Is the biggest blunder in Samsung’s history an opportunity for Lee Jae-yong?

On October 10, Lee Jae-yong, the third-generation successor of Samsung Group, South Korea's largest company, personally issued a global recall, suspension of sales and production of Samsung's new generation flagship phone Note7. The Note7 spontaneous combustion and explosion incidents escalated again and again, and finally ended in suicide.

The order was executed very quickly. The next day, Samsung's official website in China posted a recall notice for 190,000 Note7 smartphones that had been sold in China. Negative news flooded in, causing an uproar around the world.

No one knows the complex emotions Lee Jae-yong felt at the time. It was less than two months since the release of the Note 7, and only ten days after he stepped into the lobby of the office building in Seocho District, Seoul at 7 a.m. on September 22, holding the gold version of the Note 7 and showing his confidence to the Korean media. At that time, Samsung had announced that the spontaneous combustion and explosion of the Note 7 was caused by external heating.

From the launch of Note7 in ten countries and regions on August 19 to the official announcement of global suspension of sales on October 11, Samsung experienced a thrilling 53 days. Samsung first postponed shipments for retesting, then recalled the sold phones for inspection and replacement, and finally completely stopped sales and production worldwide. Lee Jae-yong was powerless to change the fate of Note7 becoming the shortest-lived annual best-selling phone in Samsung's history.

Next, Lee Jae-yong will face more.

The Note 7 has become a heavy burden for Samsung Electronics. On October 13, Samsung lowered its third-quarter profit forecast. Analysts predict that the Note 7 incident is likely to cause Samsung to bear at least $4 billion in recall costs and sales losses, which is enough to offset the mobile division's entire quarterly profits.

In the long run, Samsung will have to pay for its damaged reputation. Lee Jae-yong needs to take tougher measures and show more sincerity to win back users and gain their trust.

At the end of October, Samsung Electronics shareholders voted on Lee Jae-yong's board seat. After obtaining the board seat, Lee Jae-yong will officially take the stage and take over the management of Samsung Electronics from his father Lee Kun-hee. Samsung Electronics will officially enter the Lee Jae-yong era.

The failure of Note7 is a concentrated outbreak of the long-term and short-term worries of Samsung Electronics and even the entire Samsung Group. After the catastrophe, where Samsung Electronics will eventually go, Lee Jae-yong's decision is crucial.

Currently, the outside world is still waiting for Samsung's final report on the Note 7 explosion. On October 13, Samsung Mobile President Koh Dong-jin apologized again for the Note 7 explosion incident and announced that "the cause of the phone overheating will be found out at all costs."

Note7 accident out of control

Several important time points determined that the Note7 explosion gradually escalated from a relatively simple product safety accident to the largest mobile phone safety incident in history.

In early September, 35 cases of Note 7 battery combustion were reported worldwide, and Samsung Electronics announced that it would suspend the sale of Note 7 phones. On September 2, Samsung announced for the first time that it would recall 2.5 million Note 7s sold worldwide and replace them with new ones for consumers, but not in China. Starting from October 4, Samsung's replacement Note 7s for consumers experienced battery combustion accidents one after another, and one of them even exploded on a Southwest Airlines flight in the United States. On October 11, Samsung filed a recall plan with the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China. On October 12, Samsung issued a statement saying that it had asked partners around the world to stop selling and replacing Galaxy Note 7.

This means that the Note7 will hastily end its life of only two months and stop production. Samsung has not officially announced the suspension of production, but Samsung China confirmed it when asked by Caijing reporters.

The damage caused to Samsung by the suspension of Note7 is huge. Generally speaking, the life cycle of Samsung's flagship mobile phone is 25 million units. Samsung previously predicted that the shipment volume of Note7 in the current quarter could reach 4 million to 5 million units, and the shipment volume in the fourth quarter could reach 8 million to 9 million units.

After this incident, some analysts estimate that Samsung's revenue will decrease by US$5 billion in the short term, and its annual profit margin may drop by 5%, which will make the situation of Samsung's already declining profits worse.

On October 12, Samsung officially lowered its third-quarter profit forecast in light of the impact of the global suspension of Note7 sales. Samsung expects consolidated sales of 47 trillion won and consolidated operating profit of 5.2 trillion won in the third quarter. The latest adjusted data shows that Samsung has been severely damaged. This set of data is down 9.06% and 29.6% respectively from the third quarter of last year, when revenue was 51.68 trillion won and profit was 7.39 trillion won.

Five days ago, Samsung officially released optimistic third-quarter financial data. On October 7, Samsung estimated that its third-quarter revenue would be about 49 trillion won and its profit would be 7.8 trillion won.

