Crisis-hit Samsung scraps troubled Note 7

Samsung on Tuesday pulled the final plug on its troubled Galaxy Note 7 smartphone, permanently discontinuing production of the flagship device that has been mired in a disastrous recall over exploding batteries.

Earlier in the day, the South Korean conglomerate had halted sales and exchanges of the Note 7 and urged customers to stop using them, following reports that replacements for combustible models were also catching fire.

The move sent Samsung's share price into a steep dive and, once the markets had closed, the company announced it was scrapping the model entirely.

"Putting consumer safety as the top priority, we have reached a final decision to halt production of Galaxy Note 7s," it said in a statement.

A company spokesperson confirmed that the suspension was "permanent."

While numerous analysts had predicted just such an outcome, it was still a stunning move for a company that prides itself on the quality production of cutting-edge technology.

It is especially damaging because the large-sized Note series, along with the Galaxy S smartphones, are Samsung's flagship bearers in the fierce battle with arch-rival Apple's iPhones for supremacy in the high-end handset market.

The final decision came a little over a month after Samsung ordered the recall of 2.5 million Note 7s in 10 markets following complaints that its lithium-ion battery exploded while charging.

- PR disaster -

What followed was a PR disaster as reports emerged a week ago of replacement phones also catching fire.

"If it's once, it could be taken as a mistake. But for Samsung, the same thing happened twice with the same model so there's going to be a considerable loss of consumer faith," said Greg Roh at HMC Investment Securities.

"The reason consumers prefer brands like Samsung and Apple is because of product reliability ... so in this case brand damage is inevitable and it will be costly for Samsung to turn that around again," Roh said.

Samsung said customers will still be allowed to apply for a full refund or to swap their Note 7s for other Samsung products.

But it directed all its carrier and retail partners worldwide to stop Note 7 sales and exchanges -- a measure several major distributors like US telecom firm AT&T and German rival T-Mobile had unilaterally taken on Sunday.

Samsung also advised all customers with an original or replacement Galaxy Note 7 to "power down and stop using the device" immediately -- a warning echoed by the head of the US Consumer Product Safety Commission, Elliot Kaye.

"No one should have to be concerned their phone will endanger them, their family or their property," Kaye said in a press release.

- 'Right move' -

Samsung's decision to halt sales and exchanges was "the right move", Kaye said, adding that his commission was actively investigating reports of phones overheating and burning in multiple US states. 

The US Federal Aviation Administration issued a guidance update, urging all passengers to power off, and not use, charge, or stow in checked baggage, all Samsung Galaxy Note 7 devices -- originals or replacements.

Analysts have suggested that Samsung, battling ever-fiercer competition in the saturated smartphone market, may have rushed production of the Note 7 to launch before the iPhone 7 from bitter rival Apple.

The top-of-the-line Note 7 was crucial to Samsung's growth plans this year. The company is struggling to boost sales, squeezed by Apple in the high-end sector and by Chinese rivals in the low-end market.

Linda Sui, wireless smartphone strategies director at Strategy Analytics, estimated that Samsung could lose "$10 billion or more" over the recall.

- Brand damage -

"And the impact on brand image and consumer confidence will be even worse," Sui said.

The crisis has shone a spotlight on Samsung's management at a time when it is navigating a tricky generational power transfer within its founding Lee family.

Samsung is also under pressure from one of its shareholders, the activist US hedge fund Elliott Management run by billionaire Paul Singer.

In a detailed proposal unveiled last week, Elliott laid out a strategy for streamlining Samsung, splitting the company in two, dual-listing the resulting operating company on a US exchange and paying shareholders a special dividend of 30 trillion won ($27 billion).

Source: AFP