SSDIY Samsung SDI Company Ltd (PK)

Samsung Electronics Co. is facing growing consumer confusion and anger as the world's biggest smartphone maker grapples with a recall of its newest devices following reports of exploding batteries.

The South Korean technology company said early this month that it is recalling 2.5 million Galaxy Note 7 large-screen smartphones in 10 countries and other markets where the device had been shipped, citing faulty batteries that have led to some exploding while charging. Some 11 days later, the South Korean company had yet to set a specific timeline in important markets such as the U.S. and Canada on when consumers can get a replacement phone.

The company is also grappling with the issue of whether it will have enough supply of the new phones and components to replace millions of handsets that have reached consumers in such a short time frame.

Since Samsung announced the recall on Sept. 2, more than $10 billion has been wiped off the company's market value. Samsung also has delayed launches in other crucial markets such as India, and suffered dwindling consumer confidence as airlines and the U.S. Consumer Product Safety Commission have warned against people using or charging the phone on planes.

Samsung's decision to recall the phones from consumers in different countries through different exchange programs has proved to be a bigger-than-expected challenge, and harder than a simultaneous global recall, people familiar with the matter said.

"This is not an issue that can be fixed overnight," a spokeswoman for Samsung said Tuesday, when asked how the recalls were proceeding in the different markets. "Recalls are conducted based on the situation in each country and after consultations with different partners and carrier companies," she said.

It is difficult to predict when consumers can have their phones replaced, she said, adding that Samsung is working to meet the demands as soon as possible.

She said in markets such as the U.S. and Canada, replacement phones would be provided after an investigation by safety regulators in those countries.

In the U.S., some consumers have resisted returning their phones and are blaming phone carriers and retailers for confusion about how the phone swap works.

"Everybody is in a little bit of a standstill," said a person working for a major U.S. carrier with knowledge of Samsung's recall effort.

Olivier Cassagnol, a lawyer in New York, is using his Note 7, despite the warnings, because he says a Samsung customer representative said it could be possible to replace his phone with another Note 7.

"Of course, I'm nervous that I might have a defective unit, so I want to either have it confirmed my phone is fine or replace the unit," he said.

Samsung acknowledged Note 7 holdouts remain. "We encourage all Note 7 owners who have not yet done so, to exchange their phones today," a Samsung spokeswoman said.

The consumer confusion stems from the fact that Samsung's recall wasn't conducted through the CPSC, the way recalls in the U.S. are legally supposed to occur.

Once the CPSC issues a recall, it typically becomes illegal to sell or resell the affected product until it is repaired.

Samsung and the CPSC have said they are coordinating their efforts now. An official recall could clear up confusing messages to consumers.

"Samsung is at risk of turning a minor drama into a major crisis. Samsung needs to get a decisive grip of the battery problem and fix it," said Neil Mawston, an analyst at Strategy Analytics. "Apple has been gifted an unexpected opportunity to benefit from Samsung's product missteps in the coming holiday season."

On Tuesday, shares in Samsung recovered to close up 4.2% after two consecutive sessions of losses. Analysts said the rebound came after Samsung's decision to sell noncore assets and the nomination of heir apparent Lee Jae-yong as a board member, a move analysts say is likely to speed up decision-making at the company.

The prospect of a prolonged process means Samsung has lost a crucial window of opportunity to sway consumers to its new phones after it got the jump on rival Apple Inc. by launching the new models in August. The iris-scanning Galaxy Note 7, which costs more than $800 in the U.S, garnered rave reviews before Apple, the world's most profitable smartphone seller, unveiled its iPhone 7 last week.

It comes at a critical juncture for Samsung, with the Galaxy Note 7 and flagship Galaxy S7 having signaled a possible reversal of the company's fortunes from a bruising two years of profit declines. The Galaxy Note 7 has been pulled from shelves from Australia to the U.S., which will likely hit Samsung's sales in the crucial second half of the year in an industry grappling with slowing demand and razor-thin margins.

Samsung plans to begin its exchange program in Singapore on Friday. Consumers will be allowed to return their phones through retailers, carriers and shops, and receive new devices. The company intends to expand the program to Australia, Mexico, South Korea, Taiwan and the United Arab Emirates later this month.

On Tuesday, Samsung said it would pull television advertising in South Korea for the Galaxy Note 7 and place ads in newspapers apologizing for the recall.

But the moves might be too slow to prevent bigger damage. Some consumers have already begun shifting to rival phone makers. Samsung hasn't revealed details of the problem involving the lithium-ion batteries supplied by affiliate Samsung SDI Co., other than to say a flaw resulted from an error in the manufacturing process.

"Samsung may be compensating its users with the recall, but it hasn't regained customers' trust. The Galaxy Note 7's safety is still doubtful," said 31-year-old Seoul resident Park Seung-shin, who likes to change his smartphone every one to two years. He said he is thinking of getting the new iPhone 7.

In downtown Sydney a Vodafone store employee said Tuesday that about 20 Galaxy Note 7 buyers a day initially had turned in their phones when the recall was announced, though that number was tapering off. Some left the store with an iPhone instead of waiting for a replacement Samsung smartphone to be shipped, the employee said.

Samsung previously said it recalled about 51,000 phones in Australia. On Tuesday, a company spokeswoman said customers who wanted a replacement phone in Australia would be contacted starting Sept. 21 about getting a new device.

In China, where the phone hasn't been recalled because Samsung uses a different battery supplier there, rival Chinese vendors are prepping for new phone launches later in the fall. Chinese smartphone maker, Huawei Technologies Co., which aims to overtake Samsung globally in smartphone sales within the next five years, is preparing to introduce a new high-end phone later this year.

Earlier this month, Samsung's handset division chief, Koh Dong-jin, said the company might seek a third supplier beyond the two existing battery suppliers—Samsung SDI and Hong Kong-based Amperex Technology Ltd.—to meet demand. Samsung declined to comment Tuesday when asked who the third battery supplier might be.

Analysts expect Samsung to be able to deal with the recall's financial burden, which is estimated to be $1 billion, given the company's hefty cash reserve of $23 billion.

Samsung is raising cash by selling noncore assets. On Monday, it announced plans to sell its printer business to HP Inc. for more than $1 billion. Strong demand for Samsung's chip and display businesses—which also end up in rivals' smartphones—could help cushion the recall's impact, analysts said.

Eva Dou, Mike Cherney, John McKinnon and Nathan Olivarez-Giles contributed to this article.

Write to Eun-Young Jeong at Eun-Young.Jeong@wsj.com, Georgia Wells at Georgia.Wells@wsj.com and Yun-Hee Kim at yun-hee.kim@wsj.com

(END) Dow Jones Newswires

September 14, 2016 08:05 ET (12:05 GMT)

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