On October 11, less than two months after the launch of the Samsung Galaxy Note 7 on August 19, South Korea’s Samsung Electronics in a terse note to the stock exchange stated, “We have decided to halt production and sales of the Galaxy Note 7 in order to consider our customers safety first and foremost.” This happened more than a month after Samsung recalled 2.5 million devices globally.
In essence, the device that had been touted as the challenger to the iPhone 7 has become history. The Note 7 which had reviewers raving started to smoke, catch fire and even explode. In the US alone, there were 92 cases of the Note 7 catching fire. Samsung promised to fix the problem in newer versions of the device. But, the problems recurred in the newer versions too. It could end up being one of the costliest product safety failures in the history of technology.
What was the problem with the Note 7 about?
Samsung has not been able to nail the problem. However, it is believed the problem lies with the lithium-ion battery. Li-ion has been the preferred choice for smartphone batteries as they charge faster, last longer and have higher power density. As the battery heats up, lithium which is a highly volatile substance sometimes explodes and melts. These batteries that power most mobile phones have caught fire earlier too. But, this is the first time that a particular device caught fire frequently. The problem lies in the fact that as mobile screens get bigger and powerful, the battery has to be powerful to ensure that people can use it through the day without charging. Samsung has not been able to identify the exact source of the problem, despite their engineers trying to get phones to catch fire and explode within their labs.
What has been the financial impact on Samsung?
On October 11, when it decided to scrap the Note 7, the market capitalisation of Samsung Electronics fell $17 billion. shares fell 8%, its biggest one-day decline in eight years. Discontinuing the Note 7 will mean a $ 3.1 billion hit to Samsung Electronics over the next two quarters. This includes lost sales and costs related to discontinuing the Note 7. More important, Samsung which is the global leader in smart-phones—with a 22.8% share in smartphones shipped during Q2 2016 against Apple’s 11.7%—does not have a new device to offer in this year’s festive and holiday season across the world.
Who gains from Samsung’s woes?
The immediate gainer will be Apple’s iPhone 7, that the Note 7 was supposed to challenge. Among Android devices, this is a huge opportunity for Google’s newly launched Pixel and Pixel XL, which come in the same price range as the Note 7 and the iPhone 7. As far as hardcore Samsung loyalists are concerned, they can still opt for the Samsung Galaxy S7 Edge.
What did companies that faced problems like this before do?
In 1982, Johnson & Johnson (J&J) faced a crisis when seven people died after consuming Extra-Strength Tylenol. It was discovered that bottles were tampered and capsules were laced with cyanide. J&J recalled the entire stock in the market and launched a tamper-proof packaging. Samsung on its part has taken the right decision to stop production of the Note 7. It now needs to communicate to consumers that its products are a benchmark for quality.
What happens to those who have already bought the Note 7?
In the US, Samsung announced it will offer a $100 credit to Note 7 owners willing to exchange their device for another Samsung model. This will be over and above the refund of the price difference. In case the user wants to buy a non-Samsung phone, it is offering a full refund and $25 credit. It’s not clear what offers are there for consumers in other markets. It does not need to do that in India, because the Note 7 was to be launched only in the week before Diwali.
Will this impact future sales of Samsung?
Samsung could face consumer resistance in the immediate future. It could face a bigger challenge from Pixel for domination of the top-end Android device space. Much will depend on the Galaxy S8 that it is expected to launch in early 2017.