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Samsung Kills Off Galaxy Note 7 Smartphone Samsung, Unable to Pinpoint Galaxy Note 7 Problem, Kills Its Production
(about 9 hours later)
SEOUL, South Korea — Samsung Electronics is killing its troubled Galaxy Note 7 smartphone, a humbling about-face for the South Korean giant and its global brand. In an unprecedented move, the company will no longer produce or market the smartphones. When several Samsung Galaxy Note 7 smartphones spontaneously exploded in August, the South Korean company assigned hundreds of employees to test the device and diagnose the issue as quickly as possible.
The demise of the Galaxy Note 7 is a major setback for Samsung, the world’s largest maker of smartphones. The premium device — with a 5.7-inch screen, curved contours and comparatively high price — won praise from consumers and reviewers, and was the company’s most ambitious effort yet to take on Apple for the high-end market. None were able to get a phone to explode. Samsung’s engineers, on a tight deadline, initially concluded that 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.
But Samsung has struggled to address reports that the Galaxy Note 7 could overheat and catch fire because of a manufacturing flaw. Last month, the company said it would recall 2.5 million phones to fix the problem. But in recent days, Galaxy Note 7 users emerged with reports that some devices that had supposedly been repaired were overheating, smoking and even bursting into flames. And on Monday, Samsung asked Note 7 customers to power off the phones while it worked on the problem. The solution failed. Shortly after Samsung began delivering replacement devices to customers, reports surfaced that some of those were blowing up too. Company engineers went back to the drawing board again to figure out the problem, according to a person briefed on the test process who spoke on the condition of anonymity because the internal workings were confidential.
In a statement filed with the South Korean stock exchange late Tuesday, Samsung said it had made a “final decision” to stop production. The company will no longer make or market the phones, said a person familiar with the decision, who spoke on the condition of anonymity because Samsung did not publicly disclose details. It did not help that the hundreds of Samsung testers trying to pinpoint the problem could not easily communicate with one another: Fearing lawsuits and subpoenas, Samsung told employees involved in the testing to keep communications about the tests offline — meaning no emails were allowed, according to the person briefed on the process.
Samsung has a strong position in modestly priced smartphones and has made progress in challenging the Apple iPhone for the high end of the market. Samsung showed its confidence in the new Galaxy Note 7 by skipping a sixth version in the series and offering the new phone beginning in August, before Apple’s introduction of its iPhone 7. As of this week, hundreds of Samsung’s testers were still unable to reproduce explosions for the replacement devices. By then, it was too late. On Tuesday, in an unprecedented move, the company said it was killing the Galaxy Note 7 entirely.
It was unclear where the Galaxy Note 7’s problem began. But Samsung’s fight to catch up with Apple by cramming increasingly sophisticated features into the device may have been the phone’s undoing. Industry experts are scrutinizing Samsung’s supply chain to see whether the rush to market caused technical problems or led to corners being cut. The move 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. The electronics giant’s reputation and finances are under pressure, and it may face questions about the safety of its other products and whether it cuts corners in producing kitchen appliances and washing machines.
“With the Note 7, Samsung strengthened its power as a speedy competitor,” said Lee Seung-woo, an analyst with IBK Investment & Securities. “But one wonders whether it hasn’t raced ahead alone, without helping its component suppliers to catch up.” 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 recall of the replacement Note 7s.
The company is facing an immediate, and substantial, financial blow. On Tuesday, even before Samsung had announced it was killing 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 earlier estimated that Samsung could lose more than $10 billion from the phone’s troubles. Samsung’s smartphone business also helps its other divisions by buying their computer chips and panel screens. “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.
Tougher to predict is how badly the Samsung brand itself will suffer. “It’s difficult to estimate now the damage it has caused to Samsung’s mid- and long-term brand value,” Mr. Lee said, “as well as its impact on Samsung’s smartphone sales in the future.” A Samsung spokeswoman referred to the company’s earlier statement: “For the benefit of consumers’ safety, we stopped sales and exchanges of the Galaxy Note 7 and have consequently decided to stop production.”
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.” 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.
No major manufacturer has killed off such a high-profile smartphone at the height of its popularity. But the person familiar with Samsung’s decision to terminate production said that the company had determined that simply removing the Galaxy Note 7 from the market would be the quickest way to stem further confusion and anxiety about the phone, albeit a costly one. How quickly Samsung will emerge from the Note 7 fiasco is less clear. The company is facing an immediate, and substantial, financial blow.
It is an embarrassing moment for Samsung, whose name has come to be synonymous among South Koreans with cutting-edge technology and manufacturing prowess. On Tuesday, even before Samsung had 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 earlier estimated that Samsung could lose more than $10 billion because of the phone’s troubles. Samsung’s smartphone business also helps its other divisions by buying their computer chips and panel screens.
The Galaxy Note 7 was one of the most ambitious products Samsung had begun marketing under the leadership of Vice Chairman Lee Jae-yong, who took the helm of the country’s largest family controlled conglomerate, or chaebol, after his father, Chairman Lee Kun-hee, became ill in 2014. The senior Mr. Lee, who has not been seen in public since, famously burned a pile of 150,000 defective Samsung phones 21 years ago to demonstrate the company’s commitment to quality. 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.”
