Scrapping Galaxy Note 7s could cost Samsung $17bn

Reputation blow as production of flagship smartphones abandoned over fire fears

Scrapping Galaxy Note 7s could cost Samsung $17bn

Samsung is ending production of its problematic Galaxy Note 7 smartphones, taking the drastic step of killing off a smartphone that became a major headache for South Korea’s largest company.

It had already recalled the Note 7 once last month after early models exploded and the latest move comes after customers reported replacement phones were also catching fire.

Samsung will be without its highest-end smartphone that was supposed to compete against Apple’s iPhones and other premium devices during the Christmas shopping season.

The crisis has left Samsung scrambling to figure out the cause of the battery fires and to explain how a company known for manufacturing expertise could have missed such a critical product flaw twice. Samsung originally blamed one battery supplier for the problems and switched to an alternative company, but that did not end the problems.

Samsung Electronics’ shares fell 8% in Seoul yesterday, wiping out about $17 billion (€15.3bn) of market value, before the Note 7 termination was announced. The stock dropped further in London trading after the news, sliding as much as 9.5%.

Samsung had asked for a halt to Note 7 sales earlier under pressure from regulators and wireless operators that sell its phones.

Consumers had reported problems with supposedly safe phones in the US and China, and carriers such as AT&T Inc. and Australia’s Telstra Corporation halted sales. In one case, a Southwest Airlines flight from Louisville, Kentucky, was evacuated because a replacement Note 7 began dispersing smoke and burned carpet flooring.

The US Consumer Product Safety Commission warned users not to use the Note 7 due to concerns over overheating. The Korea Agency for Technology and Standards asked Samsung to stop selling or exchanging the Note 7 after the regulator confirmed possible defects in the phones.

Responsibility for leading the company through the crisis has fallen to Jay Y Lee, vice chairman and heir apparent at Korea’s largest conglomerate. His father Lee Kun-hee, the family patriarch who remains chairman, has been hospitalised for more than two years after a heart attack. The phone unit is run by DJ Koh, who took over in December.

“This is a catastrophe and it will put Jay Y’s leadership skills to test,” said Kim Sang Jo, professor at Hansung University.

The Note 7 debuted to rave reviews in August, but the plaudits turned to criticism within weeks as phones exploded and images of charred handsets began appearing on social media.

Samsung announced the first recall in Korea on September 2, calling back the initial shipment of 2.5 million phones and then replacing them with what it said were safe devices.

The flaw, it explained, was with the primary battery supplier, which a person familiar with the matter identified as affiliate Samsung SDI. All new phones would have batteries from another manufacturer.

The company has not said how many new or replacement phones will be affected by the latest announcement.

The drama may give an opening to activist investor Paul Elliott Singer, who is advocating for a break-up of South Korea’s biggest company.

Singer proposed that Samsung separate into an operating company and a holding company, dual-list the former on a US exchange, pay shareholders a special dividend of 30tn Korean won (€24.36bn) and improve governance by adding three independent board members.

The decision to scrap the Note 7 will affect suppliers inside and outside the conglomerate. Beyond that, the company will have to assess the impact on future phones.

“What happens to the next version of the phone when it comes out and how much this is going to impact the sales?” said Dan Baker, an analyst at Morningstar in Hong Kong. “It’s not just the phone; their whole ecosystem is behind this — displays, memory chips. If their phone sales drop, their sales of other parts of the business will be impacted.”

The debacle may lead to management changes at the Samsung conglomerate. The group typically shuffles executives at the end of the year, especially if there are losses or other problems.

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