Samsung's Note 7 recall is official, now comes the hard part

[NEW YORK] Now that Samsung Electronics Co's recall of the explosion-prone Galaxy Note 7 smartphone is official in the US, the company can start focusing on the tough job of restoring public trust.

Samsung unveiled a global replacement program for the big- screen device two weeks ago, but the formal recall on Thursday by US safety regulators is more involved because it makes the sale of affected devices illegal and sets other guidelines. With that hurdle out of the way and replacement phones set to start shipping within days, the Suwon, South Korea-based company now needs to manage the fallout.

"Now comes the hard part of restoring confidence of consumers and investors," said Kim Sang-Jo, economics professor at Hansung University in Seoul. "How they go from here will define Samsung. It's all up to how they deal with it."

Of the 2.5 million Note 7 phones that were shipped, about 1 million were sold in the US, the Consumer Product Safety Commission said in a statement Thursday. There have been about 92 reports of batteries overheating, with 26 cases involving burns and 55 involving property damage, the agency said.

"Because this product presents such a serious fire hazard, I am urging all consumers to take advantage of this recall right away," CPSC chairman Elliot Kaye said at a news conference.

With a stylus, new design and big edge-to-edge screen, the Note 7 debuted last month to positive reviews and was positioned to take on Apple Inc's new line of iPhones, which go on sale Friday. Samsung was hitting its stride, with the success of its flagship Galaxy S7 helping to drive its shares to a record and lifting quarterly profit to the highest in two years.

Instead, the market leader in Android-based smartphones found itself mired in a major recall.

While a comprehensive report hasn't yet been released on the battery issue, the explanations provided so far point to a phenomenon known as "thermal runaway," in which the battery creates so much heat that it ultimately burns or explodes.

That happens when two electrodes are close enough to each other to cause a short circuit. Usually, there's a membrane separating those poles, which can fail if the material is weak, the battery is compressed, or both.

"By putting that all together and squeezing it into the compartment, it caused some pinching," Mr Kaye said.

The batteries were made by affiliate Samsung SDI Co; Samsung Electronics is now relying on a new supplier. The CPSC also had to take steps to approve the new batteries for the replacement phones.

"The CPSC explanation on hazard with batteries confirms what we have already learned in the past two weeks," Mr Kim said.

Customers who bought a Note 7 before Sept 15 should immediately stop using and turn off their phones, the CPSC said. The agency advised consumers to contact their wireless carrier or a Samsung retail outlet to receive a new, free phone with a different battery, a refund or a replacement device. Of the phones sold in the US, 97 per cent had the battery flaw; owners of the Note 7 can go to Samsung's website and enter the device's serial number to find out if it has been recalled.

New replacement phones will be available at most retail locations in the US no later than Sept 21, the company said in a separate statement.

Samsung has been criticised for its lack of guidelines and for announcing its own replacement program on Sept 2, rather than immediately working with the CPSC to issue a formal recall. While declining to directly take issue with Samsung's actions, Mr Kaye said government action may sometimes be delayed when a company decides to announce a recall without first consulting regulators.

"I will say as a general matter that it's not a recipe of a successful recall for a company to go out on its own," he said.

Thursday's announcement gives the US government the option to formally ban the phones on airline flights and makes it illegal to continue to sell them. The CPSC has an internet surveillance unit that works with eBay Inc and scans other marketplaces, including Craigslist, Alibaba Group Holding Ltd and Overstock.com Inc, to shut down any individual sales, said Scott Wolfson, CPSC's communications director.

The agency also keeps "a close eye on retailers" to enforce the sales ban, he said.

The Pipeline and Hazardous Materials Safety Administration and the Federal Aviation Administration, which jointly regulate potential dangerous items on airlines, acted after the CPSC's recall announcement to ensure the Samsung phones don't endanger aircraft.

Currently, most airlines aren't allowing passengers to power up the phones or charge them on flights, based on guidance from the FAA. The agencies issued restrictions Thursday that permit owners of the recalled Note 7 to travel with it on a plane only if they turn off the device, protect the power switch from accidental activation and bring it in a carry-on bag or on their person.

BLOOMBERG