Samsung’s Galaxy Note 7 Supply Chain on Fire

On Sunday, Patently Apple posted a detailed report titled "Korean Press Reports the Exploding Note 7 is a Severe Blow to Samsung that could help the iPhone 7."

Today several more reports have surfaced in Korea today discussing the depth of the problem that is now in play.

One report notes that "As Samsung Electronics has decided to recall 2.5 million units of the Galaxy Note 7 due to a flaw in its battery - its performance will have an adverse effect."

"Also, its distribution and sales will be somewhat affected by Hanjin Shipping's issue. This, in turn, will create the contagion effect to component companies, leading to a vicious circle in terms of price competitiveness and profit."

Yesterday industry sources told Business Korea that "Samsung Electronics is likely to see a 1.5 trillion won (US$1.34 billion) loss on account of the recalls. The figure is calculated based on 1 million won (US$895) per unit and subtracting Samsung Electronics' profits.

The biggest problem is sales suspension of the new handset. When a company has low sales, it makes more losses. A senior official from the industry said, 'The more smartphones a company produces, the lower fixed costs it will achieve. So, operating profits can rapidly reduce when production stops and there are no new sales due to the incident. The amount can even reach trillions of won.'

Marketing is another problem. The company has to delay or cancel new marketing campaigns which are scheduled this month. An official from the industry said, 'There are limits to increase production so the company can boost the production by 10 to 20 percent. However, it is impossible to double it. The company may have an extensive marketing plans after the release and it will make an additional loss when the plan doesn't go well as scheduled.'

Read: China's Online Chatter Muted Ahead of Apple iPhone 7 Launch

This is why some market watchers say that the company will see a vicious cycle that new sales suspension and contracted marketing plans can lead to the decrease in operation profits and then to lower sales of new products.

In particular, many expect that it is the structure that hit both semiconductor and display sectors at the same time. It means that the low sales of the Galaxy Note 7 will adversely effect on the performance of the semiconductor and display divisions of Samsung Electronics, reducing the total profits. Moreover, how to bear losses with component firms will have a considerable effect on the performance.

In this situation, some say that Hanjin Shipping's troubles can also have an adverse effect on sales of its home appliances products. Hanjin has handled about 10 percent of Samsung Electronics' shipments. U.S. retail businesses, such as Walmart and Target, are complaining as they are not being supplied with the products on time before the busy season at the end of the year. 

Source: Patently Apple

Related: 7 Best Practices that Transform Samsung Electronics Supply Chain