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Samsung Note 7 fires risk hurting demand for other products

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Kong Tse has seen first-hand how the global uproar over flammable Samsung Note 7 smartphones is playing out with consumers.

[SEOUL] Kong Tse has seen first-hand how the global uproar over flammable Samsung Note 7 smartphones is playing out with consumers.

The 26-year-old, who hawks devices in the warrens of Hong Kong's Wanchai Computer Centre, says sales of the company's handsets have tumbled 30 per cent since the controversy began, including the high-end S7 Edge.

"Once betrayed, eight times avoided," says the tousle-haired salesman, invoking a local saying while leaning against the counter in a tiny shop for Well Go Telecom.

"They've lost a lot of trust." Mr Kong's experience suggests the debacle with Samsung Electronics Co's Note 7 battery fires may reverberate beyond a single product line and jeopardise a brand the South Korean company has spent billions to burnish.

Investors will find out more about the fallout on Thursday, when Samsung reports earnings for the first time since the crisis began.

Note 7 sales will undoubtedly fall short of original projections. Since the recall, six analysts surveyed by Bloomberg have cut estimates on Note 7 shipments this year by an average of 38 per cent to eight million units, from an original 13 million.

Several said they were waiting to gauge the impact on Samsung's other products, from washing machines to the flagship Galaxy S7.

Samsung has worked hard to limit the damage. The Suwon-based company moved quickly to recall more than 2.5 million Note 7s after the battery troubles emerged and has already begun shipping replacements to key markets, such as Korea and the US.

Still, Samsung has lost momentum against key rivals such as Apple Inc and Huawei Technologies Co.

The troubles appear particularly challenging in China where customers and government-owned media railed about the country's exclusion from the recall, which they saw as discriminatory.

"The Note 7 impact will last for a while, especially in China where so many good phones are flooding out," said Lee Seung Woo, an analyst at IBK Securities Co in Seoul.

"Samsung may shed market share further in China and the Note 7 impact will possibly spill over to its other product line-ups on the mainland, considering the recent public uproar."

Samsung got more competition Tuesday as Alphabet Inc's Google unveiled its new Pixel smartphones.

The devices will run on the Android operating system, the same software Google supplies to Samsung and others, and will compete with Samsung's phones at the high end of the market. Samsung shares slipped about one per cent in Seoul trading.

Mr Kong isn't alone in seeing a drop in sales. Four other stores in the same mall, traditionally a magnet for electronics shopping, reported sales of Samsung devices were down between 30 and 80 per cent.

While two blamed a slowing Chinese economy for draining business, others said consumers had been spooked by the incessant media reports. I-Mobile salesman Ken Wong, 24, said he'd been knocking a few hundred Hong Kong dollars off the shelf price to move Note 7s. All were mostly bereft of customers on a Tuesday afternoon.

The investment community is betting the crisis will blow over soon. Many Korean analysts credit Samsung with a swift response, though consumers complained about confusing policies in different markets. 

Phones make up just half its business: the company leads the world in memory chips and displays, prices for which have stabilised over past quarters and continue to drive growth.

After losing more than US$20 billion in market value over two days in early September, Samsung's stock was a mere four per cent below its Aug 23 record after Tuesday's close.

Still, the crisis means Samsung will probably post its slowest pace of quarterly profit in more than a year.

Just over a month ago, the South Korean conglomerate was riding high on a wave of glowing reviews for its priciest phone, coming off its best quarterly operating profit in more than two years.

But after rushing to get the jump on the iPhone 7, Samsung realised some of the millions of devices it pushed out housed overheating-prone batteries, prompting airlines and regulators to ban its use. 

"The global perception of Samsung's brand and quality has taken a slight knock," said Neil Mawston, executive director at Strategy Analytics Inc.

The Korean company will release only preliminary operating earnings and revenue this week, steering clear of divisional breakdowns before a full report card in late October. 

Analysts however figure the Korean company must set aside upwards of US$1 billion to replace about 2.5 million phones across the world.  Profit is expected to have inched three per cent higher to 7.6 trillion won (S$9.42 billion) in the third quarter, while sales probably dipped one per cent to 51 trillion won, according to estimates compiled by Bloomberg.

 But six analysts surveyed by Bloomberg News have already slashed their quarterly mobile profit expectations by more than one trillion won on average. 

Much hinges on whether revamped Note 7s now hitting the market manage to stay out of trouble. 

Samsung resumed selling a modified device over the weekend, and said last week that more than 60 per cent of phones with faulty batteries had been replaced in South Korea and the US.

It's looking into reports from recent Chinese customers that new phones - thought to be fault-free because they use a different battery- had burst into flame. 

"If further cases are spotted, consumers' mistrust will spread to other Samsung products. And that will also determine the shares as well," said Song Myung Sup, a Seoul-based analyst at HI Investment & Securities Co.

Kim Hak Soon, for one, is philosophical about the way everything's turned out.

The 28-year-old manager of a KT Corp store in downtown Seoul's Jonggak Station, said sales so far haven't been as bad as he'd feared.

"Some still worry about the potential exploding of the newly modified phones but everything's going smoothly so far."