Samsung empire can survive Note7 fiasco, say analysts

A Southwest Airlines passenger's Note7 replacement phone caught fire inside a plane in the US earlier this month. Workers taking down a billboard for Samsung Electronics' Galaxy Note7 from a building in Seoul on Friday. The company has yet to identif
Workers taking down a billboard for Samsung Electronics' Galaxy Note7 from a building in Seoul on Friday. The company has yet to identify the root cause of why the smartphones caught fire.PHOTO: REUTERS
A Southwest Airlines passenger's Note7 replacement phone caught fire inside a plane in the US earlier this month. Workers taking down a billboard for Samsung Electronics' Galaxy Note7 from a building in Seoul on Friday. The company has yet to identif
A Southwest Airlines passenger's Note7 replacement phone caught fire inside a plane in the US earlier this month. PHOTO: REUTERS

S. Korean conglomerate diversified enough to withstand expected $6.1 billion loss and damage to brand image

Samsung's trailblazing smartphone Galaxy Note7 is doomed. It was supposed to be Samsung's best phone but it has turned out to be its worst, burning a big hole in the South Korean tech giant's pocket.

Samsung has halted its production and pulled the phone off the shelves after a botched global recall-and-replacement exercise failed to address the problems of some phones catching fire.

The fiasco is expected to cost Samsung over 5 trillion won (S$6.1 billion) and leave a huge dent in its brand image. There is even speculation that the Note series may be scrapped for good.

The saga came at a delicate time of succession at the family-run conglomerate. All eyes are on whether Samsung Electronics vice-chairman Lee Jae Yong can prove his leadership mettle - while his ailing father Lee Kun Hee lies in hospital - and put the company back on track.

"There is no question that this incident will have a negative impact on the Samsung brand, at least for the short term," said George Washington University's international finance professor Yoon S. Park.

"Whether this adverse impact will have long-term traction really depends on how Samsung responds to this crisis.

"Delays and excuses can further harm the brand image. Only a decisive and frank response can minimise the damage."

What's worse is that Samsung has yet to identify the root cause of why the phones caught fire.

The company blamed a battery fault when it recalled the phones last month, but even replacement phones have caught fire. Investigations are ongoing, said Samsung.

Meanwhile, the exploding phone has spawned numerous memes and jokes on social media, with some users likening it to a bomb with a lit fuse while others posted pictures of the waterproof phone dunked in ice.

Samsung has itself to blame for the debacle.

 

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Immense pressure from top management to roll out the Note7 in early August - in a bid to beat Apple's iPhone 7 released last month - apparently resulted in rushed production and sloppy quality control, said analysts.

Samsung had wanted the Note7 to be its best phone - slim and sleek, yet packed with the most advanced features and long battery life. There were rave reviews early on, but after the problems surfaced the company has to pay a heavy price now.

"There's a lot of damage control that Samsung will need to do which will affect its profits, on top of the losses that it has already incurred," said IDC senior market analyst Tay Xiaohan.

She warned that it will take some time for Samsung to regain lost trust, and that some consumers may switch brands out of fear.

 

Will the Note7 fiasco bring down the entire Samsung Group, which is South Korea's largest conglomerate? Analysts do not think so, as the Samsung empire - with businesses in shipbuilding, construction, hotel, retail and more - is diverse enough to withstand the blow.

Samsung stocks plunged 8 per cent to 1.54 million won a share last Tuesday when the company took Note7 off the shelves but rebounded to 1.57 million won by Friday.

Korea University economics professor Lee Jong Wha said: "(Scrapping Note7) hurts the Samsung brand, but it may not have permanent effects considering that Samsung is quite diversified."

The electronics section, which began making home appliances in 1969, has grown phenomenally, raking in over 200 trillion won in revenue last year. The company said profits from increased sales of TV displays and memory chips can make up for the Note7 shortfall.

The Samsung brand - ranked 11th most valuable in the world by Forbes this year - is omnipresent in South Korea. You can live in a Raemian apartment built by Samsung, use your Samsung credit card at Samsung-linked shopping malls, supermarkets and cinema chains, take your children to the Everland theme park run by Samsung, seek treatment at Samsung Medical Centre, and even drive a car made by Samsung with Renault.

Samsung and its 30 affiliate companies contribute almost 20 per cent of South Korea's gross domestic product, worth US$1.3 trillion (S$1.81 trillion) last year.

However, in the aftermath of the Note7 saga, calls have emerged for Samsung to review its rigid seniority-based corporate structure and introduce radical reforms to continue to thrive in the future.

Many analysts say the company needs strong leadership.

Unlike his visionary father who took over the business in 1987 and turned Samsung into a global electronics powerhouse after famously burning 150,000 inferior phones in 1995, Mr Lee Jae Yong is said to be less authoritative.

But there are signs of his leadership style emerging. Prof Park said it is obvious he made the "resolute decision" to recall and suspend sales of the Note7.

On Friday, the company also tried to assure consumers that it will focus on enhancing product safety by making significant changes in its quality assurance processes.

Ms Tay said: "It's definitely a huge setback for Samsung, but if they handle it well they can still rise above it in the coming year."

A version of this article appeared in the print edition of The Sunday Times on October 16, 2016, with the headline 'Samsung empire can survive Note7 fiasco, say analysts'. Print Edition | Subscribe