It was the battery, after all. In a presentation and news conference on Monday that lasted more than two hours, Samsung Electronics Co. detailed the results of its investigation into Note 7 smartphones that overheated and burst into flames last year.
There were few surprises. While the company cited flaws in battery manufacturing and design for the fiasco, it took full legal responsibility and vowed never to let it happen again.
The crisis was a public relations fiasco for South Korea’s biggest company. Reports of people injured by exploding Note 7 phones raced around the web, and nervous airlines banned the gadget — and sometimes all Samsung devices — from their planes. The total cost of the recall was estimated to be more than $6 billion.
Most consumers have moved on, and Samsung is now engulfed in another crisis involving bribery, presidential influence-peddling and the heir of the conglomerate. Monday’s presentation is its final push to assure the public and investors that it acted responsibly, and put a lid on the episode.
“It was the battery — not the device itself, design of the phone or software — so the lingering doubt over Samsung’s other smartphones will be largely removed,” said Greg Roh, an analyst at HMC Investment Securities Co.
The battery in the initial batch of Note 7 phones was manufactured by an affiliate, Samsung SDI Co. Replacements made after a recall, which came from Amperex Technology Ltd., a unit of TDK Corp., were also faulty amid a quick ramp-up in production. After stumbling a second time, Samsung decided to end production and scrap the phone altogether.
Electrodes at a specific location within the first batteries came in touch with each other, causing a short circuit that in turn caused overheating and fires, D.J. Koh, head of Samsung’s mobile business, said at the news conference. The defects happened both during the design and manufacturing phase, he said.
For the second batch of batteries, a defect in another part of the unit triggered similar results. Samsung’s own investigation was backed up by UL LLC, Exponent Inc. and TÜV Rheinland Group, outside organizations hired to determine the cause of the faulty units. In total about 200,000 phones and 30,000 separate batteries were examined in an investigation that included 700 people.
“We provided the target for the battery specifications for the innovative Note 7, and we are taking responsibility for our failure to ultimately identify and verify the issues arising out of battery design and manufacturing,” Koh said. “We have taken several corrective actions to make sure this never happens again.”
With Samsung taking full legal responsibility for the recall, it isn’t likely that Samsung SDI and TDK will bear the total cost of the recall. Samsung SDI said in a statement that it has invested about 150 billion won ($129 million) in safety and that its batteries will probably be used in Samsung Electronics’ next smartphone model. A representative for Tokyo-based TDK didn’t immediately have a comment on the results of the investigation.
Investors have also mostly moved on. Samsung shares, which have been trading near record highs, were little changed on Monday following the presentation. The company will report earnings on Tuesday, which are projected to confirm a preliminary report showing that its business remains sound.
Samsung says it’s now focused on learning from its mistakes as it prepares to launch the next in its Galaxy S line. Koh said Samsung isn’t planning to unveil the S8 at the Mobile World Congress in Barcelona at the end of February, suggesting that the company is going to take its time to make sure the product isn’t prone to any defect or problems.
“Consumers will not tolerate even the tiniest problems in the S8, so that’s even the bigger challenge for Samsung now,” HMC’s Roh said. “The first month of the release will be important. If no problems detected during that one month, sales of the S8 could even surge.”
[Editor’s Note: Jason McNerlin, partner at Clyde & Co., provided some comments following the initial product recall, which Insurance Journal is reprinting here.
“This raises a red flag for products insurers. Lithium ion batteries have been highlighted in a number of recent issues affecting laptops and hoverboards through to Boeing 787s, and are now high on the agenda at the US Consumer Product Safety Commission (CPSC),” McNerlin said.
“Manufacturers of products that rely on these batteries need to be aware of the risks they face, and how to mitigate against them, as well as the terms and conditions of their insurance which may be invalidated if a recall is triggered prior to notifying the appropriate authorities,” he added.
“Recall expenses may be insured in various ways, such as mitigation expenses under liability policies and standalone product recall policies. Various triggers can be found, but some policies will not respond to design flaws, as may have may have been the case with the Galaxy Note 7,” he explained.
“If cover is triggered, there may be issues such as when the insured had first knowledge of the potential defect and whether notification was timely, and questions about the conduct of recalls,” McNerlin went on to say.
“It is not unusual to have consumer class actions alleging breach of warranty or personal injury. There have also been investor class actions alleging, for example, that company statements about risk, reserves and product controls were misleading and caused loss of share value. It is less common to see allegations a company’s handling of a recall has caused loss of share value, but this may also be a possibility. Whether products policies provide any relevant cover, such as defense costs, will depend on the claims and the policy concerned.”]
- U.S. Lawsuit Against Samsung Claims Injuries from Galaxy 7 Explosion
- Samsung Agrees to Replace 1 Million Galaxy Note 7 Smartphones in U.S.
- Samsung Recalls Its Galaxy Note 7 Smartphones on Faulty Batteries
- Samsung Blames Minor Battery Defect for Galaxy Note 7 Smartphone Recall
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