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Samsung Galaxy Note 7 recall has explosive impact on company's mobile earnings

Profits all but wiped out after debacle but damage to electronics giant's brand still being calculated, with Samsung predicting a further $3bn-plus hit

Ben Chapman
Thursday 27 October 2016 14:36 BST
The company killed off its Note 7 smartphone due to devices bursting into flames
The company killed off its Note 7 smartphone due to devices bursting into flames (Getty)

The costly and damaging recall of millions of flammable Galaxy Note 7 smartphones wiped 98 per cent off the profits of Samsung’s mobile division, it announced today. Smartphones are Samsung’s core business and the slump dragged total company profits down by 30 per cent to their lowest level in two years.

The company had issued a profit warning two weeks ago after it killed off its Note 7 smartphone due to devices bursting into flames.

The flagship phone was meant to compete with arch-rival Apple's iPhone 7, but instead has done huge damage to the Samsung brand.

Video shows the moment Samsung Galaxy Note 7 starts exploding

Scrapping the Note 7 saw earnings of the company's core mobile business drop off a cliff, to just 100bn won (£70m).

Overall, third quarter operating profit of 5.2 trillion won (£3.7bn) - down from 7.3 trillion won (£5.2bn) year ago.

Co-chief executive JK Shin apologised to shareholders at a meeting on Wednesday, saying it was “not acceptable” that the company failed to meet its own quality assurance standards.

“Samsung Electronics will revisit and reexamine every step of our engineering, manufacturing and quality control processes,” Mr Shin said.

“We know we must work hard to earn back your trust and we are committed to doing just that,” he added.

The impact of the Note 7 debacle on the electronics giant's brand name is still being calculated, with Samsung itself having predicted another $3bn-plus in lost profits over the next two quarters.

“The mobile business hit bottom, but it should pull off a partial recovery in the fourth quarter,” said Greg Roh, an analyst at HMC Investment Securities.

“But we'll have to wait until the second quarter of next year for a full recovery with the launch of the Galaxy 8 smartphone in March,” he said.

The founding Lee family controls the Samsung group companies, with interests that extend into financial services, hotels, biopharmaceuticals and fashion, through a complex network of cross ownership.

As the newest and most high-profile board member, Lee will have to deal with the harsh spotlight the Note 7 recall shone on the company's management style.

“It was a problem caused not only by technical errors but also by rigid corporate governance structure,” said Kim Sang-Jo, a Samsung shareholder and head of the Seoul-based monitoring group Solidarity for Economic Reform.

“All the executives here are, I'm sorry to say this, those hired by (the Lee family) and remarks by such executives will not be enough to earn the trust of the market,” he told AFP at the shareholder meeting.

“Only messages delivered by Lee himself will be significant, so I hope he will come out in public to talk about these pressing issues of how to improve corporate governance and corporate culture,” he said.

Mr Lee did not attend the shareholder meeting.

Despite the pall cast over the smartphone division, Samsung's display and chip businesses – which supply screens and memory chips to TV makers and rival phone brands – has held up well.

Operating profit in the semiconductor division stood at 3.37 trillion won in the third quarter, up 28 per cent from the previous quarter.

Additional reporting by AFP

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