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Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone

Several Samsung Galaxy Note 7's lay on a counter in plastic bags after they were returned to a Best Buy on September 15, 2016 in Orem, Utah.
George Frey | Getty Images
Several Samsung Galaxy Note 7's lay on a counter in plastic bags after they were returned to a Best Buy on September 15, 2016 in Orem, Utah.

When several Samsung Galaxy Note 7 smartphones spontaneously exploded in August, the South Korean company went into overdrive. It urged hundreds of employees to quickly diagnose the problem.

None were able to get a phone to explode. Samsung's engineers, on a tight deadline, initially concluded the defect was caused by faulty batteries from one of the company's suppliers. Samsung, which announced a recall of the Note 7 devices in September, decided to continue shipping new Galaxy Note 7s containing batteries from a different supplier.

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The solution failed. Reports soon surfaced that some of the replacement devices were blowing up too. Company engineers went back to the drawing board, according to a person briefed on the test process who spoke on the condition of anonymity because the internal workings were confidential. As of this week, Samsung's testers were still unable to reproduce the explosions.

By then, it was too late. On Tuesday, Samsung said it was killing the Galaxy Note 7 entirely. The drastic move is highly unusual in the technology industry, where companies tend to keep trying to improve a product rather than pull it altogether. And it caps a nearly two-month fall for Samsung, which has taken a beating from investors, safety regulators and consumers over its trustworthiness — especially with a marquee product that was supposed to rival Apple's iPhone.

The damage has been severe. Even before Samsung announced it was ceasing production of the Galaxy Note 7, its South Korea-traded shares fell more than 8 percent, its biggest daily drop since 2008, knocking $17 billion off the company's market value. Strategy Analytics, a research firm, had estimated earlier that Samsung could lose more than $10 billion because of the phone's problems. Samsung's smartphone business has helped its other divisions by buying their computer chips and panel screens.

Scotching the Note 7 does not end the questions facing Samsung. It still has not disclosed what specifically caused the Note 7s to smoke and catch fire — or even whether it knows what the problem was. And the company may face questions about the safety of its other products, such as kitchen appliances and washing machines.

Samsung has received at least 92 reports of Note 7 batteries overheating in the United States, with 26 reports of burns and 55 reports of property damage, according to information posted by the United States Consumer Product Safety Commission. The agency is now working on a potential second recall of the Note 7s, this time focused on the devices that Samsung had shipped to replace the original smartphones.

"The fact that we are dealing with potentially a second recall on top of a first recall is not your normal situation and indicative of a less-than-ideal process that should have involved earlier coordination with the government," Elliot F. Kaye, chairman of the safety commission, said in an interview.

A Samsung spokeswoman referred to an earlier statement from the company: "For the benefit of consumers' safety, we stopped sales and exchanges of the Galaxy Note 7 and have consequently decided to stop production."

In killing the Note 7, Samsung made a move reminiscent of Tylenol's 1980s recall, which is held up as a case study in business schools today. In 1982, seven people died after taking cyanide-laced capsules of Extra-Strength Tylenol, the company's best-selling product. Tylenol yanked 31 million bottles of capsules from stores. Two months later, its painkiller was back on the market with tamper-proof packaging and an extensive media campaign.

How quickly Samsung will emerge from the Note 7 fiasco is less clear. The company is facing an immediate, and substantial, financial blow. Perhaps more worrisome is how people may lose trust in the Samsung brand. An editorial in South Korea's largest newspaper, the Chosun Ilbo, said: "You cannot really calculate the loss of consumer trust in money." It said that Samsung must realize that it "didn't take many years for Nokia to tumble from its position as the world's top cellphone maker."

Eric Schiffer, chairman of Reputation Management Consultants, which helps celebrities and companies manage brand crises, said Samsung's decision to kill the Note 7 might help it in the long run. "They made a really intelligent, hard choice that saved their brand and prevented what could have been a complete melting down of all the good will they had built over the last five years," he said.

The Galaxy Note 7 was one of the most ambitious products Samsung had begun marketing under the leadership of its vice chairman, Lee Jae-yong, who took the helm of the country's largest family-controlled conglomerate, or chaebol, after his father, Lee Kun-hee, the chairman, became ill in 2014. The senior Mr. Lee, who has not been seen in public since, famously burned a pile of 150,000 defective Samsung phones 21 years ago to demonstrate the company's commitment to quality.

The Galaxy Note 7 was released in August, largely to acclaim from reviewers. In the month before the rollout, Samsung had hundreds of "beta testers" using early versions of the units, including third-party testers like its carrier partners AT&T and Verizon. None identified a problem that might cause phones to explode, according to the person briefed on the testing process.

Samsung's chief smartphone rival, Apple, announced new iPhones last month. Samsung's fight to compete with Apple by cramming increasingly sophisticated features into the device may not have helped. Industry experts are scrutinizing Samsung's supply chain to see whether the rush to market caused technical problems or led to corners being cut.

Internally, Samsung's corporate culture may also have compounded any issues. Two former Samsung employees, who asked not to be named for fear of retaliation from the company, described the workplace as militaristic, with a top-down approach where orders came from people high above who did not necessarily understand how product technologies actually worked.

"Maybe they should look harder and closer at what is happening at the management level," said Roberta Cozza, a research director with Gartner Research, who cited the damage to Samsung's credibility with customers as well as telecommunications carriers.

After the original Note 7s began running into exploding problems in August, Samsung initially concluded that the problem was batteries supplied by its subsidiary, Samsung SDI, according to documents from the Korean Agency for Technology and Standards, a government regulator, which were leaked to South Korea's SBS TV. The plates inside the SDI battery were too close to each other near its rounded corners, making it vulnerable to a short circuit, according to the documents, and the battery also had defects in its insulating tape and the coating of its negative electrode.

On Sept. 2, Samsung decided to recall 2.5 million Note 7s with SDI batteries. But the company was working on an alternative. Both Samsung and the regulatory agency decided that batteries from another supplier, ATL, did not have the same defects.

And so Samsung continued to ship Note 7s with ATL batteries, offering them as replacement phones. That decision backfired.

"It was too quick to blame the batteries; I think there was nothing wrong with them or that they were not the main problem," said Park Chul-wan, former director of the Center for Advanced Batteries at the Korea Electronics Technology Institute, who said he reviewed the regulatory agency's documents.

It did not help that the hundreds of Samsung testers trying to pinpoint the problem could not easily communicate with one another: Fearing lawsuits and subpoenas, Samsung told employees involved in the testing to keep communications about the tests offline — meaning no emails were allowed, according to the person briefed on the process.

Mr. Park said he had talked with some Samsung engineers but none seemed to know what happened, nor were they able to replicate the problem. Replication would have been quick and easy if the problem was with the chip board and designs, he said.

"The problem seems to be far more complex," Mr. Park said in a phone interview. "The Note 7 had more features and was more complex than any other phone manufactured. In a race to surpass iPhone, Samsung seems to have packed it with so much innovation it became uncontrollable."

Reporting was contributed by Emily Feng, Vindu Goel, Cecilia Kang and Carlos Tejada.