Charred Chaebol : Samsung’s Smartphone Woes

In Photo: A Samsung customer browses a web page showing a fire-damaged Samsung Note 7 mobile phone, on a similar device, at a Samsung store in Seoul on October 12, 2016.

On October 11, when Samsung Electronics announced that it would discontinue its flagship smartphone, the Galaxy Note 7, one crucial event in the history of the world’s second-biggest technology company by revenues sprang to mind.

A customer inquires about returning a Samsung Note 7 mobile phone at a Samsung store in a mall beneath the company’s headquarters in the Gangnam district of Seoul on October 12, 2016.
A customer inquires about returning a Samsung Note 7 mobile phone at a Samsung store in a mall beneath the company’s headquarters in the Gangnam district of Seoul on October 12, 2016.

In 1995 Lee Kun-hee, then its CEO, ordered 150,000 mobile phones burned and bulldozed in front of 2,000 weeping employees. Business partners who had received the devices as gifts from him had reported back that they did not work properly.

The South Korean auto-da-fé is said to have helped create a culture of permanent crisis at the firm, which drives employees to work incredibly hard. Now the question is how the ignominious end of the Galaxy Note 7 handset, which some hardware aficionados had called the best “phablet,” or large smartphone, ever made, will change Samsung, which is going through a leadership transition.

In the midst of the crisis, the company announced that Lee Jae-yong, son of Lee Kun-hee, would join the board of Samsung Electronics later this year, taking another step toward succeeding his father, who two years ago suffered a debilitating heart attack.

Samsung had thought that it was over the worst of the Note 7 crisis by early September. It had swiftly recalled 2.5 million of the phones after the batteries in some had caught fire. Earlier this month, however, it emerged that the replacement units, which came with different batteries, were also prone to combustion. Shortly after two of America’s leading mobile operators decided to stop selling the phones, Samsung scrapped the whole thing to avoid further damage to its brand.

A screen shows the Samsung share price at the Korean Exchange in Seoul on October 12, 2016.
A screen shows the Samsung share price at the Korean Exchange in Seoul on October 12, 2016.

It is still not known what exactly made the Note 7s catch fire. Lithium-ion batteries, which power most mobile phones, have caused trouble before. In its rush to get replacements out, however, Samsung overlooked the root cause, while appearing to blame suppliers. Experts suspect that the device was too tightly packed, leaving no room for the batteries to expand as they need to when charged quickly or used heavily. The resulting pressure can damage batteries’ innards, causing them to short-circuit and release densely stored energy in the form of excessive heat.

Commercial forces encouraged Samsung to push the envelope. Since the Galaxy phones run on Android, Google’s operating system, which is used by most mobile-device makers, the company needs to differentiate its high-end devices with ever-better design and hardware. The Note 7, which sold for more than $800, is replete with all kinds of features, including a super-high-resolution camera, an iris scanner to unlock the phone and an especially powerful battery.

“There is now so much that can go wrong in such devices,” said Carolina Milanesi of Creative Strategies, a consultancy.

Samsung will move on fairly swiftly, however, even if it kills the Note brand altogether, which some analysts are calling for. Within its extensive smartphone and tablet portfolio the Note is a niche product: It would be a different story if its bestselling Galaxy S7 devices were affected. If the company’s new models, to be unveiled early next year, have no major flaws, it should be able quickly to restore its reputation as a maker of excellent hardware.

 

© 2016 Economist Newspaper Ltd., London (October 15). All rights reserved. Reprinted with permission.

 

 

Image Credits: Ed Jones/Agence France-Presse/Getty Images

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