Samsung’s nightmare scenario is happening.
The South Korean electronics giant was forced to suspend sales of its new flagship smartphone, the Galaxy Note 7, on Friday because dozens of the handsets have exploded.
The phone, which has been extremely well reviewed, is now also being recalled worldwide, in a move that is likely to cost Samsung hundreds of millions of dollars.
And compounding matters, the colossal disaster comes on the eve of the launch of a new iPhone from Samsung’s archrival Apple. It’s hard to overstate the size of this screw-up.
Samsung’s star has recently been in the ascendancy. After years of wobbly sales and falling profits, the company was supposed to be onto a winner with the Note 7, and it has been on track for its first mobile profit growth in three years. Critics raved about the large-screened smartphone, and since its August 19 launch about 2.5 million phones have been sold. The Note 7 was coasting to victory on the back of its predecessor models, the Galaxy S6 and the S6 Edge from last year, which got Samsung’s revenue growing again after years of decline.
What’s more, expectations for Apple’s next iPhone, scheduled to launch later this month, are tepid. The device is expected to be only an incremental upgrade on its predecessor, the iPhone 6s. (A more radical overhaul is expected next year for the 10th anniversary of the launch of the iPhone.)
As such, the Note 7 had the stage to itself. It had the momentum. It was in with a very real shot at being the phone of 2016. But it has exploded instead.
In a statement to the press on Friday, Samsung said there had been 35 cases worldwide in which Galaxy Note 7 batteries had exploded.
“We are currently conducting a thorough inspection with our suppliers to identify possible affected batteries in the market,” the company said—and it is taking the unprecedented step of halting sales of the Note 7.
For the millions of devices already sold, a recall is in effect, the company said: “For customers who already have Galaxy Note 7 devices, we will voluntarily replace their current device with a new one over the coming weeks. We acknowledge the inconvenience this may cause in the market but this is to ensure that Samsung continues to deliver the highest quality products to our customers. We are working closely with our partners to ensure the replacement experience is as convenient and efficient as possible.”
This is devastating for Samsung, both financially and reputationally.
Back-of-the-envelope calculations about component parts are unreliable, but it’s fair to say that replacing 2.5 million devices will cost Samsung, in the short term, hundreds of millions of dollars.
It will also do brutal damage to Samsung’s reputation for quality.
Reports of exploding batteries gave Samsung’s stock a battering on Thursday, wiping $7 billion off the company’s market value. Now that the recall has been confirmed, the company’s value will most likely plunge further.
For years, Samsung’s devices had a reputation for being subpar; its phones were often made of plastic when top-line rivals used metal and glass. In the past two years, however, Samsung turned that around with a series of gorgeous all-metal models. The Note 7 was, by all accounts, the best yet.
There are a few small positives to be drawn from the mess: Relatively few Note 7 devices have actually been sold (annual sales tend to run toward 50 million units or more), and most of the damage is in Asia and not the West. And Samsung appears to have jumped out in front of the problem, recalling everything immediately, rather than going into denial or engaging in a clumsy cover-up. In the long run that may burnish Samsung’s reputation for trustworthiness.
But right now, the deck is burning.
Here’s the full statement from Samsung:
Samsung is committed to producing the highest quality products and we take every incident report from our valued customers very seriously. In response to recently reported cases of the new Galaxy Note 7, we conducted a thorough investigation and found a battery cell issue.”
“To date (as of September 1) there have been 35 cases that have been reported globally and we are currently conducting a thorough inspection with our suppliers to identify possible affected batteries in the market. However, because our customers’ safety is an absolute priority at Samsung, we have stopped sales of the Galaxy Note 7.”
“For customers who already have Galaxy Note7 devices, we will voluntarily replace their current device with a new one over the coming weeks. We acknowledge the inconvenience this may cause in the market but this is to ensure that Samsung continues to deliver the highest quality products to our customers. We are working closely with our partners to ensure the replacement experience is as convenient and efficient as possible.