The damage has been severe. Even before Samsung announced it was ceasing production of 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 companyâs market value. Strategy Analytics, a research firm, had estimated earlier that Samsung could lose more than $ 10 billion because of the phoneâs problems. Samsungâs smartphone business has helped its other divisions by buying their computer chips and panel screens.
Scotching the Note 7 does not end the questions facing Samsung. It still has not disclosed what specifically caused the Note 7s to smoke and catch fire â or even whether it knows what the problem was. And the company may face questions about the safety of its other products, such as kitchen appliances and washing machines.
Samsung has received at least 92 reports of Note 7 batteries overheating in the United States, with 26 reports of burns and 55 reports of property damage, according to information posted by the United States Consumer Product Safety Commission. The agency is now working on a potential second recall of the Note 7s, this time focused on the devices that Samsung had shipped to replace the original smartphones.
âThe fact that we are dealing with potentially a second recall on top of a first recall is not your normal situation and indicative of a less-than-ideal process that should have involved earlier coordination with the government,â Elliot F. Kaye, chairman of the safety commission, said in an interview.
A Samsung spokeswoman referred to an earlier statement from the company: âFor the benefit of consumersâ safety, we stopped sales and exchanges of the Galaxy Note 7 and have consequently decided to stop production.â
In killing the Note 7, Samsung made a move reminiscent of Tylenolâs 1980s recall, which is held up as a case study in business schools today. In 1982, seven people died after taking cyanide-laced capsules of Extra-Strength Tylenol, the companyâs best-selling product. Tylenol yanked 31 million bottles of capsules from stores. Two months later, its painkiller was back on the market with tamper-proof packaging and an extensive media campaign.
How quickly Samsung will emerge from the Note 7 fiasco is less clear. The company is facing an immediate, and substantial, financial blow. Perhaps more worrisome is how people may lose trust in the Samsung brand. An editorial in South Koreaâs largest newspaper, the Chosun Ilbo, said: âYou cannot really calculate the loss of consumer trust in money.â It said that Samsung must realize that it âdidnât take many years for Nokia to tumble from its position as the worldâs top cellphone maker.â
The stock price of Samsung fell on the news that it planned to stop making its Galaxy Note 7 smartphone, which had been recalled because its battery could overheat and catch fire. The move might have a substantial financial impact on the company, the worldâs largest maker of smartphones, generating almost half of its revenue from them.
Percentage change in the last year
Samsung’s revenue breakdown
2015 TOTAL: $ 178 BILLION*
in the last year
Samsung’s revenue breakdown
2015 TOTAL: $ 178 BILLION*
Includes TVs and appliances
Includes information technology
Eric Schiffer, chairman of Reputation Management Consultants, which helps celebrities and companies manage brand crises, said Samsungâs decision to kill the Note 7 might help it in the long run. âThey made a really intelligent, hard choice that saved their brand and prevented what could have been a complete melting down of all the good will they had built over the last five years,â he said.
The Galaxy Note 7 was one of the most ambitious products Samsung had begun marketing under the leadership of its vice chairman, Lee Jae-yong, who took the helm of the countryâs largest family-controlled conglomerate, or chaebol, after his father, Lee Kun-hee, the chairman, 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 companyâs commitment to quality.
The Galaxy Note 7 was released in August, largely to acclaim from reviewers. In the month before the rollout, Samsung had hundreds of âbeta testersâ using early versions of the units, including third-party testers like its carrier partners AT&T and Verizon. None identified a problem that might cause phones to explode, according to the person briefed on the testing process.
Samsungâs chief smartphone rival, Apple, announced new iPhones last month. Samsungâs fight to compete with Apple by cramming increasingly sophisticated features into the device may not have helped. Industry experts are scrutinizing Samsungâs supply chain to see whether the rush to market caused technical problems or led to corners being cut.
Internally, Samsungâs corporate culture may also have compounded any issues. Two former Samsung employees, who asked not to be named for fear of retaliation from the company, described the workplace as militaristic, with a top-down approach where orders came from people high above who did not necessarily understand how product technologies actually worked.
âMaybe they should look harder and closer at what is happening at the management level,â said Roberta Cozza, a research director with Gartner Research, who cited the damage to Samsungâs credibility with customers as well as telecommunications carriers.
After the original Note 7s began running into exploding problems in August, Samsung initially concluded that the problem was batteries supplied by its subsidiary, Samsung SDI, according to documents from the Korean Agency for Technology and Standards, a government regulator, which were leaked to South Koreaâs SBS TV. The plates inside the SDI battery were too close to each other near its rounded corners, making it vulnerable to a short circuit, according to the documents, and the battery also had defects in its insulating tape and the coating of its negative electrode.
On Sept. 2, Samsung decided to recall 2.5 million Note 7s with SDI batteries. But the company was working on an alternative. Both Samsung and the regulatory agency decided that batteries from another supplier, ATL, did not have the same defects.
And so Samsung continued to ship Note 7s with ATL batteries, offering them as replacement phones. That decision backfired.
âIt was too quick to blame the batteries; I think there was nothing wrong with them or that they were not the main problem,â said Park Chul-wan, former director of the Center for Advanced Batteries at the Korea Electronics Technology Institute, who said he reviewed the regulatory agencyâs documents.
It did not help that the hundreds of Samsung testers trying to pinpoint the problem could not easily communicate with one another: Fearing lawsuits and subpoenas, Samsung told employees involved in the testing to keep communications about the tests offline â meaning no emails were allowed, according to the person briefed on the process.
Mr. Park said he had talked with some Samsung engineers but none seemed to know what happened, nor were they able to replicate the problem. Replication would have been quick and easy if the problem was with the chip board and designs, he said.
âThe problem seems to be far more complex,â Mr. Park said in a phone interview. âThe Note 7 had more features and was more complex than any other phone manufactured. In a race to surpass iPhone, Samsung seems to have packed it with so much innovation it became uncontrollable.â