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Samsung Electronics Company, Ltd.: Galaxy Note 7 Crisis

Article · January 2017

DOI: 10.4135/9781526489043

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Samsung Electronics Company, Ltd.:

Galaxy Note 7 Crisis
“I pulled the phone out and threw it on the ground, because I didn’t want it to
explode in my hand. I didn’t know what else to do with it.”

~ Brian Green, Southwest Airlines Flight Passenger

On August 19, 2016 Samsung released its newest and most innovative smartphone: the Galaxy
Note 7. The unveiling of the Galaxy Note 7 created headlines and broke pre-order records.2 The
enthusiasm for and admiration of the Galaxy Note 7 were short-lived, however, because of one
vital issue: the phones were catching fire. (See Exhibit 1, p. 9).

On September 2, 2016 Samsung suspended sales of the Galaxy Note 7 after a product
design review found a manufacturing defect causing lithium-ion batteries to catch fire. Samsung
announced a global recall of 2.5 million Galaxy Note 7 phones.3

Labor Day weekend that year, Nathan Dornacher, of St. Petersburg, Florida, was charging
his Samsung Galaxy Note 7 in the center console of his Jeep Grand Cherokee. While his family
was unloading the Jeep, however, Dornacher looked outside and his Jeep was consumed in
flames.4 Dornacher’s Jeep caught fire because his four-day-old Samsung phone contained a
defective lithium-ion battery that generated excessive heat and exploded. Luckily, no one was
injured.5

Just two weeks later, on September 15, the U.S. Consumer Product Safety Commission
formally announced a recall of more than one million Galaxy Note 7 phones in the United
States.6 Samsung exchanged the defective phones for units with batteries from a different
supplier.7 This recall, however, did not solve the problem.

This case was prepared by research assistants Emily Thomas and Alejandra Zeron under the direction of James S.
O’Rourke, Teaching Professor of Management, as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation. Information was gathered from corporate as well as
public sour.

Copyright ©2017. Eugene D. Fanning Center for Business Communication. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form by any
means – electronic, mechanical, photocopying, recording, or otherwise – without permission.
 On October 6, 2016, Brian Green was powering down his Galaxy Note 7 on a Southwest
Airlines flight when he heard a pop and noticed smoke billowing out of his clothes. When he
pulled the phone out of his pocket, he threw it on the ground, and about two rows of seats were
enveloped in smoke.8 The Southwest Airlines flight was evacuated and no one was injured.
Green’s Galaxy Note 7, however, was a replacement phone from first recall in September 2016,
yet it still caught fire.9 Samsung had not fixed the lithium-ion battery defect in the first recall and,
instead, exchanged defective phones for defective phones.

As of October 11, 2016, Samsung had received at least 92 reports of the Galaxy Note 7
overheating in the U.S., 25 reports of burns, and 55 reports of property damage.10 Samsung
stopped production of the Galaxy Note 7 altogether, and issued a final recall, refund and
exchange program on October 13, 2016.11

Samsung Electronics Co., Ltd.

Byung-Chull Lee founded Samsung, today known as Samsung Group, in 1938 in Taegu, Korea.
At the start, his business focused primarily on trade exports, selling dried Korean fish, vegetables
and fruit to Manchuria and Beijing. Over the next three decades, the group diversified into other
businesses including insurance, textiles, specialty chemicals, securities and trading, construction,
and home appliances. Today, Samsung Group is recognized for its wide spectrum of innovative
and high quality products and processes.12

Samsung Group’s flagship organization, Samsung Electronics Company, Ltd., was

founded in 1969 and today leads the global market in high-end electronics manufacturing and
digital media.13 The company is structured around three business divisions: Consumer
Electronics, Device Solutions, and Information Technology & Mobile Communications. The
Consumer Electronics business unit provides cable television, monitors, printers, air-
conditioners, medical devices, washing machines, and refrigerators. The Device Solutions arm
comprises flash memory and large-scale integrated circuits, while the Information Technology &
Mobile Communications division offers handheld devices, computers, communication systems,
and digital cameras.14 In 2013, Samsung became the world’s largest manufacturer of
smartphones, fueled by the popularity of its Android-powered Samsung Galaxy product line.15
Samsung Electronics is also regarded as having pioneered tablet computing with its Samsung
Galaxy Note family of products.16

