Samsung cuts operating profit to W5.2 trillion on Note 7 losses

Finding out what went wrong is key to resolving current deadlock

By Lee Min-hyung

Samsung Electronics said Wednesday that it has revised down its preliminary operating profit for the third quarter to 5.2 trillion won ($4.63 billion) from 7.8 trillion won to reflect losses from the recall and production termination of its Galaxy Note 7 smartphone due to safety concerns.

Samsung estimates the losses from the Note 7 fiasco at 2.6 trillion won. It also adjusted its preliminary sales from 49 trillion won to 47 trillion won.

The revised operating profit marks a 29.63 percent fall from a year earlier and a 36.12 percent drop from the previous quarter.

“We’ve reflected all losses from the halt of Note 7 production in our third-quarter results,” a company official said.

The adjustment of earnings figures comes after it announced a quarterly earnings guidance last Friday.

Samsung Electronics announced late Tuesday that it would halt sales, production and replacements of the ill-fated Note 7 devices over growing safety concerns.

What went wrong?

Samsung is facing growing calls to put top priority on finding out the exact cause for the unconfirmed battery fires in the Note 7. Experts say this is the best scenario for the company to recover its tarnished brand image and regain customer trust for new models to come.

Earlier last month, the company said the fires stemmed from batteries. But as replacement Note 7s, equipped with what Samsung called “safe” batteries, were also reported catching fire, many media outlets raised the possibility that a battery fault may not be the key reason behind the manufacturing defect.

The company is conducting a joint investigation with a group of regulatory organizations in Korea, China and the United States. In particular, the company is working with the U.S. Consumer Product Safety Commission (CPSC) to investigate a recent incident in which a Note 7 handset caught fire on a U.S. plane.

“The CPSC is expected to unveil its findings over the Note 7 fires no later than this week, which will provide momentum to put an end to rumors swirling around the causes of the fires,” said a mobile industry source, asking not to be named.

Samsung Electronics, for its part, is fully cooperating with the investigation by the CPSC to ensure customer safety.

In a recent statement, the company said: “We are working with the CPSC to investigate the recently reported cases involving the Galaxy Note 7,” adding that the company will spare no efforts in cooperating fully with the U.S. agency, carriers and retail partners to take necessary steps to resolve the situation.

The Korea Agency for Technology and Standards (KATS), a state-run agency to supervise product safety, also stressed that finding the cause of the fires was key to resolving the matter. KATS said it will swiftly finalize the process by holding discussions with industry experts experienced in accident investigations.

Compensation measures

Buyers of the Note 7s will be given refunds or different models as of Thursday in Korea, with Samsung Electronics and mobile carriers offering a series of compensation options for customers.

Original or replacement Note 7 users can return their devices to the nation’s three mobile carriers until the end of the year. They can choose to either get a refund or exchange the device for another model SK Telecom, KT and LG Uplus said Wednesday.

They said customers who exchange the handset for other Samsung models ― including the Galaxy S7, S7 Edge and Note 5 ― will be able to receive a mobile gift certificate worth 30,000 won ($26.74). Note 7 users can also cancel their contracts without any cost or penalty, according to the carriers.

They are in internal talks over finalizing more detailed compensation measures for users who changed their mobile network carrier to another upon purchasing the Note 7. All three carriers are expected to announce their confirmed compensation plans no later than Thursday.

SK Telecom, the nation’s leading mobile carrier, said Note 7 users will be able to get a full refund without any penalty for breach of contract. The company also plans to notify customers of detailed compensation measures.

KT and LG Uplus also issued a statement saying they will notify each customer of any updates over the refund and exchange process.

The decision came after Samsung Electronics confirmed Tuesday that it would permanently stop producing and selling the Note 7s globally, citing safety concerns over its battery fires.

“We apologize for inconveniencing customers and partners who supported the Note 7,” the company said in an earlier statement, adding that the company recommends Note 7 users visit retail stores after making sure that they have enough different models in stock.

The decision to scrap production comes 54 days after the device debuted with much fanfare in New York in mid-August. The 5.7-inch Android handset had gained a favorable market response with some state-of-the-art functionalities ― such as an iris scanner and improved security backed by its latest version of the Knox mobile security system.

But it soon began to lose its luster over reports that the device overheated due to unconfirmed manufacturing defects.

Amid the snowballing controversy, Samsung Electronics last month decided to recall 2.5 million Note 7s already sold in 10 countries.

But with replacement Note 7s mired in a similar scandal, the company terminated sales and production for good, Tuesday.