Samsung shocked the world in September last year when it suspended sales of its flagship smartphone Galaxy Note 7 as reports of exploding batteries threatened to damage the reputation of the South Korean technology giant. The fiasco hit Samsung hard, after a global recall of the Galaxy Note 7 cost the company an estimated $5.3 billion, according to South Korea's Yonhap news agency. But even though the odds were stacked against the smartphone manufacturer, Samsung is showing signs of making a stunning comeback.
With the release of Samsung’s next flagship, the Galaxy S8, which is set to be unveiled early this year, the world is watching to determine whether Samsung can turn the tide on its bad luck streak, or fall behind its fierce top competitors. Despite losing billions of dollars as a result of the Galaxy Note 7 fiasco, Samsung stunned the world by announcing on January 24, quarterly profits of 9.2 trillion won ($7.9 billion), up 50 percent from the previous year, to its highest level in three years.
How is that possible? The bump in Samsung’s earnings highlights the company’s ability to shrug off the financial battering it took from killing off the Galaxy Note 7. Samsung’s strength comes from its scale – not only in smartphones themselves, but also the components that make them work – components that other smartphone manufacturers require.
The majority of Samsung’s profits, according to a statement by the company, have come from selling components like semiconductors, memory chips and display screens. The likes of Oppo, LG and Dell all use Samsung parts in their phones, televisions, and laptops. Some Samsung products are even found in its top competitor Apple’s products. When Samsung was suffering from its embarrassing Galaxy Note 7 recall, ironically, it was still reigning in revenue derived from iPhone 7 sales.
Additionally, Samsung reported a 12 percent profit increase from sales of its other smartphones like the S7 which sold well. Canalys mobile phone analyst TuanAnh Nguyen said Samsung’s strength is that it’s “leading in terms of technology and controlling a fair amount of the supply chain.” For the full year 2016, Samsung said in a statement it had “achieved solid results despite the Note 7 discontinuation in the second half.”
But Samsung’s ability to dodge a bullet in terms of finance didn’t save its reputation being tainted when it became embroiled in a corruption scandal that resulted in South Korean President Geun-Hye’s impeachment. On 19 January, South Korean judges denied a request by prosecutors to arrest Lee-Jae-young, vice chairman of Samsung group and acting head of the company, over accusations of bribery, embezzlement and perjury.
Lee was accused of giving multimillion-dollar bribes to Choi Soon-sil, a close friend of the South Korean president, in exchange for approval of a 2015 merger between two Samsung group affiliates, Cheil Industries and Samsung C&T. The judge concluded that Lee’s arrest wasn’t necessary, saying “it is difficult to acknowledge the necessity and substantiality of an arrest at the current stage.”
However, South Korea’s president has since been impeached, and Lee is still walking on thin ice, as he could face another arrest warrant if prosecutors discover more evidence. Two other Samsung executives are said to be under investigation.
Samsung, although financially stable for now, has garnered a reputation for high-profile scandals. In 1996, Lee’s father and semi-retired chairman of Samsung group, Lee Kun-hee, was convicted of bribery and tax evasion, and breach of trust in 2009. He has never been arrested despite the convictions.
Some analysts suspect that the Lee family’s strong influence in South Korea – leading a company that makes up 23 percent of the country’s GDP – is the reason why the family’s scandals are short-lived. Their influence “leaves courts hesitant to prosecute Samsung executives for fear of hurting the economy,” says an Ars Technica report.
Still, Samsung maintains a strong position in the market and has made every move in its power to keep its customers loyal. To heal its reputation in the United States after the Galaxy Note 7 recall, Samsung issued apologies to the public by featuring full-page advertisements in prominent US newspapers such as the Wall Street Journal, New York Times and Washington Post, admitting that it had “fell short” on delivering its promises with the Galaxy Note 7.
Samsung has officially placed the blame on batteries used from a supplier, which is widely believed to be Samsung’s partner firm SDI. After the first reports of faulty Galaxy Note 7s, Samsung released replacement devices with batteries from a different firm, thought to be Chinese manufacturer ATL – but those devices also started to combust, so Samsung eventually decided to kill off the Galaxy Note 7 for good.
Aviation authorities around the world issued warnings about the Note 7, with airlines such as Emirates banning them from all flights. In the United States, as many as 1.9 million Galaxy Note 7s were sold that had to be recalled.
Samsung’s next flagship model, the Galaxy S8, was expected to be introduced at Mobile World Congress this year in Barcelona, but Samsung has decided not to go ahead with the plans, in order to ensure that it has no safety issues.
The smartphone maker said it deployed around 700 researchers and engineers on its investigation into the cause of the exploding Galaxy Note 7s, testing more than 200,000 fully assembled devices and more than 30,000 batteries. Samsung’s findings have been verified by independent investigators UL and Exponent.
According to Kevin White, principal scientist at Exponent, ‘Battery A’ had a design issue that pushed down the right corner of the battery, while ‘Battery B’ had defective welds. Koh Don-Jin, head of Samsung’s mobile business, has dismissed the possibility of suing its battery manufacturing partners, saying, “Whatever parts we use, the overall responsibility falls to us for failing to verify its safety and quality. At this point, I don’t think it’s right to seek legal action.”
A reported 1,000 different parts from some 450 suppliers were sourced for each Galaxy Note 7. In a statement, Samsung acknowledged that it provided the specifications for the batteries, saying: “We have taken several corrective actions to ensure this never happens again. The lessons of the past several months are now deeply reflected in our processes and in our culture.”
Whether or not Samsung can rise above its infamous Galaxy Note 7 fiasco is still yet to be determined. Even though the release of its highly anticipated Galaxy S8 smartphone has been delayed, Samsung recently announced a batch of cheaper, waterproof smartphones – three new versions of its Galaxy A smartphone, the low cost alternative to the Galaxy S line – marking the company’s first product release since the ill-fated Note 7.
What’s more, Samsung-loyalists have plenty to be excited about with the pending release of the S8. In a statement, Samsung said the device will enable users to order food or perform other tasks without going through a third-party application, simply by using the phone’s virtual assistant. Samsung acquired a company called Viv Labs Inc., a Silicon Valley start-up last year that launched the same entrepreneurs who sold Siri to Apple. This has allowed Samsung to venture its own digital assistant project.