Samsung’s Note 7 was not worth saving

October 11, 2016

The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.

Samsung’s exploding Note 7s were not worth saving. The tech giant has abandoned the faulty phones, after reports of problems with replacement devices. This will hurt a lot more than the initial recall, but scrapping the Note 7 looks like the best way to protect the broader Samsung Electronics brand.

What initially looked like a fairly smooth recall has turned into a debacle. Samsung was midway through replacing 2.5 million devices, and had even resumed sales in South Korea. But then reports emerged of replacements bursting in flames too.

In total, the Note 7 could cost Samsung 3.6 trillion won ($3.2 billion) in lost operating profit over this quarter and next year, analysts at Nomura estimate, including lost sales, disposals, and other costs. That comes in addition to 1 trillion won of replacement charges last quarter. For comparison, the company was forecast to make 8.4 trillion won in operating profit in October to December.

The reputational damage will hurt too. The Note 7 is not the company’s most popular phone, but the botched recall raises questions about whether faulty batteries were to blame after all, as initially thought.

Shares of Samsung slid 8 percent on Oct. 11, the biggest single-day drop since 2008, cutting $19 billion from its market value. Samsung’s shares have bounced around a lot recently, aided by solid official forecasts for quarterly profit, and calls from Elliott, the activist hedge fund, for a revamp.

But taken in isolation, the one-day plunge shows investors are braced for a spillover into sales of other devices, such as the more popular Galaxy S series. Nomura reckons lost revenues from other phones next year could lop another 2.1 trillion won off operating profit.

The debacle has also shown up deficiencies in communication – Samsung has yet to explain the new problems – and crisis management. The longer the fiasco drags out, the more damaging it will be. Torching the Note 7 is the right call.

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