In 2015, Samsung Electronics Company, Ltd. generated $26.34 billion in operating profit
and $177.33 in cumulative net sales, 51.6 percent coming directly from its Information
Technology & Mobile Communications business division.17 In that same year, the company
employed 325,000 regular and contract-based employees across 80 countries. Forbes ranked
Samsung Electronics as the #15 world’s most reputable company in 2015.18

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 Lithium-Ion Batteries

Lithium-ion batteries contain two electrodes that are separated by an electrolyte.19 (See Exhibit 2,
p. 10). An electrolyte is a highly flammable chemical liquid between the electrodes that conducts
electricity.20 Since the electrolyte is shuttling lithium, however, it must be in a non-aqueous
solution, and cannot use acid, an alkaline solution, or water. Therefore, the organic liquid that
lithium-ion batteries use contains dissolved lithium salt, allowing the lithium to shuttle back and
forth between the positive and negative electrodes. The formula is effective but highly volatile
and flammable.21

The critical component in lithium-ion batteries is the thin separator that sits between the
two electrodes. If this barrier breaks down or is damaged by any outside pressure, this can trigger
excessive heat and could cause a battery fire. Additionally, if this barrier breaks down to the
point where the two electrodes touch, short-circuiting and overheating will result, potentially
leading to a battery fire.22

Samsung rushed the production and design of the Galaxy Note 7 in order to beat the
release of Apple’s iPhone 7 and, in the process, included an exceptionally thin separator in the
batteries that could increase the likelihood of fires or explosions. Battery scientists say that
Samsung’s aggressive design decisions made problems more likely, and that their choice to push
the limits of battery technology left little safety margin in the event of a problem.23

Despite the design flaws of the Galaxy Note 7, Samsung engineers and other outside
experts said that the Galaxy Note 7 lithium-ion battery crisis could also be blamed on
manufacturing problems. During the first recall of the Galaxy Note 7, Samsung initially blamed
Samsung SDI, the company’s in-house battery supplier, for manufacturing faulty batteries. The
initial fires in these batteries were caused, in part, by pressure damage, in which a container
pinched the top corner of the battery.24

After preliminary reports of the batteries catching fire, Samsung ceased production of
lithium-ion batteries from Samsung SDI for the Galaxy Note 7, and continued distributing
Galaxy Note 7’s with batteries from China’s Amperex Technology Limited, or ATL, offering
these phones as safe replacements. The batteries that came from this supplier, however, were also
catching fire, and were found to have defects in welding, with some lacking protective tape.25

Smartphone Industry

The smartphone industry began to gain popularity with the release of Apple’s iPhone in 2007. It
wasn’t until late 2008 that the first smartphone running on Android was sold to the consumer
market. The smartphone industry has since grown steadily in number of suppliers, different
smartphone models, and market size. Industry analysts projected that by the end of 2017, over
one-third of the world’s population would own a smartphone, an estimated 2.6 billion users. 26

3
While Samsung has the largest market share in the industry, Apple is the second largest
smartphone vendor worldwide. Other key players in the industry are Huawei, Lenovo, and
Xiamoi. 27

In response to the Galaxy Note 7’s catching fire, Samsung’s biggest competitor, Apple,
did nothing in response. Apple instead focused on the launch of their iPhone 7 and iPhone 7-Plus
in September 2016. Instead of referencing the Galaxy Note 7’s battery issue when presenting the
battery improvements of the iPhone 7 and iPhone 7-Plus, Apple did not acknowledge any
Samsung recall disaster, whatsoever.28 Despite Apple’s decision not to capitalize on Samsung’s
missteps, they captured the first position in global smartphone market share in the fourth quarter
of 2016. 29

Motorola, however, did take advantage of the Galaxy Note 7 crisis and Samsung’s
vulnerability. Some of their marketing materials were clearly aimed at Samsung’s battery errors,
and included “At Moto, our priority is safety first. Unlike some manufacturers, we adhere to the
highest standards in quality and testing of all our batteries.” 30

Samsung’s Response

On September 02, 2016 – a few days after initial customer allegations emerged – Samsung issued
a statement that it would replace 2.5 million units of the Galaxy Note 7 device as a
“precautionary measure to the battery cell issue.” The company socialized the statement through
its own website, where it urged Note 7 users to contact their point of purchase or a call center to
request a replacement phone. On September 15, 2016, the message was posted on the Samsung
Mobile U.S. Twitter and Facebook accounts.31 On September 23, 2016, the company also
launched a software update that helped customers determine whether their phone was part of the
recall.

