Samsung woes deepen over Galaxy Note 7

(FILES) A file photo taken on September 19, 2016 shows a Samsung Galaxy Note7 smartphone at a telecommunications shop in Seoul. Samsung Electronics has suspended production of its Galaxy Note 7 smartphone, a report said October 10, a month after a recall prompted by battery explosions and a day after two major overseas distributors halted replacements. / AFP PHOTO / JUNG YEON-JE

Samsung Electronics took another hit Monday over its recalled Galaxy Note 7 smartphone, reportedly suspending production after distributors stopped offering replacements because of continued safety concerns.

Samsung, the world’s largest smartphone maker, declined to comment on a report by South Korea’s Yonhap news agency that the company had temporarily halted its Note 7 production lines.

The report was sourced to an unidentified official with a Samsung supplier who said the decision had been taken in cooperation with consumer safety regulators from South Korea, the United States and China.

Samsung decided on September 2 to issue a global recall of 2.5 million Galaxy Note 7s in 10 markets after complaints that its lithium-ion battery exploded while charging.
With images of charred phones flooding social media, the unprecedented recall was a humiliation for a firm that prides itself as an icon of innovation and quality.

The recall process initially stumbled with some mixed messages, but seemed to be on track until last week when reports emerged that some replacement phones were also catching fire.

– Replacements on hold –
On Sunday, US telecommunications firm AT&T and German rival T-Mobile said they would halt exchanges of recalled Samsung Galaxy Note 7s pending further investigations.

The announcement saw Samsung’s share price plunge by as much as four percent in early morning trade on Monday — even before the Yonhap report came out.

At midday, Samsung shares were trading at 1.65 million won — down 3.2 percent from Friday’s close.

AT&T said it would still offer customers the option to exchange Galaxy Note 7s for another Samsung smartphone or other device of their choice.

T-Mobile said it was halting sales of the smartphone, as well as the exchanges.

Samsung has so far declined to confirm any problem with its replacement phones.

“It’s all got very serious again,” said S.R. Kwon, an analyst at Dongbu Securities

“They could just pull the Note 7 off the market, but the real concern is that it might not even end there,” Kwon said.

“It will damage Samsung’s brand image and also affect the sales of other Galaxy smartphones,” he added.

AT&T is the South Korean company’s third-biggest customer while T-Mobile’s parent is number three, according to estimates compiled by Bloomberg.

– Management spotlight –
The trouble with the Note 7 and the handling of the recall, which analysts say could cost up to $2.0 billion, has placed a spotlight on Samsung’s management at a time when it is navigating a tricky generational power transfer within its founding Lee family.

Industry experts have criticised the Lee dynasty for controlling the vast group through a complex web of cross shareholdings, although they only directly own about five percent of total stocks.

And Samsung is also under pressure from one of its shareholders, the activist US hedge fund Elliott Management run by billionaire Paul Singer.

In a detailed proposal unveiled last week, Elliott laid out a strategy for streamlining Samsung, splitting the company in two, dual-listing the resulting operating company on a US exchange and paying shareholders a special dividend of 30 trillion won ($27 billion).

Elliott argued that Samsung, currently a maze of listed and unlisted companies with a notoriously opaque ownership and management structure, had suffered from a long-term undervaluation in the equity market.

Despite all its problems, Samsung on Friday issued a stronger-than-expected operating profit forecast for the third quarter, thanks largely to strong sales of memory chips and OLED display panels.

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