Why Samsung Abandoned Its Popular Phone - the Galaxy Note 7
When several Samsung Galaxy Note 7 smartphones spontaneously exploded in August, the South Korean company went into overdrive. It urged hundreds of employees to quickly diagnose the problem.
None were able to get a phone to explode. Samsung’s engineers, on a tight deadline, initially concluded the defect was caused by faulty batteries from one of the company’s suppliers. Samsung, which announced a recall of the Note 7 devices in September, decided to continue shipping new Galaxy Note 7s containing batteries from a different supplier.
The solution failed. Reports soon surfaced that some of the replacement devices were blowing up too. Company engineers went back to the drawing board, according to a person briefed on the test process who spoke on the condition of anonymity because the internal workings were confidential. As of this week, Samsung’s testers were still unable to reproduce the explosions.
By then, it was too late. On Tuesday, Samsung said it was killing the Galaxy Note 7 entirely. The drastic move is highly unusual in the technology industry, where companies tend to keep trying to improve a product rather than pull it altogether. And it caps a nearly two-month fall for Samsung, which has taken a beating from investors, safety regulators and consumers over its trustworthiness — especially with a marquee product that was supposed to rival Apple’s iPhone.
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The damage has been severe. Even before Samsung announced it was ceasing production of the Galaxy Note 7, its South Korea-traded shares fell more than 8 percent, its biggest daily drop since 2008, knocking $17 billion off the company’s market value. Strategy Analytics, a research firm, had estimated earlier that Samsung could lose more than $10 billion because of the phone’s problems. Samsung’s smartphone business has helped its other divisions by buying their computer chips and panel screens.
Scotching the Note 7 does not end the questions facing Samsung. It still has not disclosed what specifically caused the Note 7s to smoke and catch fire — or even whether it knows what the problem was. And the company may face questions about the safety of its other products, such as kitchen appliances and washing machines.
Samsung has received at least 92 reports of Note 7 batteries overheating in the United States, with 26 reports of burns and 55 reports of property damage, according to information posted by the United States Consumer Product Safety Commission. The agency is now working on a potential second recall of the Note 7s, this time focused on the devices that Samsung had shipped to replace the original smartphones.
“The fact that we are dealing with potentially a second recall on top of a first recall is not your normal situation and indicative of a less-than-ideal process that should have involved earlier coordination with the government,” Elliot F. Kaye, chairman of the safety commission, said in an interview.
A Samsung spokeswoman referred to an earlier statement from the company: “For the benefit of consumers’ safety, we stopped sales and exchanges of the Galaxy Note 7 and have consequently decided to stop production.”
In killing the Note 7, Samsung made a move reminiscent of Tylenol’s 1980s recall, which is held up as a case study in business schools today. In 1982, seven people died after taking cyanide-laced capsules of Extra-Strength Tylenol, the company’s best-selling product. Tylenol yanked 31 million bottles of capsules from stores. Two months later, its painkiller was back on the market with tamper-proof packaging and an extensive media campaign.
How quickly Samsung will emerge from the Note 7 fiasco is less clear. The company is facing an immediate, and substantial, financial blow. Perhaps more worrisome is how people may lose trust in the Samsung brand. An editorial in South Korea’s largest newspaper, the Chosun Ilbo, said: “You cannot really calculate the loss of consumer trust in money.” It said that Samsung must realize that it “didn’t take many years for Nokia to tumble from its position as the world’s top cellphone maker.”
Implications for Samsung
The stock price of Samsung fell on the news that it planned to stop making its Galaxy Note 7 smartphone, which had been recalled because its battery could overheat and catch fire. The move might have a substantial financial impact on the company, the world’s largest maker of smartphones, generating almost half of its revenue from them.
Eric Schiffer, chairman of Reputation Management Consultants, which helps celebrities and companies manage brand crises, said Samsung’s decision to kill the Note 7 might help it in the long run. “They made a really intelligent, hard choice that saved their brand and prevented what could have been a complete melting down of all the good will they had built over the last five years,” he said.