Samsung Note 7 Fiasco Estimated to Cost Company More Than $6 Billion

Michael Song, Oct. 14, 2016, 9:43 a.m.

The fallout from the Galaxy Note 7 is estimated to cost Samsung Electronics more than 7 trillion won ($6.1 billion), according to the company and industry analysts Friday. 

The Korean tech giant announced Friday that the opportunity cost from the halt in production of the Note 7 is estimated to be a mid-4 trillion-won sum during the coming two quarters. It is a combined figure made up of a mid-3 trillion-won sum in the fourth quarter and 1 trillion won in the first quarter of next year, Samsung said. 

On Wednesday, Samsung had already revised down its third-quarter earnings, which reflected losses from the first global recall, which costs around 1 to 1.5 trillion won, and the second recall, which costs around 2.6 trillion won. 

In total, the halts in sales and production of the fire-prone Note 7 cost Samsung Electronics more than 7 trillion won. 

The operating profits of the company’s internet and mobile division in the fourth quarter is also estimated to drop more than 20 percent year-on-year to close to 2 trillion won, according to analysts estimates.

Soh Hyun-cheol, an analyst at Shinhan Investment Corp. estimated Samsung’s internet and mobile division’s operating profit at 1.7 trillion won, projecting smartphone sales would drop 12.6 percent year-on-year to 72 million units in the fourth quarter. 

To cover the cost from the Note 7, Samsung plans to focus on other premium smartphone brands such as the Galaxy S7 and Galaxy S7 edge.

“We plan to normalize our mobile business by expanding sales of flagship models such as the Galaxy S7 and Galaxy S7 edge,” Samsung said Friday. 

The tech giant also reportedly plans to shift operations of plants in Gumi and Vietnam -- originally for the Note 7 -- to produce the Galaxy S7 and S7 Edge. 

The performance of the internet and mobile division will depend on the demand of the Galaxy S7 during the two coming quarters before the Galaxy S8 is rolled out in the first quarter of next year, said Kim Dong-won, an analyst from Hyundai Securities. 

Regarding the latest fallout, most analysts shared the view that Samsung needs to recover consumer trust in the market first before launching its new smartphone Galaxy S8 next year.

“Samsung may improve earnings in its mobile division in the first quarter of next year if it investigates the causes of the explosions, discloses the solution for the production of the Galaxy S8, and adopts compensation programs in case of possible explosions,” said Kim Sun-woo, an analyst at Meritz Securities.

Samsung, reeling from the painful Note 7 fallout, also vowed to improve its product development that critics say is largely at fault due to its rigid organizational culture.

“We will focus on enhancing product safety for consumers by making significant changes in its quality assurance processes,” Samsung added in its statement, without disclosing further details.

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