Samsung – Limited fallout.

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A fast and efficient recall results in no lasting harm. 

• Samsung has taken the prudent decision to recall the Galaxy Note 7 following a series of fires almost certainly caused by manufacturing faults with the battery.
• RFM research indicates that this will affect approximately 2.5m devices which I estimate cost Samsung approximately $1bn to produce.
• I suspect that the cost of this will almost certainly be borne by the suppliers of the batteries for this product which are Samsung SDI (Samsung owns 20%) and Chinese supplier Amperex.
• Assuming that Samsung SDI supplied 70% of the batteries, then the total financial hit to Samsung is likely to be around $140m that will be felt through lower profit in the associates line of the profit and loss account.
• This will leave barely ripple in the accounts but the reputational damage to Samsung’s brand could be meaningful.
• Samsung is the pre-eminent Android vendor with by far the strongest brand and a reputation for producing high quality devices.
• Furthermore, the timing could not be worse with Apple due to launch a range of new products including the iPhone 7 in two days’ time.
• This is why the speed with which Samsung puts this issue to bed is of paramount importance.
• Samsung has already taken the decision to offer consumers to replace their devices with a Galaxy s7 or s7 edge which will speed replacement as these devices are already in stock.
• Where there is a difference in price, I suspect that Samsung will be more than generous to its users.
• Samsung has acted quickly and decisively to deal with its problems in the past and I see this situation as no different.
• Consequently, I think the next few weeks will be difficult with bad press and new Apple products, but as long as Samsung executes the recall quickly and diligently, I see no lasting harm.
• I am confident that it will do exactly that.
• Hence, I remain unconcerned with neither Samsung’s market share in Android nor its profitability in the short term as it remains in the middle of a healthy replacement cycle (see here).
• I see no material change to Samsung estimates in the short-term which leads me to remain positive on Samsung up to a share price of KRW1.8m, some 13% above where it is now.
• Samsung remains alongside Microsoft and Baidu my top choices for the balance of this year.