How Samsung race with Apple boomeranged

◆ Apple unveiled the iPhone 6s. Samsung’s engineers met the deadline, but Apple still grabbed a chunk of market share. In December, the chief of Samsung’s mobile division was replaced.

The 55-year-old Koh, a company veteran who had managed development of several Galaxy phones, took his place on the hot seat. Koh faced not just intensifying competition with Apple but slower growth as the whole smartphone market became saturated.

When Samsung became aware that Apple didn’t plan any major design changes, the Korean executives saw an opportunity.

After a select group of top managers got their hands on early versions of the Note, they gushed over the upgrades and praised each other’s work, according to one of the people. If Apple wasn’t going to offer consumers anything exciting, Samsung certainly would.

With Chairman Lee in the hospital, the younger Lee and co-vice chairman G.S. Choi huddled with Koh and executives of other Samsung affiliates, which make semiconductors, glass panels and batteries.

They went ahead with a slew of new features that had been on the company’s product road map, including an improved screen and stylus - and then approved a launch date 10 days earlier than last year, according to one of the people familiar with the matter.

Samsung’s unveiling was August 3 this year, compared with August 13 last year. The battery is a critical component. Smartphone makers have been pushing the boundaries of the technology for years as they try to satisfy consumer demands for long-lasting devices that charge faster.

That increases manufacturing challenges and raises the risks of defects.

Samsung opted to give the Note 7 a 3500 milliampere hour battery compared with 3000 mAh for the previous model.

For comparison, the iPhone 7 Plus has a 2900 mAh battery. The main battery supplier for the Note 7 was Samsung SDI Co., a person with knowledge of the matter has said. The company, founded in 1970 and 20 percent owned by Samsung Electronics, makes batteries for other phone-makers too, including Apple.

As the launch date approached, employees at Samsung and suppliers stretched their work hours and made do with less sleep. Though it’s not unusual to have a scramble, suppliers were under more pressure than usual this time around and were pushed harder than by other customers, according to a person with direct knowledge of the matter.

One supplier said it was particularly challenging to work with Samsung employees this time, as they repeatedly changed their minds about specs and work flow. Some Samsung workers began sleeping in the office to avoid time lost in commuting, the supplier said.

Samsung declined to comment on whether deadlines were moved, reiterating that products are only introduced after proper testing. Still, by August, it looked like Samsung had made it.

The company shipped early models of the Note 7 to wireless operators around the world, including AT&T Inc. in the U.S. and Telstra Corp. in Australia.

An executive at one carrier said his team started testing the device in May and had the typical amount of time to check its capabilities. They focused on antenna performance and data speeds and didn’t uncover the battery problem, the executive said. But when customers started using the phones, the fires began.

The first signs of trouble emerged online, as they are wont to do in this age of social media. Photos and videos of charred phones were posted on the web.

“Hey YouTube,” said one man, as he described how his phone had burst into flame and showed off the blackened remains.

“Be careful out there. Everyone rockin’ the new Note 7, it might catch fire y’all.”

Executives at Samsung headquarters in Suwon were in shock. Choi, the co-vice chairman, gathered senior managers, demanding to know what went wrong, according to one of the people familiar with the matter. The phone division pointed fingers at battery maker Samsung SDI, while managers there argued the problem could be elsewhere, including in the phone design or insulation.

Samsung said there is no ongoing debate on the issue and that the phone unit has taken responsibility. Samsung’s top managers knew they needed to move fast.

Internally, there was a debate about whether to do a full-blown recall or to take less dramatic steps, like a battery replacement programme. Then on September 1, an engineer wrote on the company’s internal online bulletin board.

“Please recall all Note7s and exchange them with new ones. I don’t have to get my PS,” he said, referring to his profit sharing, or bonus. “It’s humiliating.” The post prompted many impassioned responses, mostly in support of the idea.

Another worker said Samsung had trained everyone at the company to make no compromises with customers and the company needed a recall to live up to that standard. Then Koh himself weighed in.

He apologised to employees and said he would consider their input in taking the appropriate steps. The next day, Koh went public with the full recall.

Samsung engineers rushed to determine the cause of the problem, working through the Harvest Festival holiday last week.

The company’s most complete explanations so far have come in reports to government agencies in Korea, China and the US.

The initial conclusions indicated an error in production that put pressure on plates within the battery cells. That in turn brought negative and positive poles into contact, triggering excessive heat that caused the battery to explode.

The chairman of the US Consumer Product Safety Commission was more explicit when his agency announced an official recall on Thursday (a fortnight ago).

He said the phone’s battery was slightly too big for its compartment and the tight space pinched the battery, causing a short circuit.

“Clearly, they missed something,” said Anthea Lai, an analyst with Bloomberg Intelligence.

“They were rushing to beat Apple and they made a mistake.”

As it investigates, Samsung has stopped buying batteries for the Note 7 from the SDI affiliate. It shifted purchases to Amperex Technology Ltd., a unit of Japan’s TDK Corp., according to local media reports.

“After extensive testing and as reported to multiple regulatory agencies, this issue is isolated to the battery cell from one supplier only,” the company said in its statement.

“All replacement Galaxy Note 7 devices will have batteries from other suppliers.”

A spokesman for Samsung SDI said the company’s stance on the recall is in line with what’s been previously announced by Samsung’s mobile unit and declined to elaborate.

The replacement programme is prompting more reflection. The fast response was driven by good intentions.

Samsung managers have studied past product recalls, including those at Toyota Motor Corp., and the conclusion seemed clear — move quickly and dramatically.

But Samsung moved so fast it got ahead of regulators who help organise such pro- grammes.

In the US for example, companies are supposed to notify the Consumer Product Safety Commission within 24 hours of uncovering problems.

Instead, Samsung went public on its own and consumers didn’t have clear guidance on how to exchange their phones.

“The official recall process provides a lot of clarity to consumers and there’s someone checking to make sure the fix is a good one that serves the consumers in terms of safety,” said Jerry Beilinson, a technology editor at Consumer Reports.

Samsung, which may pay as much as US$2 billion for the recall, said on Sunday it sold stakes in ASML Holding NV, Seagate Technology Plc, Rambus Inc. and Sharp Corp. for a total value of $891 million.

While Samsung says Galaxy Note 7 sales will resume in Korea around September 28, it has yet to specify when global sales would resume. The tumult has raised questions about whether Samsung’s current management approach is sufficiently robust to handle the crisis fallout.

In the wake of the recall, Samsung said it had nominated the younger Lee to join the company’s nine-member board, a move that will give him a more active, and legitimate role across its businesses.

However, the younger Lee, who has kept a low profile inside and outside the company, is still far from having the kind of direct authority his father had. In addition to the corporate strategy office that oversees about 60 Samsung companies, Samsung Electronics has three CEOs. — Bloomberg.