Samsung’s 2016 went up in smoke
Samsung’s year started well, all things considered. The Galaxy S7 and S7 Edge were bona fide hits. The company’s financials looked great. Its position as the global leader in the smartphone market was assured. And then the Galaxy Note 7 happened. After months of success, Samsung’s year started to unravel — quickly.
In hindsight, it’s a little shocking how quickly the situation unfolded. The phone was officially announced on August 2nd, and it launched on August 19th to critical acclaim and commercial success. Toward the end of that month, the first report of a Note 7 explosion emerged from South Korea, triggering a cascade of similar reports from around the world. Samsung’s new phablet was not only flawed but also actively dangerous. After a week, Samsung halted Note 7 shipments to Korean consumers, and just days after that the company issued its first widespread Note 7 recall. As you probably remember, the US Consumer Product Safety Commission helped facilitate a recall in the US shortly after that, which should’ve been the end of it.
It wasn’t. Some of the supposedly safe replacement devices Samsung delivered to customers kept overheating, and there was even one incident that grounded a Southwest Airlines flight. Enough was finally enough. On October 10th, Samsung officially halted global sales and exchanges of the Note 7. The next day, the production lines were stopped entirely. In less than two months, Samsung’s “finest phone yet,” to quote our own review, had become a black mark on the company’s track record.
Perhaps the worst part: We still don’t know what caused all this. At first, it looked like batteries made by Samsung SDI could be to blame. Then devices with batteries sourced from other suppliers, such as Japan’s TDK, began to overheat too. Now a new report from engineering firm Instrumental suggests the Note 7’s failures were due to the fact that the batteries themselves were too big to be squeezed into a smartphone so “aggressively” designed — that is, Samsung should have made allowances for the natural swelling batteries undergo over time. Beyond the potential for explosions, though, Anna Shedletsky, the author of the report, suggests the phone would have been doomed regardless.
“If the Galaxy Note 7 wasn’t recalled for exploding batteries,” the report reads, “I believe that a few years down the road these phones would be slowly pushed apart by mechanical battery swell. A smaller battery using standard manufacturing parameters would have solved the explosion issue and the swell issue. But, a smaller battery would have reduced the system’s battery life below the level of its predecessor, the Note 5, as well as its biggest competitor, the iPhone 7 Plus. Either way, it’s now clear to us that there was no competitive salvageable design.”
Samsung’s woes didn’t end with smartphones. Between March 2011 and April 2016, Samsung produced 34 top-loading washing machine models that, due to failures in design, could quite literally blow their tops. US regulators took notice of the trend and took action in September — great timing for Samsung. The company once again collaborated with the CPSC to get a recall going, but not before some 730 reports of washing machine explosions had rolled in.
Unlike with the Note 7, Samsung has at least explained what was going on with these washing machines. According to company statements, excessively strong vibrations can occur when bedding or other bulky items are washed at high speeds. Those vibrations can dislodge the lid, leading it to shoot off the washing machine and strike people nearby. All told, some 2.8 million top-loading washing machines had to be recalled, and reports of trouble from around the world are still surfacing. Earlier this month, a family in Sydney fled their home when their Samsung washing machine caught fire. Prior to that, nine injuries related to washing machine malfunctions were reported, including a broken jaw in one case. It’s difficult to say what kind of exploding consumer good is more unnerving: the one that we carry in our pocket everywhere we go or the one that sits quietly in a corner of our home until it violently remind us of its existence.
So, yes, Samsung had a bad year. That doesn’t mean the company is doomed. Despite its recent failures, it would take a lot more than this to kill a corporate octopus flush with so much money and influence. Consider the following: The most recent estimates we could find suggested the Note 7 recall would cost at least $5.3 billion. That might sound like a lot (and it is!), but as far as Samsung is concerned, that’s chump change. As laid out in a long-term plan published in late November, the conglomerate wants to keep no more than 70 trillion Korean won in its cash reserves: That works out to just shy of $60 billion. That’s $60 billion Samsung is keeping handy for rough spells (though some of that treasure trove was probably tapped for that Harman acquisition last month).
That’s not to say Samsung was completely unaffected by the events of the past few months. Samsung’s most recent earnings release, from October, showed its mobile division tanking, with operating profit down 96 percent from the year before. No matter, though: Continued growth in the conglomerate’s chip and display business helped absorb the financial blow from the mobile side. We’re not sure how the numbers will shake out the next time earnings are released (especially in light of a potential structural shakeup), but for now Samsung’s money-making machinery still works fine. The bigger question centers on Samsung’s reputation and the trust it built with its customers. The path forward would benefit from clarity and contrition, but the truth is that rich companies can afford to muddle along until consumers forget about their past failures.
Samsung won’t forget about its troubled turn this year, but with luck the company will use it as a sobering reminder to do better in the future. After all, another pivotal moment in Samsung’s history was also forged in fire. It, too, involved phones, coincidentally enough, but none nearly as complex as the Note 7.
In early 1995, Samsung chairman Lee Kun-hee gave out cell phones as gifts to celebrate the new year, and for one reason or another they didn’t work. Lee was incensed. The phones’ failure to function properly not only reflected poorly on him personally but also highlighted the slow progress of Lee’s plan to make Samsung synonymous with quality around the world. Two years prior, Lee — fed up with Samsung’s cheap, often slipshod work — bellowed at his senior managers to “change everything except your wife and children.” If Samsung was to achieve its potential, it had to change, and it wasn’t happening fast enough.
In March 1995, Lee had those phones gathered in the courtyard of Samsung’s Gumi factory, in the heart of one of Korea’s many industrial centers. Thousands of devices lay there, surrounded by some 2,000 Samsung workers with headbands that said “quality first” lashed to their foreheads. As Lee and his board of directors looked on, the phones, along with monitors and fax machines, were battered with hammers and heaved into a fire. The message was clear: Poor quality would no longer be tolerated.
Samsung has transcended its humble origins, but the message delivered that day over 20 years ago bears repeating. Company mythology points to the fire in Gumi as an act of cleansing, signaling a new era for a revitalized Samsung. Every company has bad years. What’s more important is how the company carries itself in the weeks, months and years that follow. Samsung turned things around for itself in 1995, and it can rebound now too.
Check out all of Engadget’s year-in-review coverage right here.