Did Samsung err with the Galaxy Note 7 recall?

Recalling 2.5 million handsets is the best decision a leader can make, argues an outlier. Consensus and evidence says it is the worst

The Galaxy Note 7 recall wiped off $14.3 billion Samsung Electronics’ market capitalization. Photo: Reuters
The Galaxy Note 7 recall wiped off $14.3 billion Samsung Electronics’ market capitalization. Photo: Reuters

Samsung first earned a reputation—that of a giant killer. But did it just make a tactical blunder in recalling 2.5 million Galaxy Note 7 handsets? A lot many people were hoping this would be the final nail in Apple’s iPhone coffin.

Manufactured by Samsung Electronics, a subsidiary of the conglomerate that is Samsung, the company suspended sales after 35 cases were reported that the device is a combustible one. Literally. And ordered a recall. Early estimates compiled by Bloomberg suggest it will spend as much as $1 billion in the process. The president of the smartphone business called it a “heartbreaking amount”. Is it? Yes. Because soon after the announcement, $14.3 billion got wiped off Samsung Electronics’ market capitalization. This, after it had fought hard to earn a reputation as the “go-to place” for quality and innovation.

To understand the issues, I reached out to a few veterans—including the head of a leading handset manufacturer; another who has been through a similar situation; two CEOs of multinational companies; the founder of a creative agency; and Harsh Mariwala, chairman of Marico Ltd, who repositioned an edible oil company he inherited as one committed to quality and health.

Everyone declined to comment formally. Except Mariwala. Perhaps, because he is an outlier. He reckons that after all settles down, customers will look at Samsung afresh.

“So long as the impact on the profit and loss statement is negligible, I would think of the $1 billion spent as a good investment,” he said.

Samsung’s stated position on the recall is that it was in the larger consumer interest. Mariwala says as a matter of principle it is what he would do as well if Marico were to face a situation like this. Not everybody sees it that way. Instead, they ask, was that the only solution on hand?

All evidence suggests it was hasty. Samsung Electronics got to be the world’s largest handset brand with a market share in excess of 21%. It had overtaken the formidable Apple. The Galaxy Note 7 would have shut all those up as well who had argued Samsung got to be No. 1 on the back of low-end phones. Because this device was positioned to be the high-end iPhone killer.

Even if looked at that way, Mariwala maintains this move will pay Samsung rich dividends. “When you reach the top, you are under intense scrutiny and pressure. Any and every setback will be used against you. It requires a lot of guts to take a call like this and a hit. But when you make a comeback, your position is cemented for a long time because consumer confidence in your brand is reinforced that you are committed to do what is right for them,” he said.

In off-the-record conversations, everybody concedes that there is merit in Mariwala’s arguments. But they maintain it need not have come to this. Various reasons exist in their minds why.

Reason No. 1: The most pertinent one is that Samsung in South Korea was always close to the power centre. One-fifth of the country’s exports are now accounted for by this giant. This gives the conglomerate enormous clout there and it doesn’t shy away from using it. It shows in various ways, they argue. For instance, in 2009, when Samsung’s former chairman Lee Kun-hee was found guilty of embezzlement and tax evasion to the extent of $3.8 billion, he was given a presidential pardon. It created a furore. A quiet burial of the scandal followed. From that perspective, Samsung, they argue, is actually a behemoth with not just money, but political patronage as well.

The CEO of a multinational speaking off the record told me situations like this aren’t peculiar to South Korea. It is one they deal with in India often times. Right now, a clutch of them have banded to form a coalition against an entity that has got the attention of the masses. It too enjoys political patronage, but its actions are being misread by industry observers as “guerrilla warfare”. This is unacceptable and it is only inevitable it will attract a coalition fire. His larger point is, when a crisis of this kind hits, conglomerates like Samsung may have the muscle on home turf—but they are lost in the global ecosystem.

Reason No. 2: Cellular phones have exploded forever—from Nokia to the most recent iPhone 7. It’s got to do with the lithium-ion batteries that power these devices. That said, overall failure rates of lithium-ion batteries are extremely low at around 1 in 10 million. Nearly a billion consumer electronic devices are powered by these batteries. That means the actual number of incidents reported annually do not exceed 600.

Apple, under the genius of Steve Jobs, knew this. And that all technologies get commoditized and copied. So, he positioned the iPhone as a design feat. Everybody builds touch-screen phones now. But Apple is seen as iconic. When iPhones explode, Apple “delights” customers with a “no questions asked replacement policy” for anything defective that emerges from Apple. The problem begins when you try to out-Apple at being Apple and throw money.

Samsung critics and technology analysts I spoke to independently think there is desperation in the company. They point to numbers which suggest that. Back in 2013, it spent $14 billion on marketing and promotion. As against this, Apple spent $1 billion. While these efforts have paid off and Samsung is now the world’s largest handset manufacturer, Forbes magazine ranks Apple as the world’s most valuable brand and worth $154 billion. But Samsung stands at No. 11 and is computed to be worth just $36 billion. Subtract from this the erosion in brand value of one of its subsidiaries after the current episode.

Then there is research and development (R&D) on which Samsung spent close to $14 billion last year. Apple spent $6 billion. But where is all of Samsung’s money going, critics ask? Samsung churns out the second highest number of patents in the world after International Business Machines. But what industry has Samsung visibly upended in the consumer’s eyes?

A New York Times article on Apple put it succinctly: “The impact has been not only economic but also cultural. Apple’s innovations have set off an entire rethinking of how humans interact with machines.”

This is not to suggest Apple does not have its share of problems. Apple is staring at a crisis as well. Margins in the hardware business are shrinking. Software and the cloud is where the future lies. To make money there, Apple will have to morph into a different entity. CEO Tim Cook is worried about that—not hardware and handsets. He has Google to worry about as well.

Did the story have to be like this? Samsung has a lot going right. It cottoned on to the Internet of Things space early, where everyday objects are connected and can talk to each other. It is acquiring start-ups in the space even as it pours money into R&D. But minus a brand strategy, what chance does Samsung have?

Back to that veteran Harsh Mariwala. As he sees it, all of this doesn’t matter. To the consumer, what sticks is whether or not the company delivered on a promise.

Read an unabridged version on www.foundingfuel.com.

Charles Assisi is co-founder and director, Founding Fuel.

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