Samsung in meltdown

Samsung Galaxy Note 7
Samsung Galaxy Note 7

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11 October 2016 | 0

Niall Kitson portraitRemember Antennagate? When Apple released an iPhone that failed at the simple task of being able to receive phone calls? Remember the Microsoft Kin? A smartphone that stayed on the market for all of one month? Well embarrassment has a new name: the Galaxy Note7.

According to an official statement released today the South Korean electronics giant confirmed it was pulling its flagship smartphone from the market “for the benefit of consumers’ safety”.

So what kind of fallout are we looking at? Here are a few elements to bear in mind.

Cost estimates
Samsung shipped a total of 3.5 million Note7s, of which 1 million were sold in early September, when reports of overheating batteries, fires and explosions started to surface. At the time the cost of a full recall was estimated at $1 billion. Samsung at the time described the recall as “heartbreaking” but that’s only the start of it. Under the first recall programme Samsung sent 500,000 replacement handsets to the US alone, all of which will have to be taken back again. The Guardian estimates the final cost of the recall could be as high as $5 billion. That’s before consumer protection agencies look to slap down some painful sanctions, not to mention the inevitable class-action suits.

Nervy investors
If things aren’t looking so good at ground level, how will they be seen in the board room and on the markets? Samsung shares fell 7.5% after the announcement of a global recall was made but let’s put this in the wider context of the company’s mobile business. Samsung is the world’s largest manufacturer of Android phones with a range spanning the market. The Note7 is a premium product suited to early adopters, business users and virtual reality evangelists – that makes it small beans in comparison to the rest of its product line. In the third quarter of 2016 alone Samsung sold 76 million devices, down slightly from the 77 million sold in the second and 90 million in the first. Again, the Note7 shipped 3.5 million units, not all of which were sold.

Year-on-year, Samsung’s shares are actually up year-on-year from 1,260,000 Won ($1,121) to 1,554,000 Won ($1,383). In the third quarter it reported a year-on-year increase in profit of 6% ($7 billion) on sales of $43.9 billion. Companies love to talk about their high-end products but it’s the low and middle markets that turn a higher profit.
Will investors lose faith in the company? Not when the rest of it is doing well.

Damaged goods
Like any brand Samsung has its fanboys. In mobile Samsung is basically the anti-Apple, faster to market with better features, removable storage and batteries, an open source operating system and expandable storage – everything the iPhone isn’t. When the first recall was announced, 90% of users asked for a replacement Note7 over cashing in or asking for a different model.

The reviews for the Note7 were positive, showing the device had appeal beyond the base. The 1440×2560 display, 4Gb RAM, dual SIM cards and waterproofing to 1.5 metres for up to 30 minutes put it over the iPhone 7 Plus (although Apple wins the camera battle hands down).

Samsung already had plenty of cache in smartphones thanks to the excellent Note 5 and Galaxy SIII – devices that still cast a shadow over their respective successors.
Judging by a quick skim of the discussion forums there has actually been a fair bit of sympathy for Samsung, one part ‘maybe next time’ and another part ‘Apple is still rubbish’.

Has there been any brand damage at all? From what I can tell, not really.

Not a China crisis
What we still don’t know is what the source of the problem with the Note7 was in the first place. Suspicion has fallen on the split in battery suppliers between a Chinese company Amperex Technologies Limited (ATL) and Samsung SDI.

Initially, the blame was placed on SDI batteries – which supplied 65% of Note7s – but it seems units with ATL batteries have also been affected. Where does the fault lie? If it’s not with the power source itself, then maybe a look should be taken at the rest of the hardware and software and that could mean…

Slower product development cycles
Was the Note7 simply too powerful for its own good? One of the initial Note7 fixes was to effectively power down the device, turning a 60% charge the highest possible. You have to wonder if a longer testing period would have uncovered such a problem.

Similarly, this incident asks serious questions of how quickly products are turned around. Every year we get a slate of feature-packed tentpole devices. As we saw from Antennagate, it’s possible for products to enter the market with some rough edges.

Gamers will be particularly aware of the importance of patching for titles almost as soon as they hit the shelves. Will we see a similar approach to mobile devices? If it becomes a choice, I can manage to wait for the finished article.

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