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Samsung Electronics

Samsung permanently shuts Note 7 production

Analysts expect the South Korean tech giant to spend US$1.43b to wind down and dispose of the smartphone, deemed a potential safety risk

PUBLISHED : Tuesday, 11 October, 2016, 8:44pm
UPDATED : Tuesday, 11 October, 2016, 10:57pm

Beleaguered Samsung Electronics said it has permanently halted all production of its Galaxy Note 7 amid increased concerns of the device catching fire, which has imperilled the company’s smartphone business and severely damaged its global brand.

The South Korean technology giant may be looking to stave off a meltdown of its smartphone sales in the second half of this year by ramping up production of another premium model, as analysts said the company would need to shell out more than US$1 billion to dispose its stock of Note 7 devices.

Its shares fell 8 per cent on Tuesday, erasing about US$17 billion in market value.

“We recently readjusted the production volume for thorough investigation and quality control, but putting consumer safety as top priority, we have reached a final decision to halt production of Galaxy Note 7s,” Samsung said in a statement on Tuesday.

That followed the company’s announcement earlier in the day that it has stopped the global sale and exchange of Note 7 devices, while regulators investigated recent multiple incidents of replacement units overheating and catching fire.

I think the Note 7 is the best smartphone this year, minus the exploding batteries ... I will continue using it, despite the recall
unidentified internet user on microblogging service Weibo

Samsung issued its first recall of 2.5 million Note 7 smartphones on September 2, when senior management blamed faulty batteries supplied by its subsidiary for about 35 reported cases of exploding Note 7s at that time. The company launched the model in mid-August.

“While the Note 7 may not account for a large share of Samsung’s total smartphone sales this year, the ripple effect from the latest incidents is to make consumers think twice before buying another Samsung device,” Gartner analyst Sandy Shen said. “Samsung has not done the due diligence needed to ensure the safety of replacement Note 7 units, so this is a serious setback for its brand.”

In a statement released in China on Tuesday, Samsung said it was “actively communicating with the relevant government departments for specific recall measures”.

Data from research firm IDC showed that Samsung shipped 14.76 million smartphones in mainland China in the first half this year and 33.48 million units for the whole of last year.

It estimated that Samsung has about 80 different smartphone models on sale around the world at any given time.

Paul Haswell, a partner at international law firm Pinsent Masons, said Samsung can expect to be slapped with lawsuits in the markets where consumers have suffered injury or any damages involving Note 7 smartphones that have caught fire.

According to a Nomura report on Tuesday, Samsung faces expenses worth US$1.43 billion to dispose its stock of Note 7 devices. That estimate includes 3 million Note 7 smartphones sold in the third quarter and a million units as inventory, which Nomura calculated at US$350 per device.

“We think the Galaxy Note 7 incidents may hurt demand for Samsung’s other smartphone models as well,” the Nomura report said.

It added that the negative impact from the Note 7 fiasco to Samsung revenue this year is “likely to be more that offset by strong growth” in its semiconductor and display businesses.

Production volume of Samsung’s other high-end smartphone model, the Galaxy S7, is poised to increase this fourth quarter to make up for the Note 7, a Korea Herald report said on Tuesday.

“We will put more weight on rolling out parts for the Galaxy S7 and other models, such as the Galaxy A8,” said an unidentified executive at a Samsung supplier cited in the report.

Analysts expect LG Electronics to fill the void created by the Note 7’s hasty retreat with its V20 smartphone, which recently launched in South Korea. Apple’s new iPhone 7, meanwhile, will be released next week in that market.

Introduced in 2011, the Note series has provided Samsung with a premium smartphone model every second half of the year to compete against Apple’s latest iPhone model, which is typically launched in the third quarter.

Despite its problems with the Note 7, Samsung can still count on brand loyalty. “I think the Note 7 is the best smartphone this year, minus the exploding batteries ... I will continue using it, despite the recall,” an unidentified internet user posted on microblogging service Weibo.