Samsung recalls Galaxy Note 7 phones after battery fires

September 1, 2016 10:11 PM EDT

A model poses for photographs with a Galaxy Note 7 new smartphone during its launching ceremony in Seoul, South Korea, August 11, 2016. REUTERS/Kim Hong-Ji/File Photo - RTX2NR64


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By Se Young Lee

SEOUL (Reuters) - Samsung Electronics Co Ltd <005930.KS> recalled all Galaxy Note 7 smartphones equipped with batteries it has found to be fire-prone and halted their sales in 10 markets, denting a revival of the firm's mobile business.

Koh Dong-jin, head of the South Korean company's smartphone business, expressed regret over the recall, which will affect markets including South Korea and the United States, at a news conference on Friday.

Models in China feature a different battery and are not being recalled by the world's biggest smartphone vendor.

The recall comes just over two weeks after the launch of Samsung's latest premium phone, which features an outsized screen and high-resolution camera, and follows reports of the 988,900 won ($885) phone igniting while charging.

Koh, who declined to comment on the number of phones needing replacement, said Samsung had sold 2.5 million of the premium devices so far. The manufacturer plans to replace not only phones with faulty batteries sold to consumers, but also retailer inventories and units in transit.

"I can't comment on exactly how much the cost will be, but it pains my heart that it will be such a big number," he said.

The scale of the recall is unprecedented for Samsung, which prides itself on its manufacturing prowess. While recalls in the smartphone industry do happen, including for rival Apple Inc (NASDAQ: AAPL), the nature of the problem for the Galaxy Note 7 is a serious blow to Samsung's reputation, analysts said.

It must act quickly to minimize damage to its smartphone recovery, after a string of product successes had reversed a fall in market share, they added.

CUSTOMERS PUT ON HOLD

The phone first launched in 10 markets in North America, Asia and the Middle East. Further roll-outs have occurred since in markets like China, where sales started just this week. Its wider availability, set for coming weeks, is now on hold.

Germany's biggest operator Deutsche Telekom said it had stopped delivering orders for the Galaxy Note 7, while French operator Orange said on its website that it had stopped pre-sales of the phone and postponed its planned sales launch - scheduled for Friday.

In Britain, mobile carriers EE and Vodafone (NASDAQ: VOD) continue to accept pre-orders for the Note 7 on their sites. A Vodafone spokesman said its planned September 19 sales launch could now slip, but was waiting for more details from Samsung to decide.

U.S. operators have been taking pre-orders since early August. The No.1 U.S. wireless carrier Verizon Communications Inc (NYSE: VZ) said it has stopped selling the Galaxy Note 7 in light of customer safety.

If a customer wants to return or exchange the Galaxy Note 7, Verizon said it would waive the restocking fee it charges customers through September 30.

T-Mobile US (NASDAQ: TMUS), majority owned by Deutsche Telekom, also said it has suspended sales, while AT&T (NYSE: T) and Sprint (NYSE: S) could not be reached immediately for comment.

SECOND-HALF HOPES

Samsung has said it aimed for the Note 7 to maintain strong sales momentum in the second half of the year against stiffening competition from the likes of Apple Inc (NASDAQ: AAPL), which is widely expected to release its latest iPhone next week.

"I am concerned more about a potential reduction in sales than recall costs," said analyst Jay Yoo at Korea Investment & Securities. "The recall is likely to be a blow to earnings."

Samsung said new sales of the Note 7 in affected markets would resume after it deals with replacements, a process it expects will begin in about two weeks. The firm would extend refund periods for affected customers and offer exchanges for other Samsung phones, Koh said.

Investors sold Samsung shares after the delay announcement on Thursday, stripping about $7 billion from the firm's market value, which remains just off recent record highs. Sentiment recovered somewhat in trading on Friday as the shares rose 0.6 percent compared with 0.3 percent in the broader market <.KS11>.

Credit Suisse said a recall or major shipment delays could wipe 1.5 trillion won ($1.34 billion) from Samsung's 2016 operating profit estimate of 30.2 trillion won in an "absolute worst case" scenario.

But the brokerage said that scenario was unlikely, as it expected Samsung to resolve problem before the fourth quarter.

HI Securities analyst James Song said the replacement costs may be somewhat limited as Samsung could recycle components of the recalled phones.

"It is clever for Samsung to replace the affected models, not offering fixes. That helps enhance consumer confidence and help reduce potential falls in future sales," he said.

Samsung's mobile division accounted for about 54 percent of the firm's January-June operating profit of 14.8 trillion won.

While there are occasional reports of phones catching fire or otherwise burning users, documented cases that lead to widespread product recalls remain relatively rare.

In 2007, the largest battery recall in consumer electronics history took place when Nokia , then the world's top mobile handset maker, offered to replace 46 million phone batteries produced for it by Japanese maker Matsushita Battery.

($1 = 1,117.4300 won)

(Additional reporting by Hyunjoo Jin in Seoul, Harro ten Wolde in Berlin, Mathieu Rosemain in Paris, Eric Auchard in Frankfurt, Laura Gardner in London, Malathi Nayak in New York; Editing by Christopher Cushing and Alexander Smith)



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