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Samsung to Halt Note 7 Output as New Phone Fires Are Probed

Oct. 10, 2016
After reports of exploding batteries, and at least five new incidents under investigation in the U.S., Samsung has halted production of  Note 7 smartphones. 

Samsung Electronics Co. halted production of its Note 7 smartphones after customers reported problems with devices manufactured since the company issued a worldwide recall amid reports of exploding batteries -- including at least five new incidents under investigation in the U.S.

Samsung temporarily suspended production of its most expensive phone, a person with direct knowledge of the matter said on Oct. 10, asking not to be identified because the decision isn’t public. The move came as wireless carriers including AT&T Inc., T-Mobile US Inc., Verizon Communications Inc. and Australia’s Telstra Corp. stopped selling Note 7s following reports of problems with devices thought to be safe.

The South Korean company has been engulfed in controversy after the high-end smartphone hit the market two months ago and customers began posting videos of charred and damaged handsets. Samsung quickly issued a recall and began working with officials worldwide to replace the original shipment of 2.5 million phones. But customers have since said that replacement Note 7s and models with supposedly safe batteries were overheating and catching fire, fueling concerns Samsung hasn’t solved the battery problems after all.

In Farmington, Minn., for example, 13-year-old Abby Zuis was in a school foyer on Oct. 9 holding her replaced Note 7 when she saw the device was burning, said her father Andrew Zuis. Abby dropped the phone, which was extinguished after the school principal kicked it out the school door into a puddle, Zuis said in an interview.

The family had exchanged the phone at a Verizon store in the Mall of America on Sept 21, Zuis said. "It was a new phone, a new charger -- supposed to be a safe phone," Zuis said.

Zuis said Samsung needs to recall the phones. "You’ve got a ticking time bomb. You don’t know when it’s going to go off, or if it’s going to go off," he said.

Bryan Ma, vice president of devices research for IDC, called it “an ongoing nightmare.”

"You would have hoped that they could have gotten past this already and moved on," Ma said. "Clearly, it keeps coming back.”

CPSC Investigation

The U.S. Consumer Product Safety Commission is looking into five new overheating or fire events, agency spokesman Scott Wolfson said Oct. 10. They include two in Kentucky and one each in Texas and Virginia as well as the one in Minnesota.

The agency had negotiated a voluntary recall of 1 million of the devices Sept. 15, saying at the time the company assured it had a safe battery source. But the consumer commission expanded its evaluation after a Note 7 overheated and scorched the carpet aboard a Southwest Airlines Co. plane on Oct. 5 in Louisville, Ky. The owner of that phone said it was a replacement model.

Leadership Challenge

The crisis has strained Samsung’s leadership just as it’s in the midst of a challenging transition. Lee Kun-Hee, chairman of both the electronics unit and the broader Samsung Group, suffered a heart attack in 2014 and hasn’t been back to the business since. His son, Jay Y. Lee, is heir apparent, but hasn’t taken his father’s title because Korean culture precludes such a move while the elder Lee is alive. The phone unit is run by D.J. Koh, who took over last December.

Verizon joined T-Mobile and AT&T Inc. in halting sales of the device and no longer replacing Note 7s with the same model in the U.S. over safety concerns.

“While the investigation is underway, Verizon is suspending the exchange of replacementNote 7 smartphones. Any Verizon customer concerned about the safety of their replacement Note 7 smartphone may take it back to the original point of purchase to exchange it for another smartphone,” Verizon spokeswoman Kelly Crummey wrote in an e-mail.

Sales Halted

AT&T was the first U.S. carrier to halt Note 7 sales after the company started weighing its options Friday.

“Based on recent reports, we’re no longer exchanging new Note 7s at this time, pending further investigation of these reported incidents,” AT&T spokesman Fletcher Cook said on Oct. 9.  With the carriers suspending Note sales Samsung announced it was taking a time out of sorts on the production side.

"We are temporarily adjusting the Galaxy Note 7 production schedule in order to take further steps to ensure quality and safety matters," Suwon-based Samsung said in a statement Monday, without elaborating. The company said it will take immediate steps approved by the U.S. Consumer Product Safety Commission if it finds a safety issue exists.

"It’s meaningless to continue producing the Note 7," Greg Roh, analyst at HMC Investment Securities Co, said by phone. "It may not be able to sell the new Note 7s anyhow if the carriers are banning them for sale."

The production suspension raises questions about Samsung’s original investigation into the battery problems. The company said the issue stemmed from one supplier, which it had stopped using. “The question is, if they switched the supplier why is this problem still happening?” said Ma. “In other words, was it really a supplier issue or is there something else going on?”

The main battery supplier for the Note 7 was originally Samsung SDI Co., an affiliate 20 percent owned by Samsung Electronics, a person with knowledge of the matter said last month. “After extensive testing and as reported to multiple regulatory agencies, this issue is isolated to the battery cell from one supplier only,” the company said in a statement at the time. “All replacement Galaxy Note 7 devices will have batteries from other suppliers.”

Battery Suppliers

It shifted purchases to Amperex Technology Ltd., a unit of Japan’s TDK Corp., according to local media reports. Amperex did not respond to calls for comment.

AT&T is the third-biggest customer of the Korean company while T-Mobile’s parent is No. 4, according to estimates compiled by Bloomberg. Sprint Corp. said its exchange policy is unchanged while Verizon Communications Inc. said the phone is out of stock at its stores. Telstra, Australia’s biggest phone company, is offering alternative phones to customers as Samsung investigates the issue.

The latest imbroglio coincides with mounting pressure from investor Paul Elliott Singer, who this month advocated a break up of the complex Samsung empire. Singer’s Elliott Management Corp. -- through affiliates Blake Capital LLC and Potter Capital LLC -- proposed that Samsung separate into an operating company and a holding company, dual-list the former on a U.S. exchange, pay shareholders a special dividend of 30 trillion Korean won (US$27 billion) and improve governance by adding three independent board members.

IDC’s Ma said the production halt will deal another blow to a smartphone that had won strong reviews when it first came out in August. Bloomberg News reported last week that analysts had slashed their estimates of Note 7 shipments for the year by 38 percent to 8 million units. The forecasts may now fall further.

“They’ve invested so much in the product, which was supposed to be the product that helps turn the company around,” Ma said. “To their credit, it was doing really, really well. That’s why it’s such a shame it has developed the way it has.”

Some analysts said the Note 7 troubles could spill over to other Samsung businesses, including affiliates that make chips and displays. It could also affect Samsung’s other major smartphone line, the Galaxy.

"If Samsung Electronics continues to harm its brand image with Galaxy Note 7, this could affect the entire Galaxy S series in the long-term, which is a red light for high-tech electronic components businesses including semiconductors, and display devices,” said  Song Eun-jeong, analyst at HI Investment & Securities Co.

By Sohee Kim, Yoolim Lee and Alan Levin

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