Samsung was on a roll from the huge success of its Galaxy S7, which drove its shares last month to the highest it has ever been in two years and lifting its quarterly profit. The company was also strategic and tried leveraging on that momentum with the release of Samsung Galaxy Note 7. That started shipping about two weeks ago.
However, Samsung discovered a serious flaw in the Galaxy Note 7 late, but perhaps not too late. In a test, it was found out that three dozen of these devices had a flaw in their batteries; they catch fire and explode.
So being an ethical business, and trying to avoid lawsuits from injured (or worse killed) users coming to haunt them later on, Samsung recalled all Galaxy Note 7 that have been shipped out. The global recall exercise that will see some 2.5 million devices shipped back to Samsung warehouses will cost the company about $1 billion.
This amount is “heartbreaking”, but failure to do so would be unimaginable; possibly the death of Sam from all the lawsuits from all corners of the world. Not to mention, the company will lose the goodwill in the market.
The timing of this recall could not have come at the worst time. Samsung, which has been trying (and getting traction) to oust Apple from its grip of the high-end consumer smartphones market, will suffer a devastating blow. Apple is set to release the next generation of iPhones, the iPhone 7 this week on Wednesday.
In the race between Samsung versus Apple to capture the high-end consumer smartphones market, Sam has just tripped and fell flat on its face. Apple just got rejuvenated power to keep going. The Galaxy Note 7 was being fielded by Samsung to go head-to-head with the iPhone 7. Suddenly, it dawns on Samsung; Apple is way ahead even before the race starts.
Unless of course, Apple too discovers a fatal flaw in the iPhone 7 and has to postpone its launch or forced to recall them after they start shipping out, but that would be wishful thinking on Samsung’s part.
The loss in revenue is less than cost of Damaged Reputation
$1 billion is no small amount, even for a global company like Samsung, but it is a tiny price to pay to prevent a damaged reputation in the market. The $1 billion figure was arrived at by the Credit Suisse Group, Daishin Securities Co and Pelham Smithers Associates. Then again, that is just about 5% of Samsung’s projected income for this year (about $27.2 billion).
It is not yet clear if Samsung SDI Co. will shoulder the $1 billion loss. The affiliate company tasked with the manufacturing of batteries for Samsung. Although Samsung has not officially stated, who supplied them with the batteries in the Note 7. Sometimes they procure batteries from other outside suppliers.