Samsung likely to permanently halt Note7 sales, fiasco could cost company US$17b and hurt brand

A customer tries out a Samsung Electronics' Galaxy Note7 at the company's headquarters in Seoul.
A customer tries out a Samsung Electronics' Galaxy Note7 at the company's headquarters in Seoul.PHOTO: REUTERS

SEOUL (REUTERS) - Samsung Electronics will likely stop selling its Galaxy Note7 smartphones permanently following the latest halt of sales and production, South Korea's Hankyoreh newspaper reported on Tuesday (Oct 11) citing unnamed sources.

The paper said Samsung would likely seek to make up for lost Note7 sales through its Galaxy S7 models as well as the Note5, which was the 2015 predecessor for the Note7. Samsung did not immediately comment on the report.

The lost sales could cost the company as much as US$17 billion (S$23.45 billion), said analysts.

Samsung announced the recall of 2.5 million Note7s in early September following numerous reports of the phones catching fire and on Tuesday the crisis deepened: The company told mobile carriers to stop sales or exchange of the US$882 device and asked users to shut off their phones while it investigated new reports of fires in replacement Note 7s.

As the world's top-selling smartphone company awaits results of probe by US safety regulators, some investors and analysts predict Samsung may scrap the Note7 and move on to successor models to limit the financial and reputational damage.

"In the worst case scenario, the US could conclude the product is fundamentally flawed and ban sales of the device," said Song Myung-sub, an analyst at HI Investment Securities.

If Samsung stops selling the Note7s, that will translate into lost sales of up to 19 million phones, or nearly US$17 billion, that the firm was expected to generate during the Note7's product cycle, according to analysts including those at Credit Suisse.

 

Related Stories: 

That's a big increase from US$5 billion in missed sales and recall costs analysts initially exected Samsung to incur under the assumption that the firm would resume global Note7 sales in the fourth quarter.

Chances of that now look slim.

"This has probably killed the Note7 brand name," said Edward Snyder, the managing director of Charter Equity Research. "By the time they fix the problem they have to go through recertification and requalification and by the time that happens, they're going up against the (Galaxy) S8 launch."

Samsung has already temporarily halted Note7 production, a source familiar with the matter said on Monday. That could lead to a write-down in inventory in the event Samsung has to end sales entirely.

Broker Nomura estimates Samsung may have to incur up to 1.6 trillion won of disposal costs in the fourth quarter, assuming around 4 million Note7s have been made.

For Samsung, with a market value of US$235 billion and US$69 billion in cash and equivalents at the end of June, the loss of sales of one model could be absorbed.

The bigger problem will be long-term impact on its reputation and brand, analysts and experts say.

"We think the Note7 incident may hurt demand for Samsung's other smartphone models as well," Nomura analysts said in a note, adding it may have to slash Samsung's fourth-quarter mobile division profit estimates by as much as 85 per cent.

Verizon Communications Inc, the largest US wireless carrier, is already considering shifting marketing away from the troubled Note7s, a company spokesman said on Monday.

That will likely boost rival products such as the new Google Pixel and Apple Inc's new iPhone taking market share from Samsung, as most vendors launch new products ahead of the critical year-end holiday sales season.

"The (Note7) unit is forever going to be tarnished and the danger is that the brand becomes irretrievably damaged as well," said Stephen Robb, a partner at UK law firm Weightmans. "They need to be writing to every customer with an apology and some form of 'compensation'... It will clearly be costly for the company but the alternative is to end up going the way of Nokia and Blackberry."