October 13, 2016    6 minute read

Samsung: It’s Time To Take Note

Breaking Down The Crisis    October 13, 2016    6 minute read

Samsung: It’s Time To Take Note

The past year or so has seen its fair share of corporate fiascos – Volkswagen’s Dieselgate, Tesla’s autopilot crash, Chipotle’s E. coli outbreaks and most recently the Samsung recall which just culminated in the Korean giant abandoning the Note 7 line of phablets altogether.

In fact, in a recently held Market Mogul weekly debate which polled readers to find out what they thought was the biggest mishap in the recent past, Samsung came in first with close to 49% of the votes. VW was a close second with 42% of the pie.

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Note 7 Recalls

Volkswagen’s deception might have cost the German automobile giant over $15bn, but it’s the Note 7 recall that might have had a bigger dent regarding legacy. The original recall and the eventual decision to scrap the device altogether could cost the company close to $2.3bn, resulting in the quarterly profit estimate getting slashed by a third. This immediate impact notwithstanding, the brand could easily suffer more than five times that number, assuming a lifecycle of just over a year before the launch of the next iteration.

The chart that follows gives a break up of the Note 7 incidents that were reported in the US.

US_Reported_Incidents_Involving_The_Galaxy_Note_7_No._Of_Incidents_TMMChart

The 173 incidents in total might seem like a drop in the ocean when compared with the 2.5 million units that were recalled, but no one wants to carry a safety hazard with them in their pockets or sleep in proximity to one. The Federal Aviation Administration (FAA) for this very reason admonished passengers by asking them to refrain from using it while onboard an aircraft.

When a replacement Note 7 exploded aboard Southwest Airlines flight 944, the Seoul-based company threw in the towel. The gravity of the situation can be gauged based on the necessity to have the returns shipped in fireproof boxes.

Origins Of The Disaster

Samsung announced the first device in the Galaxy Note series back in 2011 and in the process, created a new product category – the phablet. It was greeted with curiosity and scepticism, but it did not take long for the large screen size to catch on and become a hot selling point. Samsung ought to have felt vindicated when Apple caved in and launched a phablet of their own – the iPhone 6 Plus – in order to not miss out on this craze.

Samsung thus has had the first mover advantage and was never on the back foot. It was hence uncharacteristic and desperate of them to rush the Note 7 just because the impending iPhone 7 devices were only slightly better than their predecessors thus setting off a chain of explosions – literally and figuratively.

Leadership Structure

For over a year now, hedge fund manager Paul Singer of Elliott Management has been going at it with the Lee family – the most powerful family in South Korea with undisputed hegemony over the Samsung Group.

He has lost on three separate occasions in the past, but with Samsung Electronics (part of the Samsung Group and the maker of Note 7) currently reeling, Elliott might have found their best opportunity ever to shake up things, this time at Samsung Electronics.

The activist investors are proposing to have the company restructured by splitting it into two and listing it on the Nasdaq Stock Market, among other things.

Lee Kun-hee has been at the helm of Samsung since 1987 succeeding his father, Lee Byung-Chul. Mr Lee has faced allegations of tax evasion and corruption. His son Lee Jae-Yong is the vice-chairman of Samsung Electronics and next in line to take the reins. His two daughters also hold pivotal roles within the conglomerate.

This is a clear indication of the family’s clout over the company, and the possibility of nepotism notwithstanding, the company could do with fresh blood occupying leadership positions. The company at best has been sauntering over the past few quarters, and the latest fiasco is the exclamation point.

Is A Recovery Imminent?

In the short term, the battery incident might be a setback, but there is no reason for this to have a lasting impact on Samsung’s legacy if the situation is handled with aplomb. It is going to take a lion-hearted effort to win back lost customers, who very well might have bolted to other manufacturers including Apple’s and Google’s flagship devices among others. The major US carriers offering non-Samsung devices in exchange for Note 7, portends a bad omen for Samsung.

Samsung does have a very strong brand and has been at the apex of the Android smartphone space for over five years now. If the right balance is struck regarding the costs that future incentives, advertising and marketing expenses will entail such that it does not affect the earnings power of the company, there is no reason for Samsung to not make a successful recovery.

Challenges in the form of the smartphone space being in a constant state of flux should not be neglected. History is littered with successful corporate turnaround tales and Samsung need not look any further than its nemesis Apple’s rise from the ashes in the mid-90s.

The Next Go-To Android Phone

The iPhone has a dedicated and sticky consumer base. That leaves the non-Apple manufacturers to battle it out for Android supremacy, over which Samsung has had a stranglehold. The latest crisis, however, might have offered a backdoor entry to a bunch of potential contenders, none more so than Google.

In that sense, Google’s Pixel line of smartphones could not have been timelier. Google has complete control over both the hardware and software when it comes to Pixel and Pixel XL.

The phones not only have enviable hardware specifications but also are assured of having the latest Android releases onboard. Nexus was also an attempt at such an ascendency by Google, but the device did not enjoy a commensurate amount of success.

What gives Pixel the advantage is that they are competing against a wounded Samsung. Only time will tell if Google successfully eats into Samsung’s market share. They, however, have not had a better shot at doing so thus far.

Conclusion

As current Chicago Mayor and former White House Chief of Staff Rahm Emanuel said – “Never let a good crisis go to waste.” It is a certainty that the crisis that has beset Samsung is not going down the drain worthless.

What is left to be seen is who capitalises out of it? It could be Samsung, if they use this as an excuse to revamp their leadership structure and come out of it stronger, more efficient and devoid of red tape, failing which, one could very well see a new leader among Android smartphone manufacturers.

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