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Samsung’s Flaming Phones Will Be a Slow Burn for the Company

Plummeting stock prices and missed sales are just the beginning of the fallout the company is likely to face.
October 11, 2016

Samsung has halted production of its Galaxy Note 7 smartphone and told customers to stop using the handset over fire risks—but the problems created by the debacle could burn for far longer than the devices themselves.

The company has been plagued by reports of overheating Galaxy Note 7 devices for over a month now. In early September, the smartphones were recalled because some handsets had burst into flames. The issue seems to lie with the casing around the device’s lithium-ion battery.

According to a Samsung report cited by Bloomberg, “an error in production ... placed pressure on plates contained within battery cells… [t]hat in turn brought negative and positive poles into contact, triggering excessive heat.” And, in some cases, flames.

The Galaxy Note 7 was promptly recalled. But replacement devices that Samsung provided and said were safe, have also been found to overheat and ignite. So the company has done the only thing it really could at this stage and halted production of the phone. In a note to the Seoul stock exchange, the company explained that it had “decided to halt production and sales of the Galaxy Note 7 in order to consider our consumers' safety first and foremost.”

The Consumer Product Safety Commission called an earlier suspension of sales by Samsung  “the right move,” but users with a phone are also being encouraged to stop using their devices immediately. (If that’s you, there’s a Samsung site that’s been set up to expedite the process.) Others have also begun to take precautions to ensure that the unsafe handsets don’t cause more problems—notably Oculus, which has disabled the handset’s ability to be used as a VR device out of concern that people might strap an exploding phone to their face.

Samsung’s shares have fallen by as much as 8 percent over the last 24 hours, knocking $17 billion from its market value. Predictably, Apple stock has risen to its highest value since December.  

Samsung is likely to feel the heat for some time. The Galaxy Note 7 was the company’s flagship large-screen phone, and without such a device on the market it will lose major sales in the holiday run-up. Apple and Google will benefit from Samsung’s misfortune here: their respective iPhone 7 Plus and Pixel devices will likely tempt consumers looking for a larger phone. Assuming it writes off its inventory of Note 7’s, the loss will be felt double.

The cost of the recall itself will also be expensive. Speaking to MIT Technology Review, Jason Kallis, a solicitor at Keystone Law in London, reckons that advertising and shipping costs could total around $13.50 per handset—and so far it’s sold at least 2.5 million of them. “That's roughly an expense of $40 million just on getting the phones back,” he points out. All told, he reckons that the cost of the recall could cost as much as $68 million in total, and the process could “take years to deal with.”

Then there is the tsunami of legal proceedings that is likely to follow. “Carriers will no doubt allege they have suffered a loss of profit and disruption, and where consumers have lost the use of the phone to their detriment there will no doubt be claims for consequential damage too,” explained Kallis. Predicting the likely costs of those cases is hard, though.

But perhaps the biggest and most unpredictable blow to Samsung will be to its reputation. Only time will tell will tell what damage is ultimately caused when the flames, both literal and metaphorical, have died down. “There is very little that Samsung can do to protect their brand in these situations,” says Kallis. “The only thing they can do is act swiftly and honestly.”

(Read more: Reuters, Bloomberg, Financial Times)

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