Samsung Galaxy Note 7 battery fiasco: What lies ahead?

Samsung Electronics` worst-ever recall could cost the company as much as $17 billion after it halted sales of its flagship Galaxy Note 7 for a second time, spelling an almost certain end for the ill-fated premium model.

Last Updated: Oct 11, 2016, 14:53 PM IST
Samsung Galaxy Note 7 battery fiasco: What lies ahead?

Zee Media Bureau

New Delhi/Seoul: After temporarily suspending the production of Galaxy Note 7 smartphone amid battery explosion fears, Samsung on Tuesday advised Note 7 owners to stop using the device -- both original and the replaced one.

After incidents of Note 7 device catching fire in various flights, a replacement Note 7 device also reportedly caught fire on a US flight, leading to cancellation of the flight after evacuation.

Samsung has recalled nearly 2.5 million Galaxy Note 7 smartphones over battery overheating issues globally.

Despite the global recall of its flagship device, Samsung Electronics last week released a positive forecast for the third quarter of this year, expecting operating profits of 7.8 trillion Korean won (approx $7 billion) and revenues of 49 trillion Korean won.

The operating profits are a 5.6 percent increase on the same period a year ago when the company registered 7.4 trillion won in operating profits, Samsung Electronics said in its earnings guidance for the third quarter.

Hole in Samsung's profit

The unprecedented move has turned into a PR disaster for the company, which prides itself on innovation and quality, and the situation only worsened when reports emerged a week ago of replacement phones also catching fire.

Samsung Electronics` worst-ever recall could cost the company as much as $17 billion after it halted sales of its flagship Galaxy Note 7 for a second time, spelling an almost certain end for the ill-fated premium model.

If Samsung stops selling the Note 7s, that will translate into lost sales of up to 19 million phones, or nearly $17 billion, that the firm was expected to generate during the Note 7`s product cycle, according to analysts including those at Credit Suisse.

That`s a big increase from $5 billion in missed sales and recall costs analysts initially exected Samsung to incur under the assumption that the firm would resume global Note 7 sales in the fourth quarter.

Wider Issue

Samsung is now considering permanently halting sales of its flagship smartphones as an option, a source familiar with the matter said, after fresh reports of fires in replacement devices prompted new warnings from regulators, phone carriers and airlines, as per Reuters report.

Broker Nomura estimates Samsung may have to incur up to 1.6 trillion won of disposal costs in the fourth quarter, assuming around 4 million Note 7s have been made.

For Samsung, with a market value of $235 billion and $69 billion in cash and equivalents at the end of June, the loss of sales of one model could be absorbed.

The bigger problem will be long-term impact on its reputation and brand, analysts and experts say.

Verizon Communications Inc, the largest US wireless carrier, is already considering shifting marketing away from the troubled Note 7s, a company spokesman said on Monday.

That will likely boost rival products such as the new Google Pixel and Apple Inc`s new iPhone taking market share from Samsung, as most vendors launch new products ahead of the critical year-end holiday sales season.

The brand image

With images of charred phones flooding social media, the unprecedented recall has proved a humiliation for a firm that prides itself as an icon of innovation and quality.

The recall process initially stumbled with some mixed messages, but seemed to be on track until last week when the reports of replacement phones catching fire began to emerge.

The road ahead

Samsung also faces lawsuits, with at least two consumers taking the company to the court in the United States to claim compensation on damages stemming from the faulty smartphone.

The firm received 92 reports of batteries overheating in the United States, including 26 reports of burns and 55 reports of property damage, according to the U.S. regulator`s announcement of the September. 15 recall.

The Note 7 woes may also roil Samsung`s component business, an important and growing source of revenue, as it provides key smartphone parts such as phone screens and memory chips.

Falling Note 7-related orders could not only cut overall revenue for the component business unit, but also crimp prices of such parts, analysts said.

With Agency Inputs