Samsung Electronics has pulled the plugafter failing to fix a defect that caused unexplained fires, creating a public relations crisis that will be costly and challenging for the South Korean company to resolve.
The company’s IT and Mobile Devices (IM) business is Samsung’s largest by revenue and is second in profitability only to Samsung’s Device Solutions unit, which includes semiconductors and display panels. According to a note from Macquarie Research analyst Daniel Kim, scrapping the Note 7 could wipe out the $2.8 billion profit expected in the fourth quarter. A U.S.-based spokeswoman for Samsung didn’t have an immediate comment for this story.
The Note 7’s demise could help rivals in the smartphone market including Alphabet’s Google (GOOG), which is preparing to launch its Pixel Android phone that has gotten generally favorable reviews, and to a lesser extent iPhone maker Apple (AAPL), according to Rob Enderle, an independent technology analyst.
“An Apple user would have always had some trouble moving to a Samsung phone, and a Samsung user would have had some trouble moving to an Apple phone,” Enderle said, adding that recent reports of Samsung washing machines blowing up have eroded the company’s credibility further. “That typically means that they are going to have broad brand damage. I would expect people to start avoiding the Samsung brand for a broad spectrum of products. They may not remember what it was that blew up, but in the back of their head will be the sense that Samsung products are unsafe.”
When the Note 7 was introduced in August, Samsung spared no superlatives, touting the device’s “refined craftsmanship, premium materials and a unique symmetrical edge design,” it said in a press release. Less than a month later came the first reports of the device catching on fire.
The U.S. Consumer Product Safety Commission and Samsung advised consumers on Sept. 9 not to use the Note 7. A recall started Sept. 15, and Samsung began replacing the “old” phones with “new” ones. A Southwest Airlines (LUV) flight was evacuated on Oct. 9 after a replacement Note 7 caught fire. AT&T (T) and T-Mobile (TMUS) then stopped selling the Note 7.
The reaction from investors has been swift, erasing $17 billion in market value from Samsung’s shares.
The company has undermined its credibility throughout the recall process by failing to coherently address the growing safety concerns about one of its flagship products, according to George Ball, an assistant professor at Indiana University’s Kelley School of Business who’s an expert on product recalls. Volkswagen (VLKAY) handled itself far better, even though its emissions scandal was far worse than Samsung’s because the automaker was caught misleading regulators, he noted.
“Volkswagen, which did some pretty devious things, has gone way above and beyond to communicate clearly to the consumer and to compensate them very generously for the harm that they have caused to the environment,” Ball said. “In contrast, what we have read and studied from Samsung from a communications standpoint is very shoddy. The retailers have been getting one message. The consumers have been getting a different message.”
Samsung also is having trouble in China, the largest smartphone market, where it reportedly dismissed reports of Note 7 fires as hoaxes. The company also failed to keep consumers apprised of developments and has since apologized. Samsung has already lost ground in China in recent years to rivals including Apple, according to The Wall Street Journal.
Not all experts, however, are ready to count the Korean company out.
“Let’s not forget Samsung is still by far the No. 1 smartphone player in volume and has significant assets,” said Thomas Husson, an analyst with Forrester Research. “By launching new products and adapting its marketing plan and media plan, Samsung can regain trust.”
Indeed, the picture isn’t entirely bleak for Samsung. Several U.S. Supreme Court members on Tuesday raised sympathetic-sounding questions during oral arguments in anSamsung was hit with for illegally copying parts from the iPhone.