Samsung’s exploding Galaxy Note 7 recall could cost billions, reputation at risk

In a move that could cost billions, Samsung recalled the exploding Galaxy Note 7 phone. It has also halted new shipments of the phone which launched last month.

Samsung had little choice after reports appeared of miniature blasts causing the phones to catch fire. The company conducted its own internal investigation and describes the problem as a “battery cell issue”.

It issued a statement saying 35 cases of fires or explosions have been reported globally.

Tiny problem, big consequences

Koh Dong-jin, the boss Samsung’s phone business, told the press “a tiny problem in the manufacturing process” caused the issue.

Samsung says it has already sold more than two million Note 7s.

The recall does not affect all Galaxy Note 7 models. Samsung uses different Li-ion battery suppliers in some markets and only one of the batteries is exploding.

Expensive exploding phone

The short-term cost of the recall will be expensive. Let’s say the battery cell issue affects half of all Note 7 phones. At NZ$1600 a pop, that could mean a bill of over US$1 billion for the immediate problem.

Add in the stock of phones that can now not be sold and the cost will be at least half as much again. Samsung will need to compensate carriers and retailers who face costs dealing with returned phones.

The news will also have an impact on other phone sales. Expect a drop even in those markets where Samsung uses batteries not involved in the recall. For a while consumers will have less confidence in the brand. This could cost Samsung at least as much again.

Reputation

The real damage could be to Samsung’s reputation. The Galaxy Note 7 launched last month to universal positive reviews. My review described it as Android’s deserving champion… for now. In terms of the critical reception, Samsung was on a high.

In the long term Samsung’s reputation will recover if it does everything right. The signs so far are good.

Yet, the phone recall hands an important marketing advantage to its rivals. Huawei, the up and coming number three phone maker, may be able to capitalise on Samsung’s problems.

No hesitation

On a positive note, Samsung reacted quickly to the news. It didn’t hesitate to recall phones once it checked and confirmed the problem.

Samsung launched the Galaxy Note 7 early to get traction in the market before Apple revealed the iPhone 7. Any marketing advantage it might have had has now gone.

By the time the Galaxy Note 7 is back on sale, Apple’s next phones will have been announced.

The phone maker sells many more of its devices than its main rival, but Apple still makes far more money per phone sold. With the Galaxy Note 7, Samsung increased phone prices — a move designed to improve weak margins.

Now it has to take a bath on the Galaxy Note 7. Unless there’s a surge of interest in the phone once the recall is over, it is unlikely that Samsung will come out financially ahead on the Note 7.