However, Samsung's third-quarter financial report expectations include strong shipment revenue of memory chips and display panels in the third quarter. Samsung also sold some of its subsidiaries. These revenues have to some extent offset the losses brought to Samsung by the "explosion gate."

The real reason for the misunderstanding

A senior figure in Taiwan's foundry industry told reporters that he had no idea what kind of problem had caused such a large company like Samsung to make such a low-level mistake after the Note7 explosion crisis.

Samsung announced the first recall of 2.5 million Note7s sold worldwide on September 2, and released the first investigation results. Ko Dong-jin, head of Samsung Electronics' mobile phone business, said that the main reason was that the Note7 used defective batteries. A Samsung executive publicly stated at the time that "the proportion of products with defective batteries in all sales is less than 0.1%. This problem can be solved by simply replacing the battery, but we will come up with a solution that will satisfy customers the most."

However, the Note7 exploded again after the battery was replaced, which made the outside world angry and shocked.

Verizon CEO Lowell McAdam recently accepted an interview with foreign media and publicly stated that in his many years of career as an operator, although mobile phone recalls were not uncommon, he had never seen a recall by any manufacturer like the Samsung Note7, where a recall did not solve the problem and led to another announcement of a suspension of sales.

Verizon is the largest telecom operator in the United States. On October 10, after Samsung announced the suspension of sales, Verizon immediately removed the Samsung Note7 from its shelves, and other operators in the United States followed suit. The official sales websites of the three major telecom operators in China also removed the Note7 sales information one after another, or showed that it was out of stock.

A terminal person from China Mobile told Caixin reporter that whether China Mobile will resume sales depends on the results of the investigation by Samsung and other official agencies.

This time, Samsung chose to be cautious and silent. On October 13, Samsung issued a brief announcement saying that since the replaced mobile phones used batteries produced by different suppliers, Samsung is conducting a detailed investigation and it is too early to speculate on the possible results of the investigation. Samsung predicts that the new investigation results will most likely take several weeks.

According to outside analysis, there are many possibilities for Samsung phones to spontaneously combust, but there are only two possibilities: one is that there is a technical problem with the battery design itself; the other is that there is a problem with the design of the battery protection mechanism. But what is certain is that Samsung is still not sure what caused the Note7 to spontaneously combust and explode. This is also the culprit that led to the escalation of the Samsung crisis.

Jay Ritter, a finance professor at the University of Florida, told Caixin that if Samsung had accurately identified the problem during the first recall, it could have stopped the bleeding quickly and the Note7 would not have been recalled or even destroyed. This has been proven by many previous experiences of car brands.

Samsung's fast vertical decision-making mechanism did not play a positive role this time, resulting in wrong decisions and ultimately the loss of voice.

However, to this day, many industry insiders interviewed by Caijing still believe that there is no major problem with Samsung's products and innovation capabilities. This is due to Samsung's unique ability to vertically integrate the industrial chain.

After Lee Kun-hee succeeded his father Lee Byung-sung as chairman in 1987, he broke the follow-up model of low-cost replication and winning by scale, making technology research and development Samsung's core advantage, and thus established a complete vertical electronic industry chain. From chip design to production, from component production to assembly, Samsung took the lead in everything. When production capacity was insufficient, it would outsource to outsiders.

However, Samsung Electronics CEO and Vice Chairman Kwon Oh-hyun said in an interview with Caixin that Samsung's vertical industrial chain advantage is not the "low cost" and "quick material supply" as the outside world usually thinks, but the technical ability to keep up with market changes at any time and combine new products.

Unlike most of its peers, Samsung Mobile is more willing to take risks in R&D, especially in its focused investment in upstream core components. The high investment in R&D and its determination to take risks enabled Samsung to surpass Nokia and become the world's number one in the first mobile phone revolution.

Samsung's mechanism is different from Apple's. Apple CEO Cook has repeatedly emphasized on many occasions that Apple is never the first company to launch innovative products, and Apple will not hastily launch innovative technologies before they are mature. Apple does not have a complex product line segmentation structure, so it can spend more time on details.

The Note7 integrates many innovative features of Samsung, including curved screen, wireless fast charging, iris recognition, and waterproofing. Although it is 0.2mm thicker than the previous generation flagship S7, it has reached the limit of innovation in terms of lightweight design.

Samsung obviously took a risk. While pursuing the fastest launch of the ultimate black technology and thinness, it relaxed the most basic hardware integration security requirements to a certain extent.

