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Samsung Halts Galaxy Note 7 Production as Battery Problems Linger Samsung Halts Galaxy Note 7 Production as Battery Problems Linger
(about 1 hour later)
SEOUL, South Korea — When Samsung Electronics introduced its sleek, high-end Galaxy Note 7 smartphone in August, one of its senior executives called it “the most intelligent smartphone that we have ever created.” In 1995, furious over quality problems with one of his company’s mobile phones, Lee Kun-hee, the chairman of Samsung and arguably the most famous businessman in South Korea, set a pile of 150,000 defective phones on fire outside a factory.
Today, that model — which the South Korean electronics giant was counting on to help it close the gap with Apple, its biggest rival — looks more like an expensive problem that will not go away. The phone bonfire became a turning point for Samsung’s two-decade rise from an electronics maker associated with inexpensive knockoffs to one considered a leader in product quality, design and sales. But to the company’s critics, that employee motivational moment has also served as a wry historical footnote to safety problems with one of Samsung’s top-selling smartphones.
Samsung has temporarily halted production of the Galaxy Note 7, a person familiar with the decision said on Monday, amid reports that a number of the devices had caught fire. The decision comes just five weeks after Samsung said it would recall 2.5 million Galaxy Note 7 phones after reports of battery fires, suggesting that it has not been able to fix the problem. The company has temporarily halted production of its Galaxy Note 7, a high-end answer to the latest iPhones from Apple, a person familiar with the decision said on Monday. In a statement, the company also asked retailers and telecommunication carriers to stop selling the phones until the problem is fixed, and said “consumers with either an original Galaxy Note 7 or replacement Galaxy Note 7 device should power down and stop using the device.”
On Tuesday, the company asked retailers and carriers to stop selling the phones until the problem was fixed, and said “consumers with either an original Galaxy Note 7 or replacement Galaxy Note 7 device should power down and stop using the device.” The phone has been blamed for at least one house fire, a burning Jeep and several alarming moments on planes when the devices started smoking mid-flight. The Federal Aviation Administration is so concerned that airline passengers are routinely warned that they should not turn on or charge the Galaxy Note 7 during a flight or stow the phone in checked baggage. Southwest Airlines, which had to evacuate a plane on Wednesday after a Samsung phone caught fire, said the details of the incident are still being investigated.
Samsung had initially said that the problem was solved, after allowing consumers to trade in their phones for new ones. But production was halted after telecommunications companies in the United States and Australia said they would not offer the Galaxy Note 7 following reports of fires involving new phones in which the problem was supposedly fixed. The decision to stop selling the Galaxy Note 7 comes just five weeks after Samsung said it would recall 2.5 million of them — the largest ever in the smartphone industry — after early reports of battery fires.
In a disclosure to the South Korean stock exchange on Monday, Samsung said it was “temporarily adjusting the Galaxy Note 7 production schedule in order to take further steps to ensure quality and safety matters.” It said it hoped to provide an update within a month. Samsung had said it believed it had identified the issue, and allowed consumers to trade in their phones for new ones. But production was halted after the four major United States carriers said they would stop selling or replacing Galaxy Note 7 smartphones because of additional reports of fires, including with the replacement models.
Samsung made the decision to halt production for consumer safety reasons and in cooperation with the authorities in the United States and China, according to the person familiar with the process.
The problems call into question Samsung’s campaign to catch up with Apple. While Samsung is the world’s largest smartphone company by market share, Apple has a strong hold on the expensive end of the market with the iPhone.
Samsung is also grappling with problems on another front. Last week, a large American hedge fund, Elliott Management, called for the company to overhaul its structure, putting pressure on Samsung’s leaders to justify their actions.
Samsung had been regaining some ground in the high-end market recently with its latest Galaxy phones, which feature curved edges and offer a more premium feel than its budget phones. The Galaxy Note 7 — with its 5.7-inch screen and a price tag exceeding $800 for a phone not tied to a specific carrier — was supposed to add to that momentum.
When the company announced the recall last month, it identified “a battery cell issue” and said it had stopped using batteries from that supplier, which it did not identify by name. But the recurring problem led industry experts to wonder whether the problem went beyond sloppy production and resulted from a faulty battery or software design.
The Galaxy Note 7 boasted a higher-capacity battery to help its increasingly sophisticated features, like an iris scanner for added security. It also supported fast and wireless charging technologies.
Samsung is by far South Korea’s largest and most profitable company, and its smartphones have been one of its main sources of revenue in recent years. The crisis threatens to undermine the brand name the company has taken decades to build.
Last week, Pak Yu-ak, an analyst at Kiwoom Securities Company in Seoul, the capital, estimated that the initial recall was the big driver behind a nearly 40 percent drop in operating profit for Samsung’s IT and mobile device division in the third quarter compared with the second quarter, though he predicted a fourth-quarter rebound.
But that was before major telecom companies began saying they would stop offering the Galaxy Note 7. Lee Se-cheol, an analyst at NH Investment & Securities in Seoul, said that if the sales of the Samsung model were to be suspended for the fourth quarter, it would cost $630 million in lost revenue, making the company more dependent on its semiconductor business for profit.
Samsung initially won plaudits for the scale of its Sept. 2 recall, the largest ever in the smartphone industry. But the recall has been plagued with problems, including communications issues between Samsung executives and safety officials in the United States.
