Samsung Kills Off the Galaxy Note 7 Smartphone

2016-10-11 13:22:17

 

Samsung Kills Off the Galaxy Note 7 Smartphone

SEOUL, South Korea — Samsung Electronics is killing its troubled Galaxy Note 7 smartphone, a humbling about-face for the South Korean giant and its global brand. In an unprecedented move, the company will no longer produce or market the smartphones.

The demise of the Galaxy Note 7 is a major setback for Samsung, the world’s largest maker of smartphones. The premium device — with a 5.7-inch screen, curved contours and comparatively high price — won praise from consumers and reviewers, and was the company’s most ambitious effort yet to take on Apple for the high-end market.

But Samsung has struggled to address reports that the Galaxy Note 7 could overheat and catch fire because of a manufacturing flaw. Last month, the company said it would recall 2.5 million phones to fix the problem. But in recent days, Galaxy Note 7 users emerged with reports that some devices that had supposedly been repaired were overheating, smoking and even bursting into flames. And on Monday, Samsung asked Note 7 customers to power off the phones while it worked on the problem.

In a statement filed with the South Korean stock exchange late Tuesday, Samsung said it had made a “final decision” to stop production. The company will no longer make or market the phones, said a person familiar with the decision, who spoke on the condition of anonymity because Samsung did not publicly disclose details.

Samsung has a strong position in modestly priced smartphones and has made progress in challenging the Apple iPhone for the high end of the market. Samsung showed its confidence in the new Galaxy Note 7 by skipping a sixth version in the series and offering the new phone beginning in August, before Apple’s introduction of its iPhone 7.

It was unclear where the Galaxy Note 7’s problem began. But Samsung’s fight to catch up with Apple by cramming increasingly sophisticated features into the device may have been the phone’s undoing. Industry experts are scrutinizing Samsung’s supply chain to see whether the rush to market caused technical problems or led to corners being cut.

“With the Note 7, Samsung strengthened its power as a speedy competitor,” said Lee Seung-woo, an analyst with IBK Investment & Securities. “But one wonders whether it hasn’t raced ahead alone, without helping its component suppliers to catch up.”

The company is facing an immediate, and substantial, financial blow. On Tuesday, even before Samsung had announced it was killing the Galaxy Note 7, its South Korea-traded shares fell more than 8 percent, its biggest daily drop since 2008, knocking $17 billion off the company’s market value. Strategy Analytics, a research firm, had earlier estimated that Samsung could lose more than $10 billion from the phone’s troubles. Samsung’s smartphone business also helps its other divisions by buying their computer chips and panel screens.

Tougher to predict is how badly the Samsung brand itself will suffer. “It’s difficult to estimate now the damage it has caused to Samsung’s mid- and long-term brand value,” Mr. Lee said, “as well as its impact on Samsung’s smartphone sales in the future.”

An editorial in South Korea’s largest newspaper, the Chosun Ilbo, said: “You cannot really calculate the loss of consumer trust in money. Samsung must realize that it didn’t take many years for Nokia to tumble from its position as the world’s top cellphone maker.”

No major manufacturer has killed off such a high-profile smartphone at the height of its popularity. But the person familiar with Samsung’s decision to terminate production said that the company had determined that simply removing the Galaxy Note 7 from the market would be the quickest way to stem further confusion and anxiety about the phone, albeit a costly one.

It is an embarrassing moment for Samsung, whose name has come to be synonymous among South Koreans with cutting-edge technology and manufacturing prowess.

The Galaxy Note 7 was one of the most ambitious products Samsung had begun marketing under the leadership of Vice Chairman Lee Jae-yong, who took the helm of the country’s largest family controlled conglomerate, or chaebol, after his father, Chairman Lee Kun-hee, became ill in 2014. The senior Mr. Lee, who has not been seen in public since, famously burned a pile of 150,000 defective Samsung phones 21 years ago to demonstrate the company’s commitment to quality.

Initially, Samsung watchers credited Lee Jae-yong — also known as Jay Y. Lee — with acting with similar decisiveness when Samsung first recalled the 2.5 million Galaxy Note 7 devices. But as the phone’s problems lingered, scrutiny intensified.

The troubling part for many is that Samsung recalled the devices, but then had to try to fix the problem a second time.

“Maybe they should look harder and closer at what is happening at the management level,” said Roberta Cozza, a research director with Gartner Research, who cited the damage to Samsung’s credibility with customers and with telecommunications carriers.

Earlier Tuesday, the Korean Agency for Technology and Standards, a government organization, recommended that Samsung stop selling the device, saying that it had enough reason to believe the replacement model also had a “possible defect.” The agency did not provide details.

The government also ordered South Korean airlines not to accept Galaxy Note 7 phones in luggage and to ensure that those who carry them on board powered them down.

Just hours before the Galaxy Note 7’s demise, Samsung said it would stop selling the model around the world, essentially pulling it from the market as it sought to determine what had caused the fires. It said it had asked telecom carriers and retailers globally to stop sales and exchanges of the device. Samsung had also asked all consumers with original Galaxy Note 7s or replacement models to power them down and to stop using them while the company worked with regulators to solve the problem.

Just a few hours before that, Samsung said it had temporarily halted production of the Galaxy Note 7 to try to fix the problem.

In South Korea, the company apologized to consumers and business partners, while mobile carriers offered refunds to owners of the phones or allowed them switch to other Samsung models.

The decision to end production came on the same day that the recall spread to China. Samsung had said earlier that models sold in China contained batteries that were different from those that had caught fire. But on Tuesday, before it announced the end of the Galaxy Note 7, Samsung said it was recalling nearly 191,000 of the devices in China.

That did not go over well with many Chinese consumers. “Samsung’s Galaxy Note 7 explodes, and they recall their phones in every other country except for China. They really look down on us,” wrote one user on Weibo, a Chinese social media platform.

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