Exploding phone burns hole in Samsung's balance sheet
Published 28/10/2016 | 02:30
Mobile giant Samsung Electronics has said it aims to recover quickly from the disastrous withdrawal of the fire-prone Galaxy Note 7 that dragged third-quarter mobile earnings to their lowest level in nearly eight years.
The South Korean firm said it was expanding its probe into the Note 7 fires beyond batteries, as it tried to reassure investors that it would get to the bottom of one of the worst product failures in tech history. "We know we must work hard to earn back your trust and we are committed to doing just that," said co-chief executive JK Shin as he apologised for the debacle at a general meeting in Seoul following the release of the company's results.
Investors expect sweeping management changes in response to the Note 7 failure, especially after voting to make parent conglomerate Samsung Group's de facto chief, Jay Y Lee, a Samsung Electronics director.
Lee (48), the son of patriarch Lee Kun-hee who has been hospitalised following a heart attack, will now have greater accountability at the group's flagship company and a clearer mandate to play a public role in setting strategy.
However, shareholders may have to wait for the Note 7 investigation to conclude before seeing any heads roll at the family-run conglomerate.
Samsung Electronics chief executive Kwon Oh-hyun said at the meeting the company would assign responsibility only after the crisis was resolved. The world's top smartphone maker posted a 96pc plunge in third-quarter mobile earnings to $88m(€80m).
Overall operating profit was $4.6bn (€4.2bn), matching Samsung's revised guidance and marking a two-year low.
Before the Note 7 was discontinued, the company had estimated a €6.2bn profit.
The scrapping of the flagship phone erased 0.1 to 0.2 pc from South Korea's third-quarter GDP growth in quarterly terms, a finance ministry official told Reuters.
The Apple rival said it now aimed to achieve fourth-quarter mobile profit close to that of October-December of 2015, on the back of sales of Galaxy S7 phones and lower-tier models. Galaxy S7s - its other premium phones with smaller screens - were on track to set a new launch-year sales record, it said.
Samsung has previously warned of another $3.1bn (€2.8bn) hit to profit from the Note 7 withdrawal over two quarters. But it also said it expects overall earnings to improve in the fourth quarter from a year earlier on a strong performance by its chip and display businesses.
Samsung still does not know what caused the fires in devices sent to customers as replacements for the initial 2.5 million Note 7s it recalled due to fire-prone batteries.
Co-ceo Shin said the battery might not be the only problem, suggesting the root cause may be more difficult to determine than had been hoped.
Investors now want a clear plan for how Samsung will revive earnings growth, repair its tattered brand image and boost shareholder returns, hence the company's promise to consider a share buyback.
"The key is whether Samsung will be able to remove uncertainty surrounding Note 7 and maintain its leading position in the smartphone market," LS Asset Management fund manager Kim Sung-soo said.
"What is important is clearly investigating the cause," said Lee Seung-woo, an analyst at IBK Securities. "It cannot develop a new product on top of the imperfect platform of the Galaxy Note7." (Reuters)