Tuesday 27 September 2016

Samsung shares slide as recall of 'igniting' smartphone ordered

Mobile phone maker sees shares plummet as faults in its new flagship model are revealed, writes Se Young Lee

Se Young Lee

Published 04/09/2016 | 02:30

Samsung this weekend recalled all Galaxy Note 7 smartphones equipped with batteries it has found to be fire-prone and halted their sales in 10 markets, denting a revival of the firm's mobile business. Photo: Reuters
Samsung this weekend recalled all Galaxy Note 7 smartphones equipped with batteries it has found to be fire-prone and halted their sales in 10 markets, denting a revival of the firm's mobile business. Photo: Reuters

Samsung this weekend recalled all Galaxy Note 7 smartphones equipped with batteries it has found to be fire-prone and halted their sales in 10 markets, denting a revival of the firm's mobile business.

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Koh Dong-jin, head of the South Korean company's smartphone business, expressed regret over the recall, which will affect markets including South Korea and the United States, at a news conference on Friday.

Models in China feature a different battery and are not being recalled by the world's biggest smartphone vendor.

The recall comes just over two weeks after the launch of Samsung's latest premium phone, which features an outsized screen and high-resolution camera, and follows reports of the €800 phone igniting while charging.

Koh, who declined to comment on the number of phones needing replacement, said Samsung had sold 2.5 million of the premium devices so far. The manufacturer plans to replace not only phones with faulty batteries sold to consumers, but also retailer inventories and units in transit.

"I can't comment on exactly how much the cost will be, but it pains my heart that it will be such a big number," he said.

The scale of the recall is unprecedented for Samsung, which prides itself on its manufacturing prowess. While smartphone recalls do happen, including at rival Apple, the nature of the problem for the Galaxy Note 7 is a blow to Samsung's reputation. It must act quickly to minimise damage to its smartphone recovery, after a string of product successes had reversed a fall in market share.

The phone first launched in 10 markets in North America, Asia and the Middle East. Further roll-outs have since occurred in markets like China, where sales started just this week. Its wider availability, set for coming weeks, is now on hold.

Germany's biggest operator Deutsche Telekom said it had stopped delivering orders for the Galaxy Note 7, while French operator Orange said on its website that it had stopped pre-sales of the phone and postponed its planned sales launch - scheduled for Friday.

In Britain, mobile carriers EE and Vodafone continue to accept pre-orders for the Note 7 on their sites. A Vodafone spokesman said its planned September 19 sales launch could now slip, but was waiting for more details from Samsung before deciding.

US operators have been taking pre-orders since early August. Leading US wireless carrier Verizon said it has stopped selling the Galaxy Note 7 in light of customer safety.

T-Mobile US, majority owned by Deutsche Telekom, also suspended sales, while AT&T and Sprint could not be reached for comment.

Samsung has said it aimed for the Note 7 to maintain strong sales momentum in the second half of the year against stiffening competition from the likes of Apple, which is expected to release its latest iPhone next week.

"I am concerned more about a potential reduction in sales than recall costs," said one analyst. "The recall will hit earnings."

Samsung said new sales in affected markets would resume after it deals with replacements, a process it expects will begin in about two weeks. The firm would extend refund periods for affected customers and offer exchanges for other Samsung phones, Koh said.

Investors sold Samsung shares after the delay announcement on Thursday, stripping about $7bn from the firm's market value, which remains just off recent record highs. Sentiment recovered somewhat in trading on Friday as the shares rose 0.6pc compared with 0.3pc in the broader market.

Credit Suisse said a recall or major shipment delays could wipe €1bn from Samsung's 2016 operating profit estimate in an "absolute worst case" scenario.

But the brokerage said that scenario was unlikely, as it expected Samsung to resolve the problem before the fourth quarter.

HI Securities analyst James Song said the replacement costs may be somewhat limited as Samsung could recycle components of the recalled phones.

"It is clever for Samsung to replace the affected models, not offering fixes. That helps enhance consumer confidence and helps reduce potential falls in future sales," he said.

Samsung's mobile division accounted for about 54pc of the firm's operating profit.

While there are occasional reports of phones catching fire or otherwise burning users, documented cases that lead to widespread product recalls remain relatively rare. In 2007, the largest battery recall in consumer electronics history took place when Nokia, then the world's top mobile handset maker, offered to replace 46 million phone batteries produced for it by Japanese maker Matsushita Battery.

©Bloomberg

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