Samsung recall of Galaxy Note 7 hands Apple a timely gift

By Apple’s own high standards, the hype surrounding Wednesday’s iPhone launch was looking more subdued than usual.

The company had just been hit by a €13bn tax bill by the European Commission. On top of that setback, for the first time since the device made its debut in 2007, sales of the iPhone are in decline. Supply-chain leaks point to a less radical redesign of the current model than Apple customers have come to expect every two years.

Then on Friday Samsung handed its arch-rival an unexpected gift: one of the most costly product recalls the tech industry has ever seen.

Samsung is replacing all 2.5m units that it has shipped of its Galaxy Note 7 smartphone just weeks after its release, because to a spate of exploding batteries. Just when the Korean electronics manufacturer was regaining momentum in the sluggish smartphone market, the sweeping recall resets Samsung’s attempt to head off Apple’s annual launch.

“The timing is as bad for Samsung as it is positive for Apple,” said Geoff Blaber, analyst at CCS Insight. “If consumers are facing a lengthy wait, it undoubtedly opens the door for its closest rival.”

Samsung has said it will take just two weeks to manufacture replacement phones for customers, which could leave just enough time for Apple to bring its new iPhones to market first. In the meantime, some mobile operators, including T-Mobile in the US, have said they will offer full refunds to Note buyers, leaving many with spare cash to spend on an iPhone if they feel they can no longer trust Samsung.

“The pressure is definitely on Samsung. It’s a huge amount of inventory that it needs to rebuild,” Mr Blaber said.

Until this incident, Samsung had been winning plaudits for its bold moves with the Galaxy S7 and latest Note 7 handsets. After its smartphones had struggled against soaring sales of the iPhone 6 in 2014 and 2015, Samsung has regained market share in 2016 thanks to its S7 Edge’s curved screen and strong battery performance, two areas where Apple is seen as lagging behind its rival. Following its mid-August debut, Samsung had sold 1m Notes before the recall.

“There’s no doubt in my mind that the timing of the Note launch was intended to pre-empt Apple’s announcement,” said Jan Dawson, tech analyst at Jackdaw Research. “Arguably, it worked well for Samsung at first — the Note 7 has been one of Samsung’s best-reviewed phones ever and it seems to have got off to a great startsales-wise as well.”

Mr Dawson praised Samsung for its swift reaction to the exploding battery problem. Nonetheless, at the exact moment when the iPhone 7 arrives, it will be impossible to buy Samsung’s latest product.

“That’s a significant black eye for Samsung, which will not only have to cover the cost of the recall but also lose several critical weeks of sales as well,” Mr Dawson said. “That could mean losing hundreds of thousands, if not millions, of sales and customers to its arch-rival.”

Even without product malfunctions, eking out growth in the smartphone market is tough enough at the moment. Analysts at IDC last week projected just a 1.6 per cent rise in global unit sales this year, down from 2015’s 10.4 per cent increase.

Despite the iPhone 7’s anticipated new dual-lens camera and wireless headphones, Wall Street analysts had forecast that the product’s current quarterly sales declines were unlikely to be reversed until next year.

“The dynamics in Apple’s largest user bases, being China and the US, have fundamentally changed,” said Ben Bajarin, tech analyst at Creative Strategies. “Apple is not really losing customers; people are just hanging on to their phones for longer.”

Wall Street consensus forecasts are for iPhone unit sales to fall at least 8 per cent in the current quarter ending in September, which is likely to include at least a week of new product availability, to about 44m units.

Sales in the all-important December quarter are expected to be at best flat, at about 74m compared with 74.8m a year earlier, according to analysts polled by FactSet.

Fuelling the near-term iPhone pessimism is the sense that the really big upgrades for the iPhone are coming in 2017, when the product celebrates its tenth anniversary — including a Note 7-style curved screen.

“This year, we are not hearing any killer applications,” said Abhey Lamba of Mizuho Securities. “It’s hard to have a good gauge of demand right now.”

However, Samsung’s mis-step could make the difference between growth and decline for the iPhone in the coming months. Mr Blaber said the recall “could move the needle for Apple very slightly”, albeit “at most a couple of million” units.

“Apple’s iPhone Plus is the natural alternative to the Note 7 in that price tier,” Mr Blaber said. “It is beholden on Apple that they can really get as much stock [on to the market] as fast as they can.

“Assuming they can do that, they stand to do very well out of Samsung’s misfortune.”

FT