Players in the mobile industry initially praised Samsung for its decisiveness and swiftness
in the handling the matter. The general sentiment later turned to outrage and disappointment
when it was learned that the multinational electronics company had acted without required
coordination with the Consumer Product Safety Commission in the United States, which
demands that companies notify it of defects and work collaboratively to arrange public
notification of recalls. At a news conference, the commission’s chairman, Elliot F. Kaye, alluded
to the regulator’s dissatisfaction with Samsung and condemned the company for going out on its
own.32 Samsung was also called out for telling Hong Kong consumers that models there would be
unaffected due to the use of a different battery, only to retract that statement the following day.33

Just a few weeks later, on October 11, 2016, Samsung Electronics officially announced
that it was halting all sales and production of the Galaxy Note 7, after reports that the
replacement phones were also catching fire emerged across multiple media outlets. The South
Korean conglomerate posted a statement on its website instructing owners of the phone to power
it down and contact the carrier or retail outlet where they purchased the device to obtain a refund

4
or exchange.34 To access the statement, customers had to click a link at the top of Samsung’s
home page where the passive label “Updated Consumer Guidance for the Galaxy Note 7” would
take them to the statement and information on the Refund and Exchange Program.35 On October
14, 2016, the content was cross-pollinated on the company’s Facebook account.

Implications

The decision to pull the plug on the Galaxy Note 7 cost Samsung an estimated $6.2 billion.36
Even before the company announced it was discontinuing the product, its South Korea-traded
shares fell by more than eight percent, the biggest daily drop since 2008.37 The sharp slip
knocked approximately $17 billion off the company’s market value.38 Killing production of the
high-end smartphone, however, did not curtail all of the questions that beset the company. An
editorial in South Korea’s leading newspaper, The Chosun Ilbo, pointed to even greater costs
beyond the immediate and substantial financial blow, including the loss of public trust and the
tarnishing of the brand’s reputation. The article read: “You cannot calculate the loss of consumer
trust in money.” 39 Additionally, the publication questions the efficacy of the business model that
has brought Samsung success after success in the past.

Backlash

In addition to the large amount of news coverage that the Galaxy Note 7 crisis received from its
recalls, the fires spurred unwanted media attention for Samsung in the form of tweets, Facebook
posts, and youTube videos.

As the public’s frustration began to uncoil, Samsung began losing the trust of many of its
customers, as evidenced by one consumer’s tweet to Sprint, saying “Hey @sprint, what if I don’t
trust @SamsungMobile devices anymore?” The carrier responded, “Greetings, you still can trust
Apple, HTC, LG or Alcatel.” 40

Additionally, the U.S. Department of Transportation, with the Federal Aviation

Administration and the Pipeline and Hazardous Materials Safety Administration issued an
emergency order banning Samsung Galaxy Note 7s from air transportation in the United States.
Effective October 15, 2016, the devices were not allowed to be carried on board, packed in
checked bags, or shipped as air cargo on flights to and from the United States or within the
country.41

News of the danger of the Galaxy Note 7 devices was further emphasized when
Transportation Secretary Anthony Foxx stated, “We are taking this additional step because even
one fire incident inflight poses a high risk of severe personal injury and puts many lives at risk.”42

Additional Issues

Samsung Electronics’ safety problems do not end with the Galaxy Note 7. The manufacturer
announced in November 2016 a recall of 2.8 million defective top-load washing machines in the

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United States, exceeding the number of smartphones the company had recalled a month earlier.
The Consumer Product and Safety Commission claimed the laundry machines were prone to
detaching from the washing machine chassis during use, “posing a risk of injury from impact.”43
Samsung received 733 different reports of washing machines vibrating excessively or the tops
pulling off. Additionally, the safety commission indicated there had been nine reports of related
injuries, including a broken jaw and shoulder.44

In addition to the safety issues already plaguing Samsung, the company is also facing a
graft scandal after its vice chairman and heir Jay Y. Lee was arrested on charges of corruption on
February 16, 2017. Lee was accused of paying bribes to an advisor of South Korean President
Park Geun-hye in exchange for political favors. The bribes are alleged to include support for a
merger between two Samsung subsidiaries that allowed him to inherit corporate control from his
incapacitated father, Lee Khun-hee, the chairman.45

Discussion Questions

• As the communication director for the company, what course of action would you take
after the initial consumer reports of the phone’s defect emerged?

• How can Samsung regain the trust of its consumers once more?

• What processes or structures should Samsung establish to make sure it does not encounter
these issues again?

