USA TODAY International Edition
Tarnished Samsung faces rough patch
End of Galaxy Note 7 proves costly to company known for its quality
In its short, troubled history, Galaxy Note 7 was the victim of a recurring overheating problem that Samsung couldn’t tamp down.
But that might be easy compared to what comes next.
The Samsung brand, once considered a gold standard in the tech industry, has been tarnished. Its stock price has been battered. Costs associated with the termination and recall of the phabletsized smartphone could top $ 4 billion. And the pride of the South Korean company, so closely intertwined with its country’s economy and government, has been badly bruised.
Its smartphone franchise, tops globally with a 23% market share in the second quarter according to IDC, could hemorrhage sales to rivals such as Apple, LG, Huawei Technologies and new entrant Google with its Pixel phone.
“The poor response Samsung had getting in front of this problem will have a lingering effect,” says Steve Beck, founder of New York- based management consultancy cg42.
The immediate impact was underscored Wednesday when Samsung sliced its third- quarter operating profit forecast 33% to $ 4.6 billion from a prior forecast and lowered its sales outlook to a range of $ 40.8 billion to $ 42.7 billion. If those revised results hold, it would be the company’s lowest operating income in two years.
“This has been a case study in how not to do a recall,” says Mark Johnson, associate professor of operations management at Warwick Business School in the U. K. who researches product recalls. “It was only when the second batch of phones began to fail that they began to show that there were more serious issues at play.”
The death of the Note 7 could also usher in sweeping changes among Samsung’s executive ranks. Last year, Samsung elevated DJ Koh, who ran the company’s mobile research and development, as head of mobile operations. Koh’s promotion was interpreted as an indication of Samsung’s willingness to emphasize software and services in its phones.
There is good news amid the hand- wringing and PR lashing, however. Samsung’s Note business accounts for less than 10% of its smartphone business and an even thinner slice of its $ 166 billion in revenue in fiscal year 2015, IDC says. Long- established franchise businesses — such as semiconductors, flush with profits, and TVs, the top brand by global sales for a decade — buffer losses in other product divisions, analysts say.
Still, the sting from the Note 7’ s woes has been immediate. Samsung shares on Tuesday plunged 8%, wiping nearly $ 20 million off its value in the biggest percentage drop in one day since 2008, and slipped another 0.8% Wednesday. Apple shares, meanwhile, have soared seven consecutive days, adding $ 58.8 billion — or 10% — to its market value.
South Korean Finance Minister Yoo Il- ho went so far as to say the death of the Note 7 could hurt the country’s exports, according to a Reuters report.
Closer to home, Samsung’s bungled Note 7 experience not only has frustrated some consumers but its retail channel of telecom carriers who were left “holding the bag,” Beck says.
When company officials were convinced the iPhone 7 might be underwhelming, they pushed up production of the Note 7 for an August delivery, three weeks before Apple introduced its latest smartphone Sept. 7, according to Bloomberg News, which cited unnamed people.
“Samsung tried to rush the Note 7 to market to beat the iPhone 7,” management professor Johnson says. “Samsung potentially rushed a number of critical stages, probably testing, to get to market quickly.”
“This has been a case study in how not to do a recall.” Mark Johnson, associate professor of operations management at Warwick Business School