Samsung has recalled 2.5 million of the new Galaxy Note 7 units because of a problem with the battery that can cause the device to catch fire when being recharged. These devices need to be replaced but the electronics giant has another issue in that the collapse of Hanjin Shipping is likely to cause another short term problem in getting its devices to customers. Hanjin Shipping has filed for bankruptcy and to protect its assets, much of which is floating around the world, and one in ten of Samsung’s products are shipping via Hanjin Shipping. There will be shipping containers full of Galaxy Note 7 devices en route to their target markets that may never make it. Industry sources have said that they are expecting a financial loss of around 1.5 trillion won, or $1.34 billion, because of the recall and this number is based on a selling price of $895 per device, but this is an estimate based on a number of assumptions.
In the short term, then, Samsung faces a number of difficulties. One is in replacing the original Galaxy Note 7 as sold to customers and the second is of course getting the device to customers. Because a number of existing devices will need to be written off, or at least returned to the factory before they can be sold, this means that there is going to be a lull in Samsung’s ability to sell the stock: if the company cannot sell the Note 7, this is going to have a knock-on effect on sales. The company can work to increase production runs of new and replacement Note 7 smartphones in order to satisfy demand but there are limits as to how quickly the company is able to build more smartphones and industry experts put this figure at a maximum of 20% increased production. The Note 7 contains many Samsung components, in particular from the semiconductor division, as well as supplier components. Everything needs to be paid for at some point in the manufacturing process. There are other issues associated with being unable to sell the device, such as marketing strategies that need to be pushed back a number of weeks or perhaps even written off. The picture is still unclear other than Samsung’s Galaxy Note 7 has already lost the momentum built up following the launch of the device. If Samsung were attempting to get the Note 7 out before Apple unveil their best ever iPhone, then they have effectively failed. Worse, some customers might decide to buy something else rather than wait for their replacement Note 7 and that product might have an Apple logo on it.
However, let’s take a look at the Apple iPhone to see how things may transpire, because when the iPhone 4 was released it suffered from an antenna glitch that caused the device to lose service. To add insult to injury, Steve Jobs told customers that they were holding it wrong. In the short term, there were millions of disgruntled early adopters, but in the fullness of time it did not matter so much. Apple rewrote the antenna software, gave bumper cases to some customers and subsequently redesigned the antenna arrangement for the iPhone 4S. We are more likely to remember the bending iPhone 6 family than the antenna problems of the iPhone 4. In the short term, Samsung will suffer from an inability to sell the Note 7, but there is still demand for the phablet. Once the manufacturing and supply issues are resolved – and they will be – we can expect customers to be buying the Note 7.