• What kind of crisis management plan, if any, should Samsung develop to address similar
situations in the future?

References
1
Wattles, Jackie. “Samsung Galaxy Note 7 Replacement Phone Reportedly Catches Fire on Plane,” CNN Tech, Oct.
06, 2016. <http://money.cnn.com/2016/10/05/technology/samsung-galaxy-note-7-explodes-airplane/>
2
Triggs, Robert. “Galaxy Note 7 breaks South Korean Pre-Order Record,” Android Authority, Aug. 11, 2016.
<http://www.androidauthority.com/galaxy-note-7-breaks-pre-order-records-708863/>
3
“Here’s the Timeline of Samsung’s Galaxy Note 7 Recall Crisis,” Fortune Tech, Oct. 10, 2016.
<http://fortune.com/2016/10/10/timeline-samsun-galaxy-note-recall-crisis/>
4
“Florida Man’s Vehicle Catches Fire After Charging Galaxy Note 7 Explodes,” Fox News Tech, Sept. 09, 2016.
<http://www.foxnews.com/tech/2016/09/09/florida-mans-vehicle-catches-fire-after-charging-galaxy-note-7-
explodes.html>
5
Ibid.
6
“Here’s the Timeline of Samsung’s Galaxy Note 7 Recall Crisis,” Fortune Tech, Oct. 10, 2016.
<http://fortune.com/2016/10/10/timeline-samsun-galaxy-note-recall-crisis/>
7
Chen, Brian X., & Choe Sang-Hun. “Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone,” The New York
Times, Oct. 11, 2016.

6
<https://www.nytimes.com/2016/10/12/business/international/samsung-galaxy-note7-terminated.html?_r=0>
8
Wattles, Jackie. “Samsung Galaxy Note 7 Replacement Phone Reportedly Catches Fire on Plane,” CNN Tech, Oct.
06, 2016. <http://money.cnn.com/2016/10/05/technology/samsung-galaxy-note-7-explodes-airplane/>
9
Ibid.
10
Chen, Brian X., & Choe Sang-Hun. “Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone,” The New York
Times, Oct. 11, 2016.
<https://www.nytimes.com/2016/10/12/business/international/samsung-galaxy-note7-terminated.html?_r=0>
11
“Samsung Expands Recall of Galaxy Note7 Smartphones Based on Additional Incidents with Replacement Phones;
Serious Fire and Burn Hazards,” United States Consumer Product Safety Commission, Oct. 13, 2016.
<https://www.cpsc.gov/Recalls/2016/samsung-expands-recall-of-galaxy-note7-smartphones-based-on-additional-
incidents-with>
12
Samsung Website, About Samsung <http://www.samsung.com/us/aboutsamsung/corporateprofile/history05.html>
13
Ibid.
14
“Canada’s Best Employers 2017,” Forbes Magazine.
<https://www.forbes.com/companies/samsung-electronics/>
15
Garside, Juliette. “Samsung Overtakes Apples As World’s Most Valuable Profitable Phone Market,” The
Guardian, July 26, 2013.
<https://www.theguardian.com/technology/2013/jul/26/samsung-apple-profitable-mobile-phone>
16
“Samsung Gains Tablet Market Share As Apple Lead Narrows,” BBC News, Feb. 01, 2013.
<http://www.bbc.com/news/business-21288852>
17
Samsung Electronics Co., Ltd. 2015 Annual Report
<http://www.samsung.com/us/aboutsamsung/investor_relations/financial_information/downloads/2015/2015_busines
s_quarter04.pdf>
18
Samsung Newsroom, About Us, Fast Facts <https://news.samsung.com/global/fast-facts>
19
Fitzpatrick, Alex. “We Asked a Battery Expert Why Samsung’s Phones Are Catching Fire,” Time Tech, Sept. 09,
2016. <http://time.com/4485396/samsung-note-7-battery-fire-why/>
20
Criddle, Cristina. “Why is the Samsung Galaxy Note 7 Catching Fire? The Lithium-Ion Battery Explained,” The
Telegraph Technology, Oct. 11, 2016. <http://www.telegraph.co.uk/technology/2016/10/11/why-is-the-samsung-
galaxy-note-7-catching-fire-the-lithium-ion-b/>
21
Fitzpatrick, Alex. “We Asked a Battery Expert Why Samsung’s Phones Are Catching Fire,” Time Tech, Sept. 09,
2016. <http://time.com/4485396/samsung-note-7-battery-fire-why/>
22
Mozur, Paul. “Galaxy Note 7 Fires Caused by Battery and Design Flaws, Samsung Says,” The New York Times,
Jan. 22, 2017. <https://www.nytimes.com/2017/01/22/business/samsung-galaxy-note-7-battery-fires-report.html>
23
Ibid.
24
Ibid.
25
Ibid.

