SEOUL (BLOOMBERG) - Samsung Electronics Co. has halted production of its Note 7 smartphones after customers reported problems with new devices, the latest blow in a six-week crisis over exploding phone batteries.
Samsung temporarily suspended production of its most expensive phone, a person with direct knowledge of the matter said on Monday (Oct 10), asking not to be identified because the decision isn't public. The move came after wireless carriers including T-Mobile US Inc. and Australia's Telstra Corp. stopped selling Note 7s following reports of problems with devices thought to be safe.
The South Korean company was originally engulfed in controversy after the high-end smartphone hit the market two months ago and customers began posting videos of charred and damaged handsets. Samsung quickly issued a recall and began working with officials worldwide to replace the original shipment of 2.5 million phones.
But customers have since said that replacement Note 7s and models with supposedly safe batteries were overheating and catching fire, fuelling concerns Samsung hasn't solved the battery problems after all.
"It's an ongoing nightmare," said Mr Bryan Ma, vice president of devices research for IDC. "You would have hoped that they could have gotten past this already and moved on. Clearly, it keeps coming back."
The crisis has strained Samsung's leadership just as it's in the midst of a challenging transition. Mr Lee Kun-Hee, the chairman of both the electronics unit and the broader Samsung Group, suffered a heart attack in 2014 and hasn't been back to the business since. His son, Mr Jay Y. Lee, is heir apparent, but hasn't taken his father's title because Korean culture precludes such a move while the elder Lee is alive. The phone unit is run by Mr D.J. Koh, who took over last December.
Along with T-Mobile, AT&T Inc. halted sales of the device in the US over safety concerns. "Based on recent reports, we're no longer exchanging new Note 7s at this time, pending further investigation of these reported incidents," AT&T spokesman Fletcher Cook said in an e-mailed statement on Sunday (Oct 9).
"We are temporarily adjusting the Galaxy Note 7 production schedule in order to take further steps to ensure quality and safety matters," Suwon-based Samsung said in a statement on Monday, without elaborating. The company said it will take immediate steps approved by the US Consumer Product Safety Commission if it finds a safety issue exists.
Shares of Samsung fell 1.5 per cent to 1,680,000 won (S$2,079.2) in Seoul after closing at a record high on Friday (Oct 7).
"It's meaningless to continue producing the Note 7," Mr Greg Roh, analyst at HMC Investment Securities Co, said by phone. "It may not be able to sell the new Note 7s anyhow if the carriers are banning them for sale."
The production suspension raises questions about Samsung's original investigation into the battery problems. The company said the issue stemmed from one supplier, which it had stopped using.
"The question is, if they switched the supplier why is this problem still happening?" said Mr Ma. "In other words, was it really a supplier issue or is there something else going on?"
The main battery supplier for the Note 7 was originally Samsung SDI Co., an affiliate 20 per cent owned by Samsung Electronics, a person with knowledge of the matter said last month.
"After extensive testing and as reported to multiple regulatory agencies, this issue is isolated to the battery cell from one supplier only," the company said in a statement at the time. "All replacement Galaxy Note 7 devices will have batteries from other suppliers."
It shifted purchases to Amperex Technology Ltd., a unit of Japan's TDK Corp., according to local media reports. Amperex did not respond to calls for comment.
AT&T is the third-biggest customer of the Korean company while T-Mobile's parent is No. 4, according to estimates compiled by Bloomberg. Sprint Corp. said its exchange policy is unchanged while Verizon Communications Inc. said the phone is out of stock at its stores. Telstra, Australia's biggest phone company, is offering alternative phones to customers as Samsung investigates the issue.
The latest imbroglio coincides with mounting pressure from investor Paul Elliott Singer, who this month advocated a break up of the complex Samsung empire. Mr Singer's Elliott Management Corp. - through affiliates Blake Capital LLC and Potter Capital LLC - proposed that Samsung separate into an operating company and a holding company, dual-list the former on a US exchange, pay shareholders a special dividend of 30 trillion Korean won (S$27 billion) and improve governance by adding three independent board members.
IDC's Mr Ma said the production halt will deal another blow to a smartphone that had won strong reviews when it first came out in August. Bloomberg News reported last week that analysts had slashed their estimates of Note 7 shipments for the year by 38 per cent to 8 million units. The forecasts may now fall further.
"They've invested so much in the product, which was supposed to be the product that helps turn the company around," Mr Ma said. "To their credit, it was doing really, really well. That's why it's such a shame it has developed the way it has."
Some analysts said the Note 7 troubles could spill over to other Samsung businesses, including affiliates that make chips and displays. It could also affect Samsung's other major smartphone line, the Galaxy.
"If Samsung Electronics continues to harm its brand image with Galaxy Note 7, this could affect the entire Galaxy S series in the long-term, which is a red light for high-tech electronic components businesses including semiconductors, and display devices," said Mr Song Eun-jeong, analyst at HI Investment & Securities Co.