Samsung Halts Galaxy Note 7 Production Amid New Reports of Exploding Phones

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By Yoolim Lee and Sohee Kim | 10:48 am, October 10, 2016

Samsung Electronics Co. halted production of its Note 7 smartphones after customers reported problems with new devices, the latest blow in a six-week crisis over exploding phone batteries.

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

Customers have said that replacement Note 7s and models with supposedly safe batteries were overheating and catching fire, fueling concerns Samsung hasn’t solved the problem that led to its initial recall of 2.5 million units. The South Korean company has been engulfed in controversy since the device hit the market two months ago and customers began posting videos of charred and damaged handsets.

“It’s an ongoing nightmare,” said Bryan Ma, vice president of devices research for IDC. “You would have hoped that they could have gotten past this already and moved on. Clearly, it keeps coming back.”

Along with T-Mobile, AT&T Inc. halted sales of the device in the U.S. over safety concerns. “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 in an e-mailed statement Sunday.

“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.

Shares of Samsung fell 1.5 percent to 1,680,000 won in Seoul after closing at a record on Friday.

“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?”

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 ($27 billion) and improve governance by adding three independent board members.

Ma at IDC 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.”