Last week, a Southwest Airlines flight in the United States was evacuated after a Galaxy Note 7 began smoking inside the plane. The owner and his family told the news media that the phone was a replacement model. Samsung said it would investigate the incident.
On Sunday, the American wireless carrier AT&T said it would stop selling or replacing Galaxy Note 7 smartphones because of reports of fires. Another major carrier, T-Mobile, also said it was temporarily halting sales and exchanges of new Galaxy Note 7s.
SK Telecom and other South Korean mobile carriers have not taken similar steps yet, saying that they were closely monitoring the situation.
Three of Australia’s biggest telecom companies — Telstra, Optus and Vodafone Australia — said they had stopped shipping Galaxy Note 7 phones to customers after reports that the replacement model had caught fire in the United States.Three of Australia’s biggest telecom companies — Telstra, Optus and Vodafone Australia — said they had stopped shipping Galaxy Note 7 phones to customers after reports that the replacement model had caught fire in the United States.
“We have asked Samsung to provide us with an update on their investigations as a matter of priority and will update our customers as soon as we learn more,” said Steve Carey, a spokesman at Telstra, Australia’s largest carrier. There have been no reported fires in the handsets sold in Australia, Mr. Carey said. The company said it hoped to provide an update within a month. The federal Consumer Product Safety Commission praised Samsung’s move and urged consumers to stop using the phone.
The missteps by Samsung, the world’s top seller of smartphones, have given a rare opportunity to competitors like Apple to close the gap with the South Korean giant as the holiday shopping season approaches.
“We believe this incident has destroyed billions of dollars of Samsung brand value,” said Laura Martin, a technology analyst with Needham & Company. “The consumer says, ‘Which one blows up? I’m just going to stay away from Samsung.’”
The Galaxy Note 7 featured a higher-capacity battery to help its increasingly sophisticated features, like an iris scanner for added security. It also supported fast wireless charging technologies. It was the most expensive phone offered by Samsung, putting it in direct competition with Apple’s iPhone.
“Definitely, Apple is the biggest beneficiary” of Samsung’s problems, said Linda Sui, a director at research firm Strategy Analytics.
What’s more, Google, the company whose Android software runs on nearly all of Samsung’s smartphones, is now pushing harder to sell its own phones. Last week, Google unveiled the Pixel — the first smartphone that it designed and manufactured. At the same time, aggressive smartphone manufacturers like Huawei and Xiaomi are looking for ways to expand beyond their footholds in China to compete with Samsung all over the world.
It is difficult to say what the impact of the phone problems will be on the company’s overall sales. Before the recall, the research firm Strategy Analytics had estimated that Samsung would sell 15 million Note 7 units in 2016. But now, the firm is estimating that Samsung, with about $180 billion in annual revenue, could lose more than $10 billion from the ongoing troubles.
Samsung’s reputation is already taking a big hit online, according to an analysis by Spredfast, a social media marketing firm that helps businesses analyze chatter on Twitter and other social networks.
Since the Note 7’s problems began to receive widespread attention, negative Twitter messages about the device rose 450 percent compared to the previous five and a half weeks, the company said.
“While this is itself a huge problem for Samsung, we also found a steep 186 percent rise in negative sentiment about Samsung itself,” Chris Kerns, Spredfast’s vice president of research and insights said in a statement. “Digging deeper, it’s clear that this is not just an isolated issue with one product, but is, in fact, a full-blown brand crisis.”
Like many Asian companies, Samsung struggled for years to establish a strong reputation in the West. Shortly after Apple introduced the iPhone, Samsung went headlong into the smartphone market.
Samsung had been gaining some ground in high-end smartphones with its latest Galaxy S phones, which have curved edges and offer a premium feel over the company’s budget phones. When it released the Galaxy Note 7 in August — with its 5.7-inch screen and a price tag exceeding $800 — it was supposed to add to that momentum.
The recurring problem has led industry experts to wonder whether the problem went beyond sloppy production and resulted from a faulty battery or software design.
Technology companies are hardly immune to manufacturing issues. In 1994, Intel was forced to recall its flagship Pentium chip because of a mathematical mistake built into it. Dell recalled more than 4 million laptop computers in 2006 because of exploding lithium ion batteries produced by Sony. And companies like Fitibit and Microsoft have had manufacturing problems over the years.
Companies with strong brands can withstand product quality problems. Over a two-year span starting in 2009, Toyota recalled about 9 million cars because of issues related to sudden, unintended acceleration. Its chief executive appeared before Congress, and Toyota paid a $1.2 billion fine to the Justice Department for concealing information about defects from consumers and government officials. In 2015, Toyota was the world’s largest automaker.
Samsung is counting on customers like Justin Brooke of Cooper City, Fla., whose family owns three Note 7 phones as well as Samsung televisions and tablets, to stay loyal to the brand.
Mr. Brooke said he thinks the fire risk has been overblown. He loves the Note 7’s big screen and pen feature, which he uses to critique websites for his advertising training business, DMBI Online. “For me as a business owner, it’s the most productive phone on the market,” he said.
Still, he admitted to some apprehension. He said his family never charges the batteries on their phones to 100 percent to reduce the risk of overheating. “Maybe we’re in denial,” he said.
He said his father asked him for a phone recommendation on Sunday night, and he recommended another Samsung model, the S7, which has not been implicated in the fires, or a Google Pixel phone.