Galaxy recall puts Samsung's profits and next leader on the line

As images of charred phones threaten Samsung's reputation, how heir-apparent Lee Jae Yong deals with the fallout will be closely watched by investors amid a controversial leadership transition.
As images of charred phones threaten Samsung's reputation, how heir-apparent Lee Jae Yong deals with the fallout will be closely watched by investors amid a controversial leadership transition.PHOTO: AGENCE FRANCE-PRESSE
As images of charred phones threaten Samsung's reputation, how heir-apparent Lee Jae Yong deals with the fallout will be closely watched by investors amid a controversial leadership transition.
As images of charred phones threaten Samsung's reputation, how heir-apparent Lee Jae Yong (above) deals with the fallout will be closely watched by investors amid a controversial leadership transition.

SEOUL • Exploding batteries and an embarrassing recall of a flagship gadget during a controversial, closely watched leadership transition - it has been a bad year for Samsung, and analysts warn that the trouble is not over yet.

As competition grows fiercer in the saturated smartphone market, South Korea's largest firm is desperate to avoid a full-blown disaster that could cost billions, dent its reputation and taint its new leadership.

Just weeks after the early roll-out of the Galaxy Note 7 "phablet", the world's largest maker of smartphones was forced to recall 2.5 million units globally, following complaints that the battery exploded while being charged.

"Samsung appears to have rushed fast to roll out the Note 7 with the iPhone 7 in mind... and it is paying a hefty price now," said analyst Greg Roh at Seoul-based HMC Investment & Securities.

With images of charred phones flooding social media, the unprecedented recall was a humiliation for a company that prides itself as an icon of innovation and quality - and the crisis could not have come at a worse time.

The Note 7 was meant to underpin growth this year, at a time when Samsung is struggling to shore up sales. Squeezed by Apple in the high-end segment and Chinese rivals in the low-end market, it has seen profits stagnate.

One bright spot this year was its flagship handset Galaxy S7, which earned rave reviews and boosted operating profits to a two-year high during the second quarter. The Note 7 was crucial to sustaining that momentum.

The recall, currently under way in 10 countries, could cost Samsung US$3 billion (S$4 billion) in the long run, say some analysts. Mr Roh warned that the fallout could significantly hurt profits for months.

The crisis has also shaved US$15 billion off Samsung's market value since late August, when its share price hit the highest point so far this year. While the move was unconnected, Samsung said last week it had sold shares in four technology firms to free up money, in a decision it said was "aimed at focusing on our core business".

In recent years, Samsung and its sister firms have divested from non-core operations as the parent Samsung Group sought to streamline the business and the founding Lee family underwent a generational power transfer. The group wants to build public support ahead of the controversial and closely watched handover, amid lingering questions over the leadership credentials of the family scion and an overall lack of transparency in governance.

Mr Lee Kun Hee, who heads Samsung Electronics and the parent Samsung Group, has been bedridden since suffering a heart attack in 2014. His son, Mr Lee Jae Yong, 48, is expected to take over.

The junior Lee, currently vice-chairman of Samsung Electronics, was nominated two weeks ago as the firm's new board member, cementing his grip on power.

The father is largely credited with turning the once-obscure firm into a global giant, but less is known about the son, who has kept a relatively low profile while rising through the ranks.

"He has a lot to prove as all eyes are on him, and the recall crisis would be a crucial test," said analyst Wi Pyoung Ryang at the Economic Research Reform Institute in Seoul.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on September 26, 2016, with the headline 'Galaxy recall puts Samsung's profits and next leader on the line'. Print Edition | Subscribe