Strong demand for Samsung's Galaxy Note 7 tests supply chain

August 23, 2016 7:49 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


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By Se Young Lee

SEOUL (Reuters) - Better-than-expected demand for Samsung Electronics Co Ltd's <005930.KS> new Galaxy Note 7 is causing supply constraints globally, the South Korean tech giant said on Wednesday, suggesting strong initial sales for the new premium smartphone.

While robust demand could help deliver another solid quarter of earnings, Samsung also risks missing out on potential sales if it cannot boost supply quickly. Rivals such as Apple Inc (NASDAQ: AAPL) are poised to launch new phones which could pull customers away from Samsung if a shortage persists.

"As pre-order results for the Galaxy Note 7 have far exceeded our estimates, its release date in some markets has been adjusted," Samsung told Reuters in a statement without commenting on where launch delays could occur.

Production problems for the curved displays for the Galaxy S6 edge phone resulted in disappointing sales last year, and some investors fear a repeat if the world's top smartphone maker does not move quickly to meet Note 7 demand.

Samsung shares were down 2 percent as of 0339 GMT Wednesday after hitting a record high on Tuesday, while the broader market was down 0.3 percent <.KS11>.

Samsung said it was trying to boost production at the secret locations where the Notes are made, and aimed to meet demand "as early as possible". It gave no further details.

A person familiar with the matter told Reuters there was no production issue for the curved screens used on the Galaxy Note 7 and that the shortage would not be a long-term problem.

"The party got more visitors than Samsung expected, so they just need to put more food out," said Nomura analyst C.W. Chung, who said the supply situation was not a major risk given that Samsung made key parts such as displays and chips in-house.

Samsung could sell as many as 15 million Galaxy Note 7 phones this year, Chung said, compared with an estimated 9 million Galaxy Note 5 phones sold last year.

The phone went on sale on Aug. 19 in countries including the United States and South Korea, where it retails for 988,900 won ($882).

Samsung hopes it helps maintain sales and earnings momentum in the second half. Some analysts raised their profit forecasts for Samsung after the phone received favorable reviews.

"There could be a temporary issue but Samsung has almost never had prolonged production misses," said IBK Asset Management fund manager Kim Hyun-su, adding that the share price decline appeared to be profit-taking after a recent rally.

"It's a problem from selling well, so I don't think there is a need to worry too much."

($1 = 1,121.1700 won)

(Editing by Tony Munroe and Stephen Coates)



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Comments

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