Samsung faces $5bn profit hit from Note 7

Samsung Electronics says the demise of the Galaxy Note 7 will reduce its operating profit by Won3.5tn ($3bn) over the next six months, taking the total cost of the safety debacle to more than $5bn.

The additional impact expected over this quarter and the next brings total losses to about $5.3bn, after Samsung this week estimated the direct recall cost of the fire-prone model at $2.3bn. 

The South Korean company said on Friday it would now concentrate on expanding sales of its flagship Galaxy S7 line of smartphones, enhancing product safety and overhauling its quality assurance processes. 

Samsung expects the Note 7 withdrawal to erode its operating profit by about Won2.5tn in the fourth quarter of this year and by about Won1tn in the first quarter of next year. 

“The negative fallout on earnings will be substantial as the Note 7 model contributes about 15 per cent of the company’s smartphone sales annually,” said Greg Roh, an analyst at HMC Securities. “Samsung will try hard to make up for the losses by boosting sales in other divisions such as semiconductors and displays.” 

On Wednesday the world’s largest smartphone maker cut its operating profit estimate for the July-September quarter by one-third to Won5.2tn, from guidance of Won7.8tn given earlier this month. 

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The company has also begun the task of trying to regain consumer confidence, stepping up promotional efforts for its smartphones, including financial incentives of Won100,000 for domestic customers who exchange the $880 Note 7 phones for other Samsung models. 

However, analysts said it would be difficult for Samsung to avoid a substantial loss in market share in the coming quarters, with its next model, the Galaxy S8, due to launch in March 2017. 

“Domestic consumers may stick to Samsung phones but many overseas customers won’t,” said Mr Roh. “Many Samsung customers will likely shift to Apple’s iPhone7 while Chinese customers will probably opt for local phones.” 

However, Mr Roh said investors should not underestimate Samsung’s fundamentals, given its diverse business portfolio including the booming memory chip and OLED panel businesses. “That’s why Samsung is different from Nokia,” he noted. “But the company should never sacrifice quality and safety for the sake of speed.” 

Shares in Samsung have begun to recover after sliding 10 per cent over the first three days of this week. They were up 0.5 per cent on Friday morning, after gaining 1.4 per cent on Thursday.

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