Samsung’s recall of millions of Note 7 smartphones isn’t going to be cheap. The South Korean company may spend as much as $1 billion, after deciding to replace all of the 2.5 million Note 7 phones that were shipped since they went on sale two weeks ago, according to estimates compiled by Bloomberg.
The estimated cost to return each handset has been calculated at around $900 plus the profit that Samsung would have made. Koh Dong Jin, the head of Samsung’s smartphone business, said at a press conference in Seoul on Friday that this was a “heartbreaking amount.’’ Estimates from Credit Suisse Group AG, Daishin Securities Co. and Pelham Smithers Associates put the recall’s cost at around $1 billion or less.
Still, the estimated impact only represents less than 5 percent of Samsung’s projected net income of 23 trillion won ($20.6 billion) this year. And it’s unclear whether part of the cost, if any, will be shouldered by Samsung SDI Co, the company’s affiliated battery manufacturer. While Samsung hasn’t said who supplied the Note 7’s batteries, the battery company will probably also bear some of the cost of the recall. Samsung SDI supplied 70 percent of the batteries to Samsung.
Even if Samsung increased its production output by 20 percent, the company is now very unlikely to be able to meet consumer demand and replace all of its 2.5 million units in a timely fashion, leading to constricted supply. If Samsung’s Galaxy Note 7 misses its sales target as a result, there will be large knock on effects for Samsung’s battery, display and semiconductor businesses, which all supply components for the handset.
The timing of the fiasco is another aspect of increasing stress for the company, since Apple is about to launch it’s flagship. Samsung has been on a roll this year selling smartphones like hot pancakes. In the top segment, S7 has done a fabulous job financially and has been widely acclaimed. While, the J Series and A Series have been highly successful in capturing low and mid segment in developing countries.
Many analysts though have been more optimistic and believe that the hit will be short termed because of Note 7’s technical superiority, Samsung’s wide portfolio and S7’s ability to act as a backup.
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