Samsung’s Note recall could hurt bottom line say analysts
EXPLODING batteries and an embarrassing recall of a flagship gadget during a controversial, closely watched leadership transition – it’s been a bad year for Samsung, and analysts warn the trouble isn’t over yet.
With ever-fiercer competition in the saturated smartphone market, South Korea’s biggest firm is desperate to avoid a full-blown disaster that could cost billions, hammer its reputation and taint its new leadership.
Just weeks after the early roll out of the Galaxy Note 7 “phablet”, the world’s largest maker of smartphones was forced to recall 2.5 million units globally following complaints its battery exploded while charging.
“Samsung appears to have rushed fast to roll out the Note 7 with the iPhone 7 in mind ... and it is paying a hefty price now,” said Greg Roh, analyst at Seoul-based HMC Investment & Securities.
With images of charred phones flooding social media, the unprecedented recall was a humiliation for a firm that prides itself as an icon of innovation and quality – and the timing of the crisis could not be worse.
The Note 7 was meant to underpin growth as Samsung struggles to boost sales, squeezed by Apple in the high-end sector and Chinese rivals in the low-end market.
One bright spot this year was the flagship handset Galaxy S7, which earned rave reviews and boosted operating profit to a two-year high in the second quarter. The Note 7 was crucial to sustaining that momentum.
The recall, currently underway in 10 nations, could cost the firm US$3 billion in the long run, while Mr Roh warned the fallout could significantly hurt profit for months.
The crisis has also shaved $15 billion off its market value since late August, when the firm’s share price hit the highest point so far this year.
While unconnected, Samsung said last week it had sold shares in four technology companies to free up money, in a move it said was “aimed at focusing on our core business”.
Samsung and its sister firms have in recent years divested from noncore operations as the parent Samsung Group sought to streamline business amid a generational power transfer in the founding Lee family.
As the recall threatens to drag on, it is unclear how long the crisis would plague the firm, said Lee Seung-Woo of IBK Investment & Securities.
While the financial hit will likely be huge, a bigger worry for the firm is the effect on the Samsung name, said Linda Sui, analyst at market research firm Strategy Analytics.
“In addition to material loss by revenue and profitability, potential damage on brand image and consumer confidence is even worse and hard to fix up in the short-term,” she said.
“The Korean giant is facing a tough time now,” she said, warning of “falling fortune and tough competition” until it rolls out another flagship model next year.