Mixed Appraisals
Samsung Electronics’ decision to permanently cease the production of its Galaxy Note 7 flagship smartphone stirred mixed opinions among international credit rating agencies on October 13. Fitch Ratings pointed out that damage on the value of Samsung Electronics and the Galaxy brand would pose a threat to the credit rating in the long term, citing Blackberry and Nokia as an example. On the other hand, Standard & Poor's Global Ratings (S&P) said it’s too early to tell about its effect and should watch the change in the market position until the first half of the next year.
In regard to Samsung Electronics, Fitch said in the statement on the same day, “The damage on the brand value to be shown in the long term will become a bigger threat to the credit rating, rather than direct losses from the discontinuance and recall of the Galaxy Note 7. This problem has increased the long-term uncertainties of Samsung Electronics’ cell phone sector.” It also said that Samsung Electronics showed its weakness in not only the capability of research and development but also the capability of making an effective response to serious hardware defects through the Galaxy Note 7 crisis. It means that consumers who purchased the Galaxy Note 7 or intend to buy Samsung Electronics’ upcoming products cannot help purchasing products of its competitors, including Apple, when the company doesn’t improve its corporate and Galaxy brand images. In particular, firms, which established a solid foothold in the cell phone market like Blackberry and Nokia, can rapidly lose their market shares according to changes in technology and consumer preference.
On the contrary, S&P said it remains to be seen whether or not Samsung Electronics will restores its blemished reputation in a short period of time after the company releases a new flagship model in the first half of next year. Han Sang-yun, director at S&P, said, “It is not certain that how much and how long Samsung Electronics will lose its market presence yet.” However, he agreed that it is inevitable that Samsung Electronics will see its reputation of the product quality and brand be damaged and its position in the smartphone market in the medium and long term. Han added, “Additional costs for the next few quarters and no revenues from the new smartphone will adversely affect the business showings.”
Meanwhile, both credit rating agencies said that Samsung Electronics’ decision to discontinue the production of the Galaxy Note 7 will not threaten its credit rating immediately. This is because the company puts up a good show in other sectors, such as semiconductor, display and home appliance, and has a diversified product portfolio as well as sufficient liquidity and sound financial index factors. S&P said, “Samsung Electronics’ cash reserves reached 65 trillion won (US$57.24 billion) as of the end of June and it has good cash flow for operation.” Fitch also said that Samsung Electronics has enough cash to handle 12.3 trillion won (US$10.83 billion) of loans.