Samsung Note 7 recall could hurt brand, or not

U.S. consumer product safety agency is working with Samsung over formal recall

Samsung's recall of Galaxy Note 7 smartphones over reports that dozens caught fire might have a lasting impact on the company's image.

Or not, depending on which analyst you ask.

"What more can a vendor do than a complete recall?" asked Patrick Moorhead, an analyst at Moor Insights & Research. "This is exactly what Samsung did. All I'd say is that that they could have sent out the 'power down' message a few days earlier and maybe sent that through the carrier text network like a weather alert."

In fact, Samsung issued a global recall of Note 7s on Sept. 2. From the start, however, there was confusion about whether that recall meant users should immediately stop using the smartphones or charging them, since the fires were traced to problems with lithium ion batteries. About 2.5 million Note 7s were reportedly sold at the time of the Samsung recall, with 35 initial reports of fires.

About a week later, on Sept. 10, Samsung updated its advice and urged Note 7 users in the U.S. to "power down" the device and "exchange it now."

Samsung said consumers should visit the store where they purchased the device to obtain a replacement Note 7, pending approval of the replacement device by the U.S. Consumer Product Safety Commission (CPSC). Samsung listed phone numbers and emails for five U.S. carriers to make the exchanges. Customers could also receive a Galaxy S7 or Galaxy S7 Edge as a replacement, Samsung said.

As of Wednesday, there was no formal CPSC recall for the U.S. or a CPSC approval of a replacement device. A software upgrade to lessen the power that could be charged to a Note 7 in use in South Korea also hadn't been approved for use in the U.S.

A statement from the CPSC, dated Sept. 9, said the agency was "working cooperatively" with Samsung to formally announce an official recall.

The CPSC requires a company to notify the agency of a recall within 24 hours of discovering a serious defect. The CPSC has made no comment about whether there will be any enforcement action against Samsung, nor has it commented on how long Samsung took to inform the CPSC of the defect.

There are some reports and tweets of Note 7 customers not being able to make exchanges as recommended, but some analysts said there didn't seem to be a tremendous backlash for how Samsung was handling the problem.

"I think the damage to Samsung will be short term," said Jack Gold, an analyst at J. Gold Associates. "Samsung has been giving out some statements and instructions to consumers. The actual number of Samsung devices overheating is fairly small. That's not to say that Samsung shouldn't fix the problem as quickly as they can and recall all the affected devices. But I don't think this will have long-term negative consequences for Samsung as a brand as long as they keep making phones that people want to buy."

Jack Narcotta, an analyst at Technology Business Research, said Samsung is "addressing the problem with speed, [which] speaks to the magnitude of the problem within Samsung and how important it knows this situation is to its brand."

Difficulties with replacement devices and attaining an official recall with the CPSC "has piled on some additional pain for Samsung," Narcotta added. "Samsung's mobile business was on the rebound. and this Note 7 problem will surely squelch some of the momentum."

Narcotta said the recall and the subsequent fallout is unlikely to influence Samsung's current or upcoming market share, which puts it at No. 1 globally in shipments and No. 2 behind Apple in the U.S. The Note 7 accounts for only 10% of Samsung's total smartphones shipped, behind the Galaxy S7 or Galaxy S6. "However, I think the ripple effect on future purchases will be significant and visible in shipment totals in fourth quarter 2016 and first quarter 2017," he added.

Narcotta said the negative press from battery fires appears to be specific to only the Note 7. "But as bad news travels fast, and gets distorted along the way, I'd expect the Galaxy S smartphones to be affected as well."

Overall, Narcotta added, "Samsung is not in a great situation. Huawei is charging hard. China is a huge battleground in all price bands, not just premium bands that Samsung covets. India is rife with strong, fast competitors."

One analyst was especially hard on Samsung over the way it has handled the Note 7 battery fires and recall.

"Samsung's battery-gate is one of the biggest problems the company has ever faced," said Jeff Kagan, an independent analyst. "I think it is very significant and potentially devastating to their smartphone business. ... Things will get worse if users start to get injured."

Kagan questioned how Samsung didn't know the problem existed before the phone was released. "What about testing? Apparently Samsung did not test well enough before the release. Samsung shot themselves in the foot. There will be real damage to the Samsung brand."

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