The Taiwanese foundry industry insider commented: "The advantages of vertical industry chain integration have opened up multiple links in design and manufacturing, creating a much wider innovation space for Samsung than other companies. Everything can be changed. It has created a possibility, but it has also buried more hidden dangers. Other manufacturers can't do it, and they dare not do it."

"Moreover, the innovation is huge and exceeds Samsung's regular technical specifications. This is why Samsung did not find the exact cause of the explosion the first time," he added.

The principle of design priority has an impact on the internal structure, but Samsung's willingness to take risks and quickly launch Note 7 is more driven by business. Samsung released Note 7 in early August, one month earlier than Apple released iPhone 7. The outside world believes that Samsung hopes to seize this time window to ensure that the new generation of flagship phones has better sales space.

Samsung has been in a passive position in the smartphone market in recent years. Although it is still the world's sales leader, the market appeal of its flagship phones is becoming increasingly weak. Flagship phones represent the limits of a mobile phone company's design and technology level. The market appeal of flagship phones will directly affect total sales and bring core profits to mobile phone companies.

Samsung's previous flagship S6 shipped 10 million units in the first month after its launch, which is equivalent to the total sales of other smartphones in their entire life cycle, but it has begun to decline compared with the 11 million units sold in the same period of the previous flagship S5.

Samsung Electronics' financial reports over the years show that from 2010 to 2015, Samsung's operating profit and net profit reached a peak in 2013, and showed a downward trend in the following two years. Samsung Electronics' net profit in 2013 was 30.5 trillion won, 23.4 trillion won in 2014 and 19.1 trillion won in 2015.

In the Chinese market, Samsung cannot even guarantee its market share. According to statistics from market research firm TrendForce, Samsung fell out of the top five in the Chinese market in the first half of 2016.

According to the omni-channel data provided by D.Phone to reporters in the third quarter, Samsung's sales ranking in its omni-channel sales ranged from 5th to 7th place, and its sales volume and sales revenue from July to September fell by about 40% year-on-year. Taking September as an example, Samsung only accounted for 6% of D.Phone's sales, with sales volume down 41% year-on-year and sales revenue down 29% year-on-year. Huawei, vivo, OPPO, Apple, and Honor have divided Samsung's market.

Samsung Note7 directly competes with Apple iPhone7, but CFRA Research analyst Angelo Zino predicts that the Note7 explosion incident will drive some Android users to switch to Apple, which is expected to help Apple increase its global market share by 1%.

Lee Jae-yong's plan to rebuild Samsung is in tatters

The Note7 crisis occurred at a critical time for Samsung's successor rotation. At the end of October, Samsung Electronics shareholders will vote on Lee Jae-yong's director nomination. Lee Jae-yong is expected to win a board seat for the first time and officially take the helm of Samsung Electronics.

Lee Jae-yong, 48, serves as vice chairman of Samsung Group. Since his father Lee Kun-hee lost his ability to move due to a heart attack more than two years ago, Lee Jae-yong has influenced major decisions of Samsung Group through informal channels and has become the de facto core decision-maker of Samsung Electronics.

An insider close to Samsung told reporters that the Note7 crisis was initially handled by Samsung Mobile Division President Koh Dong-jin and other senior executives. But after a Southwest Airlines flight in the United States had to evacuate passengers due to smoke from a Samsung replacement phone, Lee Jae-yong began to realize the seriousness of the problem and personally made the decision to completely stop selling the Galaxy Note7.

Several analysts interviewed believe that Lee Jae-yong's position as successor has been established, but the Note 7 crisis has put him in a rather passive position.

On the one hand, Lee Jae-yong must quickly eliminate the financial and brand losses caused by the discontinuation of Note 7 production and bring Samsung Electronics back on track; on the other hand, Samsung Electronics has been in a slump for many years and transformation is imperative. Smartphones are the most core and competitive products of the Samsung Group. Samsung is a large company with a huge business. Short-term financial pressure can be released through multiple channels, but it is not so easy to eliminate the brand trust crisis.

The bigger challenge is that Samsung's strategic transformation began as early as 2013. In the Samsung management system that has already formed scale and inertia, Lee Jae-yong's personal role is actually difficult to overestimate. But after this incident, Lee Jae-yong will have more say in deciding the future direction of Samsung.

Most industry insiders interviewed still recognize Samsung's innovation capabilities. Xiaomi Research analyst Wu Lianfeng believes that Samsung is likely to use more high-tech assets in its next generation of flagship phones to stimulate the market.

Samsung does have enough resources. As early as 2013, Samsung established a graphene synthesis laboratory, and its technology was 2-3 years ahead of Europe and the United States at that time. Graphene has excellent electrical conductivity and heat transfer properties. It can not only increase the energy density of batteries to nearly twice that of existing batteries, but is also a necessary technology for the large-scale production of foldable and bendable devices.

