Samsung Note7 fires risk hurting demand for other products

A man walks past an advertisement for the Samsung Galaxy Note 7 in London.
A man walks past an advertisement for the Samsung Galaxy Note 7 in London.PHOTO: REUTERS

SEOUL (BLOOMBERG) - Kong Tse has seen first-hand how the global uproar over flammable Samsung Note 7 smartphones is playing out with consumers. The 26-year-old, who hawks devices in the warrens of Hong Kong's Wanchai Computer Center, says sales of the company's handsets have tumbled 30 per cent since the controversy began, including the high-end S7 Edge.

"Once betrayed, eight times avoided," says the tousle-haired salesman, invoking a local saying while leaning against the counter in a tiny shop for Well Go Telecom. "They've lost a lot of trust."

Mr Kong's experience suggests the debacle with Samsung Electronics' Note 7 battery fires may reverberate beyond a single product line and jeopardize a brand the South Korean company has spent billions to burnish. Investors will find out more about the fallout on Friday, when Samsung reports earnings for the first time since the crisis began. The Korean company had originally aimed for a Thursday release.

Note 7 sales will undoubtedly fall short of original projections. Since the recall, six analysts surveyed by Bloomberg have cut estimates on Note 7 shipments this year by an average of 38 per cent to 8 million units, from an original 13 million. Several said they were waiting to gauge the impact on Samsung's other products, from washing machines to the flagship Galaxy S7.

Samsung has worked hard to limit the damage. It moved quickly to recall more than 2.5 million Note 7s after the battery troubles emerged and has already begun shipping replacements to key markets, such as Korea and the US. Still, Samsung has lost momentum against key rivals such as Apple Inc and Huawei Technologies Co. The troubles appear particularly challenging in China where customers and government-owned media railed about the country's exclusion from the recall, which they saw as discriminatory.

"The Note 7 impact will last for a while, especially in China where so many good phones are flooding out," said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul. "Samsung may shed market share further in China and the Note 7 impact will possibly spill over to its other product line-ups on the mainland, considering the recent public uproar."

Samsung got more competition on Tuesday as Alphabet Inc.'s Google unveiled its new Pixel smartphones. The devices will run on the Android operating system, the same software Google supplies to Samsung and others, and will compete with Samsung's phones at the high end of the market. Its shares stood little changed in Seoul trading on Wednesday (Oct 5).

Mr Kong isn't alone in seeing a drop in sales. Four other stores in the same mall, traditionally a magnet for electronics shopping, reported sales of Samsung devices were down between 30 and 80 per cent. While two blamed a slowing Chinese economy for draining business, others said consumers had been spooked by the incessant media reports.

In Singapore, that other Asian hub for electronics, several two-story-high banners still proclaim the Note 7's superiority at a popular mall in the east. But the long lines that accompanied the phone's August launch have vanished with the device pulled off shelves, with no word on when sales might resume. Local wireless operator StarHub's "What's Hot" counter displayed Oppo, Huawei, LG - no Samsung.

The investment community is betting the crisis will blow over soon despite the consumer anxiety. Many Korean analysts credit Samsung with a swift response, though consumers complained about confusing policies in different markets. Phones make up just half its business: the company leads the world in memory chips and displays, prices for which have stabilized over past quarters and continue to drive growth. After losing more than US$20 billion in market value over two days in early September, Samsung's stock was a mere 4 per cent below its Aug 23 record after Tuesday's close.

Still, the crisis means Samsung will probably post its slowest pace of quarterly profit in more than a year. Just over a month ago, the South Korean conglomerate was riding high on a wave of glowing reviews for its priciest phone, coming off its best quarterly operating profit in more than two years. But after rushing to get the jump on the iPhone 7, Samsung realized some of the millions of devices it pushed out housed overheating-prone batteries, prompting airlines and regulators to ban its use.

Samsung will release only preliminary operating earnings and revenue this week, steering clear of divisional breakdowns before a full report card in late October. Analysts however figure the Korean company must set aside upwards of US$1 billion to replace about 2.5 million phones across the world.  Profit is expected to have inched 3 per cent higher to 7.6 trillion won in the third quarter, while sales probably dipped 1 per cent to 51 trillion won, according to estimates compiled by Bloomberg. But six analysts surveyed by Bloomberg News have already slashed their quarterly mobile profit expectations by more than 1 trillion won on average.

Much hinges on whether revamped Note 7s now hitting the market manage to stay out of trouble. Samsung resumed selling a modified device over the weekend, and said last week that more than 60 per cent of phones with faulty batteries had been replaced in South Korea and the US. It's looking into reports from recent Chinese customers that new phones - thought to be fault-free because they use a different battery- had burst into flame.

"If further cases are spotted, consumers' mistrust will spread to other Samsung products. And that will also determine the shares as well," said Song Myung Sup, a Seoul-based analyst at HI Investment & Securities Co.