Initial Note 7 costs have already wiped out Samsung’s entire mobile business profits

Samsung has slashed $2.3B from its Q3 profit projections to allow for Note 7 recall costs, effectively wiping out the entire profits of its mobile business for the quarter, reports the WSJ.

Lee Seung-woo, an analyst at IBK Securities in Seoul, said he was now expecting the company to report a small operating loss in the third quarter for Samsung’s mobile division. If so, that would mark that business unit’s first quarterly loss stretching back to before its first Note series phone was released in 2011.

Samsung last week said that it expected profits to rise despite the first Note 7 recall, but it was at that time expecting most owners to swap the original for a replacement device. Its new numbers are claimed to reflect the complete loss of those sales, but that claim seems optimistic at best …

The company has chosen its words carefully, stating that ‘the expected direct cost of the discontinuation of the Galaxy Note 7 has been reflected’ (our emphasis).

Analysts already estimate that the true all-in costs of the recall expenses and lost sales are likely to be in the $4-5B range – around double Samsung’s figure. But even that doesn’t factor in two huge aspects of the long-term hit: the reputational damage, and lost future sales from customers now forced to switch to competitor devices who may stick with their new brand through future upgrades.

Right now, it appears the company doesn’t even know what caused the fires in the replacement devices. The NYT says that Samsung has yet to identify the problem despite assigning hundreds of employees to the investigation.

Samsung’s share price has fallen 10% in the past three days, a loss of $21B in market value, notes Bloomberg.

“It’s the biggest crisis for Samsung Electronics,” said Huh Nam Kwon, chief investment officer at Shinyoung Asset Management, which held more than 300,000 shares in the company according to filings compiled by Bloomberg. “It’s not because of its physical losses, but because the issue has been a blow to the company’s brand.”

It’s being widely speculated that Samsung will drop the tarnished Note brand altogether, the Korea Herald noting that negative perceptions have risen dramatically even in the company’s loyal home market.

Speculations are high that Samsung Electronics may discard the Note brand, as the company’s brand reputation has suffered serious damage from the Galaxy Note 7 explosions and the consequent pullout […]

Negative perception of the phone rose to 53 percent in October from 34 percent in August when the phone was first rolled out. Positive perception has dropped to 42 percent from 62 percent during the same period, according to the institute, citing local solutions firm Konan Technology which analyzes social network services.

It is, however, expected to retain the Galaxy branding, as the costs of establishing a replacement brand would be too high.

Photo: Associated Press