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Note Debacle Will Cost Samsung $5.3 Billion In Profit

There are many ways to quantify the costs of an error — with the massive failure of the Galaxy Note this week, Samsung will likely be learning about several of them.

The monetary costs alone will be pretty impressive — Samsung has confirmed that it expects to take a $3 billion hit to its operating profit over the next two quarters due to the discontinuation of the Note, following an apparently intractable issue with spontaneous combustion.  The total losses are estimated to be in the $5.3 billion range — with a $2.3 billion hit to third-quarter profit soon to be visible.

Samsung shares have fallen off another 8 percent this week but did manage to pick up a little in early trading today in some global markets. To account for some of the lost funds, Samsung has announced efforts to scale up the sale of  Galaxy S7 and S7 edge phones. The electronics maker has also announced a plan for “significant changes” in its quality assurance processes to improve product safety.

Those, however, are just the monetary costs — there are also the reputational costs associated with such a massive and public product failure.

“The sales impact on other models remains unclear,” said Kim Sung-soo, a fund manager at LS Asset Management, which owns Samsung Electronics shares.

“The end of the premium model will damage Samsung’s brand, and hurt demand for its other models. It is difficult to measure such impact. What’s important is whether the flagship S7 can fill the gap left by the Note 7, and how much trust Samsung can regain from consumers by the time the S8 comes out,” he said. Analysts expect the S8 to be released in the first quarter.

Samsung posted earnings of $7.2 billion in the second quarter, with mobile profits — its biggest earner — soaring 57 percent.

 

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