In the next stage, graphene is likely to become a new battlefield for competition between Samsung and Apple or other giants.

However, more analysts believe that before graphene technology matures, smartphone innovation will not have much breakthrough, and will mainly focus on micro-innovation. This also means that in the short term, the extent to which Samsung's black technology assets will attract consumers remains to be verified.

How Lee Jae-yong can turn the tide in the difficult situation and continue Samsung's hegemony has turned from a grand strategy into a pressing issue.

In addition, unlike his father Lee Kun-hee, Lee Jae-yong is more inclined to focus on core competitiveness and narrow the strategic map. The main landmark events include selling a number of non-core assets, integrating and merging similar business departments, and promoting more subsidiaries to go public. Statistics show that since 2013, Samsung Group has launched more than 30 business adjustment and restructuring measures.

If there had not been the Note7 incident, Samsung would have had enough time and space to make adjustments. But after the incident, the risk of decision-making increased significantly.

In September this year, during the Note7 explosion incident, Samsung sold its printer business to HP. The purchase price was only US$1.05 billion (about RMB 7 billion), less than 60% of what Samsung expected, almost half the price. Some people analyzed that Samsung's move was due to strategic needs and performance figures.

However, when Lee Jae-yong started the strategic transformation plan in 2014, Samsung's decision-makers still hoped to carve out a niche in the printer and white appliance markets. In June 2014, Samsung Electronics CFO Lee Sang-hoon told Caijing that Samsung Electronics hoped to gain new revenue from mature office equipment such as printers and white appliance products, and to gain the world's largest market share.

At that time, Lee Sang-hoon believed that the argument that "the printer market is a red ocean" was a smokescreen released by Japanese companies, and that there was actually great potential; with the help of IT technology in the era of the Internet of Things, white goods products could break their inherent regional characteristics and form a global scale.

That is to say, in Samsung's original decision map, the printer business could have become an important part of Samsung's Internet of Things strategy.

Although the hasty sale of the printer business, which was originally entrusted with the task of strategic transformation, to HP is in line with Lee Jae-yong's focus on core competitiveness, it also indirectly shows that Samsung is unable to cope with the ever-changing competitive environment and is unable to complete its established strategic plan.

If the printer business plays an ambiguous role in Samsung's overall strategy, being able to be shaped into a business driver for future strategies and being a chess piece that Samsung can abandon when it shrinks its strategy, then the smartphone business is the trump card that Samsung absolutely cannot give up.

The external environment facing Samsung has obviously become worse. Tao Xujun, director of the communications department of Nomura Research Institute Shanghai Consulting Co., Ltd., believes that if Samsung remains conservative, it will have no way out and it needs to be adventurous and courageous. "Not taking risks is waiting for death, and taking risks is seeking death."

In the complex internal and external environment, Lee Jae-yong needs to carefully choose between stepping on the accelerator and braking. For Samsung, this is a test of life and death.

Samsung Note7 incident chronology

August 2: Samsung releases Note 7

August 24: A Korean forum posted several pictures of suspected Note7 explosions

Late August: Samsung says it will conduct additional testing and delay shipments of the phone

Early September: At least 35 Samsung Note7 fire and explosion incidents reported worldwide

September 2: Samsung announces global recall of 2.5 million Note7s, excluding China

Early September: Samsung's new replacement smartphones exploded again, and many airlines around the world put Note7 on the list of dangerous goods

September 14: Samsung was interviewed by the General Administration of Quality Supervision, Inspection and Quarantine of China and announced to recall some Galaxy Note7 manufactured between July 20 and August 5, 2016 in China. The number of units affected in mainland China is 1,858.

Mid-to-late September: Samsung's Chinese version of the Note 7 exploded for the first time

September 28: Samsung issued a statement saying that Samsung Electronics Research Institute and Quality Inspection Department conducted a detailed analysis of the product and concluded that the product was damaged due to external heating.

September 29: Samsung said it can ensure the safety and reliability of the Note 7 officially sold in China

October 10: Samsung announces a global halt to sales and replacements of the Galaxy Note 7 smartphone, and advises all consumers to stop using the phone for safety reasons.

October 11: Samsung China decided to recall all Note7s sold in mainland China, totaling 190,984 units (including the 1,858 units previously announced for the first recall)

October 13: Samsung Mobile President Koh Dong-jin apologizes again for the Note 7 explosion and announces that "we will do whatever it takes to find out the cause of the phone overheating"

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.