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Business

Samsung cuts profit goal amid Note 7 crisis

Samsung's Q3 profit is likely to plunge by more than a third as the Korean tech giant is facing massive costs from the sales halt of its flagship Note 7 smartphone and the damage the crisis has done to its image.

Samsung shares suffered another bout of selling on Wednesday afterthe Korean company had announced it would scrap the troubled flagship Galaxy Note 7, sending its share price down 10 percent so far this week.

The sell-off further accelerated on the news that the tech giant slashed its third-quarter profit estimate by 33.3 percent, citing fallout from the Note 7 crisis - commonly referred to as Batterygate.

In a note to investors Wednesday, Samsung filed a revised operating profit estimate of 5.2 trillion won ($4.6 billion, 4.1 billion euros), compared to the 7.8 trillion won it announced just last week. The company also slashed its sales estimate for the quarter by four percent to 47 trillion won from 49 trillion won.

The revised earnings estimate came after the firm announced Tuesday it was scrapping production of the Note 7, halting future global sales and advising all customers to cease using the device immediately.

Mounting losses

In September, Samsung launched a global recall of 2.5 million Galaxy Note 7 smartphones after reports that several devices exploded or caught fire. It said a subtle manufacturing error in the batteries made the phones prone to catch fire, and offered to replace the devices. Some replacement phones, however, also started to combust.

The world's top-selling smartphone company is now awaiting the results of probes by US and Korean safety regulators. But some analysts believe Samsung may have to scrap the Note 7 altogether and move on to successor models to limit the financial and reputational damage.

"In the worst case scenario, the US could conclude the product is fundamentally flawed and ban sales of the device," Song Myung-sub, an analyst at HI Investment Securities, told the news agency Reuters.

Industry analysts have estimated that this would translate into lost sales of up to 19 million phones that the firm was expected to generate during the Note 7's product cycle - equating to nearly $17 billion in lost revenue. Samsung initially thought it would lose $5 billion in missed sales and recall costs under the assumption that it resumed sales in the fourth quarter.

USA Samsung Galaxy Note 7 geht in Flammen auf (picture-alliance/AP Photo/A. McAvoy)

Samsung received 92 reports of batteries overheating in the US, including 26 reports of burns and 55 reports of property damage. At least two consumers want to take the comapny to US courts, claiming compensation.

Edward Syder, managing director of Charter Equity Research, thinks that the crisis has "probably killed the Note 7 brand name."

"By the time they fix the problem they have to go through recertification and requalification, and by the time that happens, they're going up against the [Galaxy] S8 launch," he told Reuters.

Regaining consumer trust

Samsung is reported to launch its next high-end smartphone, the Galaxy S8, in late winter or early spring. Jan Dawson, a tech industry analyst with Jackdaw Research, thinks the new gadget is crucial for Samsung to win back consumers' trust.

"They have that time to come up with a convincing story and a set of actions that will reassure customers that when they buy an S8, it's going to be safe," Dawson told the news agency AP.

And SK Securities analyst Kim Young Woo told the same news agency that the company might chose to accelerate the launch of the S8 to make up for abandoning the Note 7. But it could not afford to start from scratch, and needed to find the cause of the overheating, he added.

Samsung sold more than 77 million phones in the second quarter of 2016. But in the prized US market it was lagging behind Apple, whose iPhone models are more popular, according to industry data.

IDC analyst Ryan Reith said Batterygate was a "big setback" for the company but wouldn't do a lot of damage to its overall share of the market. But he warned that Samsungs profit would continue to suffer because it would need to offer substantial discounts and other promotions to boost sales of its models in future.

uhe/jd (AP, Reuters, AFP)

 

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