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Samsung issues recall for Galaxy Note 7 after battery fires

[September 02, 2016] By Se Young Lee

SEOUL (Reuters) - Samsung Electronics Co Ltd <005930.KS> will replace all Galaxy Note 7 smartphones equipped with fire-prone batteries and halt sales of the flagship product in 10 markets, a devastating blow for what had been a revival in the firm's mobile business.

Koh Dong-jin, head of the South Korean company's smartphone business, spoke at a news conference jam-packed with reporters and cameras where he expressed regret at the recall, which will affect markets including South Korea and the U.S. - but not China, where models feature a different battery.

The announcement on Friday comes just over two weeks since the premium device's launch, and follows reports of the 988,900 won ($885) phone igniting while charging.

The executive, who declined to comment on the number of phones needing replacement, said Samsung had sold 2.5 million of the premium devices so far. The manufacturer plans to replace not only phones with faulty batteries sold to consumers, but also retailer inventories and units in transit.

"I can't comment on exactly how much the cost will be, but it pains my heart that it will be such a big number," Koh said.

The scale of the recall is unprecedented for Samsung, which prides itself on its manufacturing prowess. While recalls in the smartphone industry do happen, including for rival Apple Inc <AAPL.O>, the nature of the problem for the Galaxy Note 7 is a serious blow to Samsung's reputation, analysts said.

Analysts said the firm must act quickly to minimize damage to its smartphone recovery, after a string of product successes had reversed a fall in market share at the world's biggest smartphone vendor.

The firm has said it aimed for the Note 7 to maintain strong sales momentum in the second half of the year against stiffening competition from the likes of Apple Inc <AAPL.O>, which is widely expected to release its latest iPhone next week.

"I am concerned more about a potential reduction in sales than recall costs," said analyst Jay Yoo at Korea Investment & Securities. "The recall is likely to be a blow to earnings."

Samsung said new sales of the Note 7 in affected markets would resume after it deals with replacements, a process it expects will begin in about two weeks. The firm would extend refund periods for affected customers and offer exchanges for other Samsung phones, Koh said.

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An employee poses for photographs with Samsung Electronics' Galaxy Note 7 new smartphone at its store in Seoul, South Korea, September 2, 2016. REUTERS/Kim Hong-Ji

Investors sold Samsung shares after the delay announcement on Thursday, stripping about $7 billion from the firm's market value. Sentiment recovered somewhat in Friday trade as the shares rose 0.6 percent compared with 0.3 percent in the broader market <.KS11>.

Credit Suisse said a recall or major shipment delays could wipe 1.5 trillion won ($1.34 billion) from Samsung's 2016 operating profit estimate of 30.2 trillion won in an "absolute worst case" scenario.

But the brokerage said that scenario was unlikely, as it expected Samsung to resolve problem before the fourth quarter of the year.

HI Securities analyst James Song said the replacement costs may be somewhat limited as Samsung could recycle components of the recalled phones save the battery.

"It is clever for Samsung to replace the affected models, not offering fixes. That helps enhance consumer confidence and help reduce potential falls in future sales," he said.

Hyundai Securities also said in a report on Thursday that the Note 7 problem should be resolved within "a few weeks". The brokerage retained its third-quarter operating profit forecast of 8.5 trillion won.

Samsung's mobile division accounted for about 54 percent of the firm's January-June operating profit of 14.8 trillion won.

($1 = 1,117.4300 won)

(This version of the story has been corrected to add dropped text in the second paragraph)

(Reporting by Se Young Lee; Additional reporting by Hyunjoo Jin; Editing by Stephen Coates and Christopher Cushing)

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