Samsung ends sale and production of Note 7, shares tumble and earnings outlook dims

The Korean smartphone maker has suspended sales of its Note 7 amid reports of fires. Analysts say that while the problem will impact the company's earnings, its strong brand and track record will help it bounce back.

Samsung has suspended sales and production of its Galaxy Note 7 smartphones and told owners to stop using them after reports of fires in replacement devices. Jeon Heon-kyun / EPA

Samsung appears to have finally slammed on the brakes on the unfolding crisis over its Note 7 smartphone.

On Tuesday it stopped sales of the Note 7 and told owners to stop using them while it investigates the reports of fires. Its shares closed down 8 per cent after the announcement, wiping out about US$17 billion of market value.

After trading closed, the company announced it would end production of the Note 7 entirely.

It was all going so well for Samsung just a couple of months ago.

The Korean company had rediscovered its mojo, reporting its best quarterly results in more than two years on the back of the success of its Galaxy S7 and S7 Edge smartphones. Its arch-rival Apple had just reported its second consecutive quarterly drop in iPhone sales. And on August 19, the company released the Note 7, the latest iteration of its massively popular “phablet”, to wide acclaim.

A few days later the trouble began. There were numerous reports of the Dh2,999 devices overheating, emitting smoke – and bursting into flames. Samsung rolled out a worldwide recall programme with impressive speed, replacing about 2.5 million at-risk devices with ones that had been verified.

But the issue refused to go away: a few days ago a supposedly safe Note 7 began to emit smoke on an airplane in the United States, prompting an emergency evacuation. More instances have been reported in the past days.

“It was a bad situation [for Samsung] that is unfortunately getting even worse, with a management impact to sort out as well,” said Roberta Cozza, a research director at the industry analyst Gartner.

“The next opportunity to improve on trust and brand impact will be likely be with the launch of the Samsung Galaxy S8 in the first quarter of next year.”

In the meantime, the company’s financials are expected to take a hard knock. Last week, Samsung said it would report a 5 per cent increase in third-quarter profit, with the cost of the initial recall offset by a strong performance in its components division.

The failure of that initial recall, and the subsequent apparent suspension of production, will almost certainly hit the company’s bottom line for the fourth quarter.

“The financial impact for the company this year will be significant … as recalls have already cost the company a fortune,” said Nabila Popal, a research director at IDC in Dubai. “In tough times like this, it will be a hard pill to swallow.”

Samsung’s decision to end production of the Note 7 inevitably raises the question of whether the company will try to resurrect the Note brand in the future or shut it down completely to protect its other brands.

Indeed, the timing may be right for a retirement of the Note, or at least an overhaul and rebrand. Upon its launch in October 2011, the original 5.3-inch Note was dismissed as a freakishly large device that would attract a tiny number of users.

Fast forward five years, the Note’s phenomenal success has led others to follow suit and increase screen sizes. Samsung’s other main flagship device, the S7 Edge, is now just 0.2 inches smaller than the Note 7’s 5.7 inches, reducing the handset’s unique appeal.

While the Note may about to make its exit, the collateral damage for Samsung’s wider business is likely to be limited.

“I think it’s a temporary setback brand image-wise, as Samsung is a very strong brand,” said Ms Popal. “One incident – although significant – is not enough to do it lasting damage.”

Samsung remains the world’s most popular smartphone manufacturer by some distance: its global market share stood at 22.4 per cent for the second quarter, nearly double that of closest rival Apple.

“Even after the first problems with the Note 7 it was still selling massively well at Gitex last week,” said a senior executive at a UAE-based retailer, who asked not to be named.

“That’s going to change now of course but the Samsung brand is still massively popular here in the Middle East, and I don’t think that’s going to change any time soon.”

* Video courtesy CNBC

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