Steel shares.
So excluding borrowing costs or any leverage, if one had managed to short sell Kobe Steel at 1350 (on Sep 21) and brought back at today’s prices a quick fire 53% return would be gained.
The important question is whether the regulator will investigate any potential foul play when looking at the video replay. I will be asking this question directly to the Financial Services Agency (FSA) as I have been invited the regulator to give a speech on ways to improve Japanese corporate governance in a few weeks time.
This won’t be just a beat up of Japan’s corporate governance as foreign corporates have made countless scandals post the introduction of Sarbanes Oxley in 2002. However it will aim to be a realistic overview of tolerating what seems to be endless preventable insider trading scams with paltry penalties of $500 and a slap on the wrists with a feather duster.
Until serious punishments for flagrant market manipulation are thrust front and centre in front of bewildered and annoyed (foreign) investors, the cynicism will remain that Japan is not a safe place to invest. Remember insider trading is effectively fraud. Perhaps your pension fund owns Kobe Steel in a global portfolio meaning that some shady investor has stolen your retirement to feather his or her nest.
Perhaps I should thank Kobe Steel for getting dirty in the ruck area to help the final presentation draft.