7
26
”Statistics and Facts About Smartphones,” Statista. <https://www.statista.com/topics/840/smartphones/>
27
Ibid.
28
Smith, Chris. “Apple’s Reaction to the Galaxy Note 7 Recall was Brilliant, and We All Missed It,” Yahoo Tech,
Sept. 13, 2016. <https://www.yahoo.com/tech/apple-reaction-galaxy-note-7-recall-brilliant-missed-184431973.html>
29
“Strategy Analytics: Global Smartphone Shipments Hit a Record 1.5 Billion Units in 2016,” Business Wire, Jan.
31, 2017. <http://www.businesswire.com/news/home/20170131006472/en/Strategy-Analytics-Global-Smartphone-
Shipments-Hit-Record>
30
Smith, Chris. “Apple’s Reaction to the Galaxy Note 7 Recall was Brilliant, and We All Missed It,” Yahoo Tech,
Sept. 13, 2016. <https://www.yahoo.com/tech/apple-reaction-galaxy-note-7-recall-brilliant-missed-184431973.html>

31
Maheshwari, Sapna. “Samsung’s Response to Galaxy Note 7,” The New York Times, Oct. 11,
2016. <https://www.nytimes.com/2016/10/12/business/media/samsungs-passive-response-to-
note-7s-overheating-problem-draws-criticism.html>
32
Lee Su-Hyun, and Paul Mozur. “Samsung Stumbles in Race to Recall Troubled Phones,” The New York Times,
Sept. 15, 2016. <https://www.nytimes.com/2016/09/16/business/samsung-galaxy-note-recall.html>

33
Maheshwari, Sapna. “Samsung’s Response to Galaxy Note 7,” The New York Times, Oct. 11,
2016. <https://www.nytimes.com/2016/10/12/business/media/samsungs-passive-response-to-
note-7s-overheating-problem-draws-criticism.html>
34
Ibid.
35
Ibid.
36
Ibid.
37
Chen, Brian X., and Choe Sang-Hun. “Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone,” The New
York Times, Oct. 11, 2016.
<https://www.nytimes.com/2016/10/12/business/international/samsung-galaxy-note7-terminated.html?_r=0>
38
Ibid.
39
Ibid.
40
Maheshwari, Sapna. “Samsung’s Response to Galaxy Note 7,” The New York Times, Oct. 11, 2016.
<https://www.nytimes.com/2016/10/12/business/media/samsungs-passive-response-to-note-7s-overheating-problem-
draws-criticism.html>
41
“DOT Bans All Samsung Galaxy Note7 Phones From Airplanes,” U.S. Department of Transportation. Oct. 14,
2016. <https://www.transportation.gov/briefing-room/dot-bans-all-samsung-galaxy-note7-phones-airplanes>
42
Ibid.
43
“Samsung Recalls Top-Load Washing Machines Due to Risk of Impact Injuries,” United States Consumer Product
Safety Commission, Nov. 4, 2016. <https://www.cpsc.gov/Recalls/2016/samsung-recalls-top-load-washing-
machines>

8
44
Ibid.
45
Russel, Jon. “Samsung Vice Chairman Arrested on Bribery Charges,” TechCrunch, Feb. 16, 2017.
<https://techcrunch.com/2017/02/16/samsung-vice-chairman-arrested-on-bribery-charges/>

Exhibit 1: Galaxy Note 7 After Battery Fire

Source: Mozur, Paul. “Galaxy Note 7 Fires Caused by Battery and Design Flaws, Samsung Says,” The New York
Times, Jan. 22, 2017. <https://www.nytimes.com/2017/01/22/business/samsung-galaxy-note-7-battery-fires-
report.html>

9
 Exhibit 2: Lithium-Ion Battery

Source: Criddle, Cristina. “Why is the Samsung Galaxy Note 7 Catching Fire? The Lithium-Ion Battery Explained,”
The Telegraph Technology, Oct. 11, 2016. <http://www.telegraph.co.uk/technology/2016/10/11/why-is-the-samsung-
galaxy-note-7-catching-fire-the-lithium-ion-b/>

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