Samsung slashes profit estimate after Note 7 disaster

Halted production of Note 7 will damage Samsung's brand image and eventually hurt future sales of its smartphones

SEOUL: Samsung Electronics on Wednesday slashed its latest quarterly profit estimate by one third in the wake of a highly damaging recall crisis that ended with the scrapping of its latest flagship smartphone.

In the first indication of just how much the Galaxy Note 7 fiasco might end up costing the world's largest smartphone maker, Samsung revised its operating forecast for the third quarter to 5.2 trillion won ($4.6 billion), compared to the 7.8 trillion won it announced just last week.

The company said the revision reflected the expected impact on sales and earnings of its decision on Tuesday to permanently discontinue production of the Note 7.



Song Myung-Sup, an analyst at Hi Investment & Securities, said the impact would be felt for many quarters to come.

"Halted production of the Note 7 will damage Samsung's brand image and trust and eventually hurt future sales of its smartphones," Song said.

"Given that it needs to spend more on research, development, inspection and marketing down the road, this crisis will affect its earnings until late 2017," he added.

The company also slashed its third-quarter sales estimate by four per cent to 47 trillion won from 49 trillion won.

The announcement came after the close of trade Wednesday which saw Samsung's share price fall 0.7 per cent, following an 8.0 per cent plunge the day before.

Wednesday's revision would reflect a 30-per cent drop in Samsung's quarterly operating profit from a year ago, compared to a 5.5-per cent rise according to the earlier estimate.

Samsung announced a recall of 2.5 million units of the oversized Galaxy Note 7 smartphone in early September after several devices exploded or caught fire.



When replacement phones also started to combust, the company eventually decided to scrap the Note 7 line entirely.

The company blamed faulty batteries made by an unnamed supplier -- widely believed to be its sister company Samsung SDI.

But reports in the Wall Street Journal and Financial Times cited analysts, experts and other sources who suggested the fault may have been with the underlying technology -- possibly the processor or voltage control system.

"If you try to charge the battery too quickly it can make it more volatile. If you push an engine too hard, it will explode. Something had to give," a source who had spoken to Samsung executives told the Financial Times.

Discontinuing the Note 7 leaves Samsung extremely vulnerable as the highly-competitive market for premium smartphones enters the holiday buying season.

Arch-rival Apple launched its latest iPhone 7 last month, and Google just came out with its Pixel smartphone, which runs on the same Android software as Samsung's devices.

Numerous analysts have suggested that the rush to release the Note 7 ahead of the iPhone 7 left Samsung's engineers little time to test the device's new built-in battery.



The Note 7 was meant to underpin growth this year as Samsung struggles to boost sales, squeezed by Apple in the high-end sector and Chinese rivals in the low-end market as profit has stagnated.

Wednesday's revised earnings forecast, which comes ahead of audited results to be released this month, did not provide a net income figure or breakdown of divisional earnings for the company's mobile, TV, semiconductor and display units.

Samsung's handling of the Note 7 recall has placed a spotlight on the South Korean conglomerate's management at a time when it is navigating a tricky generational power transfer within the 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 per cent of total stocks.