The Galaxy Note 7 looked like a promising new upgrade to Samsung’s flagship smartphone. According to Business News Daily, the new phone sported a Quad High Definition AMOLED Gorilla Glass display capable of a resolution better than 720p. It had an iris scanner, which Samsung claimed was more secure than fingerprint scanning technology. Plus it was IP68 certified, making it dust and water resistant. Ironically, the water resistance did not help the phone much when owners dunked their phones after it caught fire in several instances.
Shortly after release, reports of Galaxy Note 7’s exploding and catching fire began to surface on social media. Samsung was quick to respond, launching an internal investigation into the problem. The company’s investigation revealed that the problem was caused by a defective battery that was used in some of the devices. It confirmed 35 cases of catastrophic phone failure that occurred while the phone was charging and immediately issued a recall.
Samsung told the press that it used two battery suppliers in the production of the Galaxy Note 7 and that the batteries from one of the suppliers were faulty. Since there was no way to tell which phones had the defective power cell, the company recalled all of the devices and initiated an exchange program. The move was certainly a damage control procedure, both from a PR perspective and a financial standpoint.
The explosions and fires began occurring just before Apple announced the iPhone 7. Samsung needed to quell the PR nightmare before Cupertino released its directly competing handset. They needed to get safe working replacements into the hands of their customers before they decided that maybe something from Apple would be a better option. With the iPhone 7’s release date right around the corner, the clock was ticking, and actions needed to be swift.
The company was also looking to mitigate what could have been a loss of hundreds of millions of dollars. At the time of the recall over one million Galaxy Note 7s had been sold. Plus there were another million or so devices still on store shelves. A total of 2.5 million Notes had been shipped out. They needed to get those phones back to salvage what they could and issue replacements to avoid sending out refunds. Financially, the exchange program would nearly cut their losses in half.
If techs were unable to reproduce the results of the defect, how did they initially determine that the explosions were caused by the battery from a particular manufacturer? Did Samsung lie or were they just taking a stab in the dark? Either way, it does not look good for the South Korean tech giant.
What had been a public relations nightmare, is now a serious PR disaster. Not only did those seeking replacement devices get another dangerously faulty Galaxy Note 7, but it seems they were also possibly lied to by the company. Although there have been no reliable polls on the public’s trust in Samsung, it is safe to assume that it is not high at the moment.
Furthermore, since the replacement handsets have been exploding as well, Samsung has completely discontinued production the Galaxy Note 7 and has recalled all of the phones, including the replacements.
According to Best Buy’s website, customers can make an exchange for a Galaxy S7, S7 Edge, or any other Samsung device, and receive a reimbursement of the price difference. Consumers may also request a full refund of the purchase price. The whole fiasco is going to cost the company dearly.
According to a earnings guidance report for the third quarter of 2016, Samsung expected to earn $6.9 billion in operating profits. However, on October 12, the company revised the statement to reflect the costs of the recall. Earnings for 3Q 2016 are now expected to be $4.6 billion, a $2.3 billion decrease. The pain does not end there.
In another earnings guidance statement, Samsung reports that it expects to lose another $3.1 billion in operating profits over the next two fiscal quarters, $2.2 billion for Q4 2016 and $900 million for Q1 2016. Total revenue losses due to the Galaxy Note 7 discontinuance look to be around $5.4 billion. The electronics powerhouse reported earnings of $177 billion in 2015, so the losses are not nearly enough to sink the firm. However, they still represent a three percent total loss in revenue. Shareholders do not like to see these kinds of numbers.
Bloomberg reported Wednesday that Samsung stock had a three-day “meltdown.” After dipping $23 billion in share value, stock in the company is facing the most volatility it has seen in over five years. Despite the bearish outlook, some investors are betting on a recovery.
Duncan Robertson, a portfolio manager at TT International, said, “The battery issue can only be a long-term threat if the company doesn’t take the correct steps to restore its brand. We have confidence that they have taken the correct steps so far.”
So while the short-term outlook for Samsung is rather depressing, many investors are looking at it as an opportunity to invest in a stable company that is determined and likely to make a rebound.
The Galaxy Note 7 has created a financial hardship that Samsung is sure to recover from, but the public relations aspect of the problem seems a little more complicated. Public perception and trust are much harder to change than financial situations. Samsung cannot just throw money at the problem and hope it goes away. Its PR department is sure to be working overtime to resolve this mess. If public trust is not restored, a Galaxy Note 8 or any other named smartphone from the company, will have a hard time keeping up with the competition.