Note 7 fiasco could burn a $17 billion hole in Samsung accounts

Tue Oct 11, 2016 10:00pm EDT
 
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By Se Young Lee

SEOUL (Reuters) - Samsung Electronics' (005930.KS: Quote) worst-ever recall could cost the company as much as $17 billion after it halted sales of its flagship Galaxy Note 7 for a second time, spelling an almost certain end for the ill-fated premium model.

Samsung announced the recall of 2.5 million Note 7s in early September following numerous reports of the phones catching fire and on Tuesday the crisis deepened: The company told mobile carriers to stop sales or exchange of the $882 device and asked users to shut off their phones while it investigated new reports of fires in replacement Note 7s.

As the world's top-selling smartphone company awaits results of probe by U.S. safety regulators, some investors and analysts predict Samsung may scrap the Note 7 and move on to successor models to limit the financial and reputational damage.

"In the worst case scenario, the U.S. could conclude the product is fundamentally flawed and ban sales of the device," said Song Myung-sub, an analyst at HI Investment Securities.

If Samsung stops selling the Note 7s, that will translate into lost sales of up to 19 million phones that the firm was expected to generate during the Note 7's product cycle, according to analysts.

That would equate to nearly $17 billion in lost revenue, based on a Reuters calculation of the cost of the phones.

That's a big increase from $5 billion in missed sales and recall costs analysts initially expected Samsung to incur under the assumption that the firm would resume global Note 7 sales in the fourth quarter.

Chances of that now look slim. South Korea's Hankyoreh newspaper, citing unnamed sources, said on Tuesday Samsung will likely stop Note 7 sales permanently. Samsung did not comment on the report.   Continued...

 
Signage is seen at the Samsung 837 store in the Meatpacking District of Manhattan, New York, U.S., October 10, 2016.  REUTERS/Andrew Kelly