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Fighting fires: Samsung struggles to limit damage from smartphone recall

[October 07, 2016] By Se Young Lee

SEOUL (Reuters) - Heated meetings, sacrificed holidays and teams monitoring social media round-the-clock to track whether there have been any new smartphone fires: Samsung Electronics is still desperately trying to limit the damage of a record global recall announced more than a month ago.

Samsung said most of the fire-prone Galaxy Note 7s have been recovered in major markets, including the United States and South Korea.

But the trouble is not over for either South Korea's largest listed company or mobile division chief Koh Dong-jin, who bowed in a public apology last month, less than a year into the job.

Samsung's hopes of finally getting ahead of the crisis took a knock on Wednesday. A replacement model began smoking inside a U.S. plane on Wednesday, the family that owns it said, prompting fresh investigations by safety regulators.

And on top of that, Samsung is being pressured by one of the world's most aggressive hedge funds, Elliott Management, to split the company and pay out $27 billion in a special dividend.

UNLUCKY TURN

Ahead of the Note 7's August launch, Koh told other executives how lucky he was: taking charge of the world's largest smartphone business just before it began to reverse two years of declining sales and market share.

Instead, he was soon weathering international aviation bans on the phone, online jokes and criticism over Samsung's handling of the process. It initially wiped almost $16 billion off the company's market value.

The crisis is worse than any other the company has faced, said one Samsung insider, who declined to be named due to the sensitivity of the subject. "It directly impacts our products, our brand, and trust with consumers," this person said.

Samsung told Reuters in a statement it was not thinking about management or organizational changes, and is focused on the Note 7 replacement process.

Samsung insiders say that the unassuming Koh needs to get sales moving again so that the company can salvage the fourth quarter and defend market share against Apple Inc and other rivals.

"If this doesn't get fixed quickly, everybody loses," said a second Samsung source, who didn't want to be named due to the sensitivity of the issue, adding that as yet there was no finger-pointing at Koh or other executives.

TV ads for the Note 7 resumed in South Korea last week, with additional incentives for those buying the device in October.

"We will give Note 7 all the support we were going to give it in the first place," David Lowes, Samsung's chief marketing officer in Europe, told Reuters. "There is no backing away from it."

TOO MUCH, TOO SOON?

Some of the toughest criticism leveled at Samsung has been over its fumbling of the recall.

It warned affected users to immediately turn off their phones only after the same warning was issued by the U.S. consumer protection agency. The regulator criticized Samsung for not following proper recall procedures.

Some consumers also complained about the replacement phones, either saying they lose power too quickly or run too hot.

In China, where Samsung says its Note 7 uses safe batteries, some users claimed their phones caught fire, while it was forced to delay resuming sales in South Korea due to a slow recall progress.

Eric Schiffer, brand strategy expert and chairman of Reputation Management Consultants based in Los Angeles, said Samsung needs to woo its customers.

"They need to be very transparent. Invite customers who have been affected to the plants...let go of whoever was in charge of this debacle, and accept responsibility and show goodwill by sending new phones, giving discounts - anything to show the importance of the customer relationship," he said.

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Koh Dong-jin, president of Samsung Electronics' Mobile Communications Business, speaks during a news conference in Seoul, South Korea, September 2, 2016. REUTERS/Kim Hong-Ji/File Photo

Samsung has formed a dedicated team of public relations staff to speed up decision making and contain damage, the sources inside the company said.

"We share information instantly and far more widely than usual. We try to reply more promptly," said one of them, who noted how complex it was to deal with a recall across 10 nations spread across the globe.

Samsung employees say the recall has dominated internal meetings since the Sept. 2 announcement, whether it be efforts to get the recalled phones off the streets or deal with a continued stream of claims and reports of damages or problems.

Long hours, weekends and canceled tie off are commonplace. The long Korean thanksgiving holiday - the biggest holiday of the year - coincided with the U.S. consumer protection agency's mid-September recall of 1 million Note 7 phones.

SLEEPLESS NIGHTS

Koh, 55, is a Samsung veteran with previous roles in human resources and research & development. His elevation had been a shot in the arm for the mobile business, company insiders said, as he boosted morale by delegating more responsibility to subordinates and stressing a bottom-up approach.

At a Galaxy S7 launch event in March, he confessed to sleepless nights agonizing over how to rejuvenate a business battling falling profits and market share losses to Apple and others.With signs of a recovery - first-half mobile profits grew by nearly half - Koh had started to focus more on how to ensure steady long-term profit growth, according to a person familiar with his thinking.

That all changed with reports of battery fires weeks after the Note 7 launch.

Missed sales and recall expenses could cost Samsung nearly $5 billion this year, analysts say. The risk to its brand is as yet unquantifiable.

Samsung's quarterly earnings forecast on Friday will provide an initial glimpse of the recall impact.

It has been particularly painful because many insiders thought the Note 7 could be a landmark product. Pre-orders for the 988,900 won ($895) device were stronger than expected, and the recall cost Samsung a month-long sales window before Apple launched its new iPhone.

The latest twist created by activist fund Elliott may be unwelcome to Samsung's founding Lee family, which still controls the company through a complex web of cross shareholdings.

However, for investors generally it has been a shot in the arm as Samsung shares have recovered to be well above the pre-recall levels and hit all-time highs on Thursday.

($1 = 1,105.4000 won)

(Additional reporting by Eric Auchard in FRANKFURT, Deborah Todd and Jessica Toonkel in NEW YORK and Sijia Jiang in HONG KONG; Editing by Miyoung Kim, Tony Munroe and Martin Howell)

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