Galaxy Note 7 recall could cost Samsung $1 billion

It’s inevitable that Samsung’s mass Galaxy Note 7 recall is going to cost the company a notable sum, but industry analysts are now expecting that the total bill could reach around $1 billion in order to fix the mess.

Despite the relatively low number of affected devices, Samsung has issued a total recall on the estimated 2.5 million Galaxy Note 7 handset that has shipped out to consumers in the last two weeks. Estimates from Credit Suisse Group AG, Daishin Securities Co. and Pelham Smithers Associates, all suggests that such a mass recall could cost the company up to $1 billion. The estimated cost to return each handset has been calculated at around $900 plus the profit that Samsung would have made. Koh Dong Jin, the head of Samsung’s smartphone business, said at a press conference in Seoul on Friday that this was a “heartbreaking amount.’’

According to Credit Suisse, Samsung is expected to generate around $108 of operating profit for every Note 7 sold, and the company was probably aiming for sales of around 8 to 9 million before the end of the year. This would net Samsung around $864 to $972 million, so the recall will likely wipe out all of the profit that Samsung was hoping to generate from the Note 7 this year. While this sounds like a lot, the $1 billion costs would only account for less than 5 percent of Samsung’s total projected net income of 23 trillion won ($20.6 billion) for the year.

There’s not just the recall costs to worry about though, the shipment halt is eating into important early sales and reducing Samsung’s launch advantage over its main rival, Apple’s upcoming iPhone 7. Even if Samsung increased its production output by 20 percent, the company is now very unlikely to be able to meet consumer demand and replace all of its 2.5 million units in a timely fashion, leading to constricted supply. If Samsung’s Galaxy Note 7 misses its sales target as a result, there will be large knock on effects for Samsung’s battery, display and semiconductor businesses, which all supply components for the handset.

The Galaxy Note 7 fiasco has come at a particularly bad time for Samsung. The company’s mobile division had made a healthy profit following the launch of its Galaxy S7 handsets and a strong performance from the Note 7 would have ensured a notable turnaround in Samsung’s mobile business this year, after a couple of years of falling market shares and profits. With Samsung potentially looking to take hits across its business, there are real concerns that the company may struggle to achieve its 30 trillion won (US$26.86 billion) in operating profit target.

That being said, not every analyst is so pessimistic. Some expect that, while Samsung will take a short term hit, the company’s fast response to the issue will see a quick recovery to Note 7 sales and consumer confidence.