Samsung battery crisis began with rush to beat iPhone

Bloomberg

Few things motivate Samsung employees like the opportunity to take advantage of weakness at Apple Inc. Earlier this year, managers at the South Korean company began hearing the next iPhone wouldn’t have any eye-popping innovations. The device would look just like the previous two models too. It sounded like a potential opening for Samsung to leap ahead.
So the top brass at Samsung Electronics Co., including phone chief D.J. Koh, decided to accelerate the launch of a new phone they were confident would dazzle consumers and capitalize on the opportunity, according to people familiar with the matter. They pushed suppliers to meet tighter deadlines, despite loads of new features, another person with direct knowledge said. The Note 7 would have a high-resolution screen that wraps around the edges, iris-recognition security and a more powerful, faster-charging battery. Apple’s taunts that Samsung was a copycat would be silenced for good.
Then it all backfired. Just days after Samsung introduced the Note 7 in August, reports surfaced online that the phone’s batteries were bursting into flame. By the end of the month, there were dozens of fires and Samsung was rushing to understand what went wrong. On Sept. 2, Koh held a grim press conference in Seoul where he announced Samsung would replace all 2.5 million phones shipped so far. What was supposed to be triumph had turned into a fiasco.
Samsung drew criticism for the recall too. It announced the plans publicly before working out how millions of consumers in 10 countries would actually get replacements. Then it sent mixed signals about what customers should do. First, Samsung told people to shut off their phones and stop using them. A few days later, it offered a software patch to prevent batteries from overheating, signaling consumers could keep using the phones. “This is creating an enormous problem for the company — for its reputation and ability to support its customers when there’s a problem,” said David Yoffie, a management professor at Harvard Business School and board member at Intel Corp.
Samsung declined to comment specifically on whether it moved up the Note 7 launch because of its perception of the iPhone. “Timing of any new mobile product launch is determined by the Mobile business division based on the proper completion of the development process and the readiness of the product for the market,” the company said in a statement.
The misstep has set off soul-searching at the Samsung conglomerate and in South Korea, where the company employs hundreds of thousands and is revered for leading the nation’s rise since the Korean War. Samsung’s flagship electronics unit built its reputation on high-quality products and cutting-edge technology, becoming the largest phone maker in the world and a powerful rival to Apple in innovation. One employee, in an online discussion group, called the episode “humiliating.”
The crisis is straining a management team that’s been without clear leadership for more than two years. Lee Kun-Hee, the Samsung patriarch who is chairman of both the electronics unit and the broader conglomerate, suffered a heart attack in 2014 and hasn’t been back to the business since. His son, Jay Y. Lee, is heir apparent, but hasn’t taken his father’s title because Korean culture precludes such a move while the elder Lee is alive. The result is that no one appears to have the kind of authority that, say, Tim Cook wields at Apple to take responsibility and hammer out solutions.
“The battery issue arrived at the worst moment for Samsung and it seems like there was a delay in reacting to this communication crisis,” said Thomas Husson, an analyst at Forrester Research. “This may indeed be due to the change in top management.”
With Chairman Lee in the hospital, the younger Lee and co-vice chairman G.S. Choi huddled with Koh and executives of other Samsung affiliates, which make semiconductors, glass panels and batteries. They went ahead with a slew of new features that had been on the company’s product road map, including an improved screen and stylus — and then approved a launch date 10 days earlier than last year, according to one of the people familiar with the matter. Samsung’s unveiling was Aug. 3 this year, compared with Aug. 13 last year.
Samsung opted to give the Note 7 a 3500 milliampere hour battery compared with 3000 mAh for the previous model. For comparison, the iPhone 7 Plus has a 2900 mAh battery. The main battery supplier for the Note 7 was Samsung SDI Co., a person with knowledge of the matter has said. The company, founded in 1970 and 20 percent owned by Samsung Electronics, makes batteries for other phone-makers too, including Apple.
As the launch date approached, employees at Samsung and suppliers stretched their work hours and made do with less sleep. Though it’s not unusual to have a scramble, suppliers were under more pressure than usual this time around and were pushed harder than by other customers, according to a person with direct knowledge of the matter. One supplier said it was particularly challenging to work with Samsung employees this time, as they repeatedly changed their minds about specs and work flow. Some Samsung workers began sleeping in the office to avoid time lost in commuting, the supplier said. Samsung declined to comment on whether deadlines were moved, reiterating that products are only introduced after proper testing.
Samsung, which may pay as much as $2 billion for the recall, said on Sunday it sold stakes in ASML Holding NV, Seagate Technology Plc, Rambus Inc. and Sharp Corp. for a total value of about 1 trillion won ($891 million). While Samsung says Galaxy Note 7 sales will resume in Korea around Sept. 28, it has yet to specify when global sales would resume.
The tumult has raised questions about whether Samsung’s current management approach is sufficiently robust to handle the crisis fallout. In the wake of the recall, Samsung said it had nominated the younger Lee to join the company’s nine-member board, a move that will give him a more active, and legitimate, role across its businesses. However, the younger Lee, who has kept a low profile inside and outside the company, is still far from having the kind of direct authority his father had. In addition to the corporate strategy office that oversees about 60 Samsung companies, Samsung Electronics has three CEOs.
“This is a crisis and a blow to Samsung’s image,” said Kim Sang Jo, economics professor at Hansung University in Seoul. “Clearly there were procedural missteps and the company will have to restore consumer and investor confidence.”
Apple’s iPhone 7 also wasn’t as uninspiring as Samsung may have anticipated. Though it kept the same physical design with modest technology changes, loyalists still lined up at stores around the world on Friday to get the company’s latest gadget.