Samsung Shaken by Galaxy Woes -- WSJ

By Jonathan Cheng and Eun-Young Jeong in Seoul and Georgia Wells in San Francisco 

Samsung Electronics Co.'s recall of one of its most advanced smartphones descended further into confusion, as the technology giant told consumers to stop using the Galaxy Note 7 and halted its production and distribution, while investigators probed reports of overheating batteries on devices that were supposed to be safe.

The company late on Monday U.S. time said it was asking all telecom carriers and retailers that sell the Note 7 globally to stop sales and exchanges of the device pending investigation into the latest incidents. Major U.S. carriers already had made that move on their own.

Consumers with either an original or a replacement Note 7 should power down and stop using the device, said Samsung.

The Samsung announcement came after the company suspended production of the Note 7, a decision that raised questions about Samsung's initial diagnosis of the problem, which attributed overheating batteries in some Note 7s to manufacturing issues at one of its suppliers. Samsung said last month that it stopped using batteries from that supplier.

The turn of events has shaken already-damaged confidence in the global recall of 2.5 million Note 7s that began more than a month ago, creating a headache for consumers, carriers and airlines worried that the smartphone's faulty batteries could cause smoke or fires in midflight.

Shares in Samsung Electronics fell by more than 7% in Seoul Tuesday.

Verizon Communications Inc. Chief Executive Lowell McAdam on Monday said the recall was "a major black eye" for Samsung. "This is by far the biggest concern I have seen in cellphones during my tenure," said the CEO -- a veteran of the wireless business since the 1980s -- at an industry conference in Menlo Park, Calif. "In my however many years in the market I have not seen a recall like this," Mr. McAdam said.

Samsung didn't immediately comment on Mr. McAdam's remarks. The company's statement Monday said "We remain committed to working diligently with appropriate regulatory authorities to take all necessary steps to resolve the situation."

Samsung's move Monday came after recent incidents in which owners reported problems with Note 7s that they said they had received as replacements as part of the recall. The U.S. Consumer Product Safety Commission was investigating a total of five such incidents, two in Kentucky and one each in Minnesota, Virginia and Texas. Authorities haven't confirmed that the incidents involve replacement versions of the Note 7.

CPSC Chairman Elliot Kaye late Monday endorsed the decision by Samsung and the U.S. carriers to halt distribution of the Note 7, and urged existing owners to take advantage of remedies available, including a full refund. "No one should have to be concerned their phone will endanger them, their family or their property," he said.

The muddled recall process has raised the prospect of lasting damage to Samsung's brand, which is competing for global market share with Apple Inc. and Huawei Technologies Co.

Matthew Quint, director of the Center on Global Brand Leadership at Columbia Business School, said that consumers might have let the initial glitch slide. "But a second time, you're definitely going to see some long-term impact."

Mr. McAdam said Verizon has seen some customers shift to competing products, but that he thinks Samsung will recover. "This is certainly helping Apple, but people aren't flocking away from Samsung," he said.

Samsung initially stumbled in the U.S. by not coordinating its initial recall announcement with the CPSC, earning it a public rebuke from the agency's leader last month.

The process seemed to have stabilized in recent weeks. Then on Friday, after reports of new incidents surfaced, major carriers said they had started to allow customers to get a second replacement for their Note 7s. On Sunday, Verizon, AT&T Inc. and T-Mobile US Inc. said they would stop issuing new Note 7s to replace those turned in by customers. Sprint Corp. followed suit on Monday.

Some U.S. airlines held internal meetings Monday on providing additional guidance to passengers to prevent the use of their phones, but decided to stay for now with existing guidance barring passengers from using or charging Note 7s on flights. Carriers said they would follow any new guidance from regulators.

If authorities determine that replacement Note 7s do indeed have the same battery problems that originally prompted concern, it would cast doubt on the entire recall so far.

"Trust factor is a very important one in recalls, and it is undermined every time a mistake is made," said Pamela Gilbert, a partner with Washington law firm Cuneo Gilbert & LaDuca LLP and a former executive director of the CPSC.

Samsung has attributed the battery problems to one of its battery suppliers. It hasn't named the supplier, but people familiar with the matter say it is Samsung SDI Co., an affiliate of the smartphone maker. Samsung SDI has declined to comment.

Samsung said on Sept. 2 that it immediately would stop sourcing its Note 7 batteries from the supplier, diverting orders to Amperex Technology Ltd., a unit of Japanese electronic-parts maker TDK Corp.

Samsung's short turnaround to produce replacement phones risked straining the other battery supplier, said Cho Jae-phil, director for the Future Batteries Research Center, which is overseen by Samsung SDI and South Korea's Ulsan National Institute of Science and Technology. "More quality issues can surface when you have a supplier trying to mass produce batteries in a short amount of time," Mr. Cho said.

Some battery experts and analysts said it is possible the Note 7's woes are the result of another component in the smartphone. In complex devices such as smartphones, "You can do 499 things right out of 500, but if you make that one error, that phone is going to be problematic," said Daniel Kim, a Seoul-based analyst for Macquarie.

Samsung declined to comment Monday on speculation about specific technical problems with the Galaxy Note 7 replacements.

--Trisha Thadani, John D. McKinnon and Doug Cameron contributed to this article.

Write to Jonathan Cheng at [e-mail] and Georgia Wells at [e-mail]

(END) Dow Jones Newswires

October 11, 2016 02:47 ET (06:47 GMT)

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