Samsung Electronics announced the discontinuation of the Galaxy Note 7 at 6 p.m. Oct. 11. The announcement was made before an announcement on cases where the smartphone caught fire by the U.S. Consumer Product Safety Commission (CPSC). The decision was made through deliberations with related authorities such as the Korean Agency for Technology and Standards. On the same day, the Korean Ministry of Land, Infrastructure and Transport recommended passengers to power down the Galaxy Note 7, stop charging the device in airplanes and send it in a package by airplane for aviation safety.
Samsung Electronics’ decision to kill off the Galaxy Note 7 is interpreted as a decision to sacrifice the ill-fated device for the “Galaxy” brand, which the global smartphone giant has taken care of for more than seven years.
First of all, Samsung Electronics is discussing exchange and refund policies for the Galaxy Note 7. The company is planning to announce the exchange and refund policies as soon as possible through eleventh-hour deliberations with leading mobile carriers in each country.
It is expected that Samsung Electronics’ decision to halt production and sales of the Galaxy Note 7 for good will give rise to a huge omni-directional aftermath. As the decision will inevitably deal a big blow to Samsung Electronics’ business scores, incur massive losses due to the recalls and damage partners’ business operations, its shock waves are expected to hit the company’s overall smartphone business hard.
As the worst-case scenario of the obsolescence of the device was realized, Samsung Electronics’ losses will snowball. For the time being, exchanges and refunds of the devices will cost Samsung Electronics a huge amount of money.
The smartphone industry estimates that Samsung has rolled out about 3.8 million units of the troubled smartphone. It is expected that the discontinuance decision will cost the Korean tech giant more than during the first recall, taking into account inventory, financial damage and the cost of the collection and exchanges of the device.
Analysis says that Samsung Electronics took a hit of 1 to 1.5 trillion won to make the first recall. Presuming that the same cost will be incurred due to the decision, two recalls and the collection of units sold will cost Samsung Electronics more than 3 trillion won in total. This will offset about 70 percent of Samsung Electronics’ IM Division’s second-quarter operating income of 4.3 trillion won. Considering the use of time and human resources, actual losses may further grow.
As if to add fuel to the fire, if the Galaxy Note 7 is found to have a flaw, it will cost Samsung Electronics an opportunity to sell refurbished versions of the phone to retrieve some of the cost. If the problem cannot be fixed by replacing the battery, the company will not be able to sell collected devices as refurbished products. This is because Samsung Electronics will have no choice but to dump all of the collected units.
Even if the US CPSC concludes that there is no flaw in the Galaxy Note 7, Samsung Electronics will not be able to avoid damage, since the company decided to scrap the smartphone. But to Samsung Electronics, they will be able to save their reputation as a quality management leader if they receive a report that says that the fiasco was not triggered by a flaw in the device. However, it seems unlikely that the results of the investigation will be positive for Samsung Electronics.
It has become more likely that the discontinuance of production and sales of the Galaxy Note 7 will give Samsung Electronics a fourth-quarter business scorecard poorer than its third-quarter one. The Galaxy Note 7 was supposed to take the lead in bringing strong business performances to the company in the second half of this year. The IM Division is expected to post the second half of the 2 trillion won level to the first half of the 3 trillion won level in operating profit, down nearly one trillion won from the previous quarter due to the aftermath of the Galaxy Note 7 recall.
Samsung Electronics’ partners, which supply parts to the company, are being pressed by the decision. The shutdown of the Galaxy Note 7 business will cause big damage to such partners that have invested in technology development, human resources and infrastructure in order to produce parts for the doomed smartphone. It is expected that the partners will suffer bigger damage as Samsung Electronics made big changes to the Galaxy Note 7 such as clearer displays and iris recognition, and such changes cost the partners a lot of initial investment.
Finally, an alternative plan of Samsung Electronics is said to be to put the Galaxy S7, launched in the first half of this year, front and center to minimize the damages caused by the Galaxy Note 7 debacle. But this option will not be easy, as it may help Samsung Electronics’ rivals to make the most of the launches of their new products such as the iPhone 7 and V20. Some experts say that next year Samsung Electronics may move up the date of the launch of the next high-end product (the Galaxy S8) to minimize the new product vacuum left by the Galaxy Note 7. But this choice will not be easy either, as it requires a big change in the company’s product launch schedule.