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Samsung’s Galaxy Note Problem

Samsung Galaxy Note 7 display in a Target electronics department
photo by Mike Mozart

Neither you nor I will ever buy a Galaxy Note 7, Samsung’s top-of-the-line smartphone, and I’m reasonably sure that we will never even have an opportunity to buy a Galaxy Note 8.

But although the epic disaster of the Galaxy Note 7 is a major setback to Samsung in the global phone business, I wouldn’t write off the company and its phones for good just yet.

Ford is still selling millions of cars every year, even though one infamous Ford product – the early-1970s Pinto – notoriously burst into flame when struck with even modest force from the rear. Ford’s return to prosperity occurred despite a memo that came out in litigation over the Pinto, which demonstrated that Ford had decided against making an inexpensive fix to the Pinto’s dangerously exposed fuel tank after calculating (or, as it turned out, grossly miscalculating) that it would be cheaper to pay damage claims for any resulting injuries or deaths.

Ford even burnished its reputation by launching a 1980s ad campaign under the slogan, “Quality is Job 1.”

Hyundai took a similar, though less dramatic, tack to overcome a reputation for poor quality earned by its first export to America, the Hyundai Excel. To sever the association of its name with cheap and shoddy products, Hyundai pushed a warranty longer than any of its competitors offered and, notably, also improved the basic quality of its vehicles. The Excel line was terminated and replaced by the Accent, which is still in production.

Hyundai now enjoys a reputation for high quality and reliability. I have one myself, a Hyundai Santa Fe SUV. My wife loves that car. According to The Wall Street Journal, Hyundai Motor Company has enjoyed 4.5 percent market share in U.S. car sales in 2016, ranking it seventh among major automakers. Its sister company, Kia Motors, ranks 10th. Hyundai Motor Group, which acquired its interest in Kia in the late 1990s, chose to market Kias under a sportier, more youthful image in part because Hyundais were by then a hit with more mature customers – at least partly because of the brand’s restored reputation.

Hyundai’s fellow South Korean company Samsung would do well to keep the automaker’s success in mind as it plans a way forward in the wake of the Galaxy Note 7 debacle.

Samsung released the Galaxy Note 7 in August, and the company had high hopes the cutting-edge model would challenge the dominance of the iPhone. Reviewers heaped the device with praise ahead of its launch, and it beat both the iPhone 7 and Google’s new Pixel phone to the sales floor. But anticipation turned to disaster when dozens of users reported their shiny new smartphones catching fire. The hazard was serious enough to trigger the Federal Aviation Administration to demand passengers refrain from using or charging the phones in flight, and forbidding them in checked baggage.

In early September, the situation became severe enough that Samsung suspended sales of the Note 7 and issued a recall. The company offered a refund or a replacement, encouraging the latter. According to Samsung, about half of Note 7 owners had turned in their units as of last month and 90 percent of those who did had opted for a new and supposedly improved Note 7 unit.

Unfortunately for Samsung, reports began to arrive that the replacement phones’ batteries were also prone to catch fire. Earlier this week, Samsung instructed users to stop using the Note 7 and retailers to stop selling it. On Tuesday, the company officially announced it would stop making and selling the devices due to ongoing safety concerns. Analysts estimated that scrapping the Note 7 could cost the company up to $17 billion, Reuters reported, as well as substantially damaging the technology company’s global reputation.

In the short term, the immediate beneficiaries of Samsung’s Note 7 debacle are its chief global rivals, Apple – whose iPhone competes with Samsung’s products at the high end of the smartphone market – and China’s Huawei, which started out competing in the low end but is moving steadily upmarket, especially in sales outside the United States. It also creates space for potentially strong new competitors, such as Google and Amazon, to market their own devices into the void. (Although Amazon’s first attempt at a smartphone never caught on, Samsung’s mistake may create a tempting opening for it to try again.)

But history shows that if a company acknowledges and addresses quality problems, it can eventually recover its reputation with consumers – at least if it has the resources to ride out a bad storm. Hyundai did it. Toyota did it just a few years ago, when a scandal over unintended acceleration cost it huge fines. General Motors did it too, with a massive recall of models whose ignition keys could spontaneously turn off the car’s airbags while the vehicle was in motion. And Volkswagen is in the process of trying to live down its ongoing cheating scandal over rigged tests for diesel engine emissions.

On the other hand, when a company is unable to overhaul its product or lacks the resources to convince the public that it has made the needed improvements, a brand or a corporation can die. You will never buy a Yugo automobile in the United States, or anywhere else, ever again – not that you would want to. Serbian manufacturer Zastava still produces a successor to the notorious global flop, but it is marketed under the Fiat name and the company is two-thirds owned by the Italian automaker, with the remaining one-third held by the Serbian government.

When a problem is confined to a single brand or product line, discontinuing the line or even just the brand name can be a step toward recovery. Hence my conclusion that Samsung will never again try to market a Galaxy Note.

Samsung’s biggest issue may be with cell phone carriers, rather than with consumers. As the holiday season approaches, phone carriers have little reason to push Samsung products when its competitors haven’t recently suffered major scandals or caused unhappy recall customers to visit carriers’ stores. The costs of replacing the high-end Note 7 are going to be steep, and that does not include the loss of customer goodwill for the millions who are going to be inconvenienced by losing access to their devices – in many cases, twice over.

My guess is that Samsung will end up absorbing most of those costs. It may have no choice if it wants to remain a major player in the global market rather than suffer the fate that befell Motorola, Nokia and Blackberry. Those phone makers lost dominant positions even without a major quality scandal (though they had their hiccups), merely because they failed to keep up with shifting technology and consumer preferences. Samsung will have to pony up to stay on top of the technology curve, even as it invests in extensive marketing to restore its reputation. It will be a heavy lift and it will take time, if the company manages to pull it off at all.

As Warren Buffet has famously said, “It takes 20 years to build a reputation and five minutes to ruin it.” Samsung may win back customers’ trust, but it will not be overnight.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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