Initially, Samsung watchers credited Lee Jae-yong — also known as Jay Y. Lee — with acting with similar decisiveness when Samsung first recalled the 2.5 million Galaxy Note 7 devices. But as the phone’s problems lingered, scrutiny intensified. Eric Schiffer, chairman of Reputation Management Consultants, which helps celebrities and companies manage brand crises, said Samsung’s decision to quickly kill the Note 7 may 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.
The troubling part for many is that Samsung recalled the devices, but then had to try to fix the problem a second time. The Galaxy Note 7 was one of the most ambitious products Samsung had begun marketing under the leadership of its vice chairman, Lee Jae-yong, who took the helm of the country’s largest family-controlled conglomerate, or chaebol, after his father, Lee Kun-hee, the chairman, became ill in 2014. The senior Mr. Lee, who has not been seen in public since, famously burned a pile of 150,000 defective Samsung phones 21 years ago to demonstrate the company’s commitment to quality.
“Maybe they should look harder and closer at what is happening at the management level,” said Roberta Cozza, a research director with Gartner Research, who cited the damage to Samsung’s credibility with customers and with telecommunications carriers. The Galaxy Note 7 was released in August, largely to acclaim from reviewers. In the month before its rollout, Samsung had hundreds of “beta testers” using early versions of the units, including third-party testers like its carrier partners AT&T and Verizon. None identified a problem that might cause phones to explode, according to the person briefed on the testing process.
Earlier Tuesday, the Korean Agency for Technology and Standards, a government organization, recommended that Samsung stop selling the device, saying that it had enough reason to believe the replacement model also had a “possible defect.” The agency did not provide details. Samsung’s chief smartphone rival, Apple, announced new iPhones last month. Samsung’s fight to compete with Apple by cramming increasingly sophisticated features into the device may not have helped. Industry experts are scrutinizing Samsung’s supply chain to see whether the rush to market caused technical problems or led to corners being cut.
The government also ordered South Korean airlines not to accept Galaxy Note 7 phones in luggage and to ensure that those who carry them on board powered them down. Internally, Samsung’s corporate culture may also have compounded any issues. Two former Samsung employees, who asked not to be named for fear of retaliation from the company, described the workplace as militaristic, with a top-down approach where orders come from people high above who did not necessarily understand how product technologies actually work.
Just hours before the Galaxy Note 7’s demise, Samsung said it would stop selling the model around the world, essentially pulling it from the market as it sought to determine what had caused the fires. It said it had asked telecom carriers and retailers globally to stop sales and exchanges of the device. Samsung had also asked all consumers with original Galaxy Note 7s or replacement models to power them down and to stop using them while the company worked with regulators to solve the problem. “Maybe they should look harder and closer at what is happening at the management level,” said Roberta Cozza, a research director with Gartner Research, who cited the damage to Samsung’s credibility with customers as well as telecommunications carriers.
Just a few hours before that, Samsung said it had temporarily halted production of the Galaxy Note 7 to try to fix the problem. After the original Note 7s began running into exploding problems in August, Samsung initially concluded that the problem was batteries supplied by its subsidiary, Samsung SDI, according to documents from the Korean Agency for Technology and Standards, a government regulator, which were leaked to South Korea’s SBS TV. The plates inside the SDI battery were too close to each other near its rounded corners, making it vulnerable to a short circuit, according to the documents, and the battery also had defects in its insulating tape and the coating of its negative electrode.
In South Korea, the company apologized to consumers and business partners, while mobile carriers offered refunds to owners of the phones or allowed them switch to other Samsung models. On Sept. 2, Samsung decided to recall 2.5 million Note 7s with SDI batteries. But the company was working on an alternative. Both Samsung and the regulatory agency decided that batteries from another supplier, ATL, did not have the same defects. And so Samsung continued to ship Note 7s with ATL batteries, offering them as replacement phones.
The decision to end production came on the same day that the recall spread to China. Samsung had said earlier that models sold in China contained batteries that were different from those that had caught fire. But on Tuesday, before it announced the end of the Galaxy Note 7, Samsung said it was recalling nearly 191,000 of the devices in China. That decision backfired.
That did not go over well with many Chinese consumers. “Samsung’s Galaxy Note 7 explodes, and they recall their phones in every other country except for China. They really look down on us,” wrote one user on Weibo, a Chinese social media platform. “It was too quick to blame the batteries; I think there was nothing wrong with them or that they were not the main problem,” said Park Chul-wan, former director of the Center for Advanced Batteries at the Korea Electronics Technology Institute, who said he reviewed the regulatory agency’s documents.
Mr. Park said he has talked with some Samsung engineers but none seemed to know what happened, nor were they able to replicate the problem. Replication would have been quick and easy if the problem was with the chip board and designs, he said.
“The problem seems to be far more complex,” Mr. Park said in a phone interview. “The Note 7 had more features and was more complex than any other phone manufactured. In a race to surpass iPhone, Samsung seems to have packed it with so much innovation it became uncontrollable.”