Samsung's Galaxy Note 7 fiasco may not cost the Korean electronics company much in terms of its financial rating, given its diversified product portfolio, but the recall and subsequent decision to stop production of the handset will hurt its overall credit profile, says Fitch Ratings. The decision to scrap production will cost Samsung about $2.3 billion, it said.
"The immediate impact of the Note 7 incident is unlikely to be significant enough, in itself, to affect Samsung Electronics' (SEC) A+/Stable credit rating, which is supported by strong financial metrics that are in line with a higher rating," the ratings agency said in a note titled "Reputation Risk Bigger Than Cost Impact of Samsung Recall" on Thursday.
The implications are of a different nature, raising doubts over its handset manufacturing operations. "However, the problems with the Note 7 have raised long-term uncertainty about SEC's handset operations, as the issues with the flagship model have highlighted weaknesses both in R&D capabilities and the company's capacity to efficiently remedy serious hardware defects," Fitch Ratings said.
Citing past such incidents that affected handset makers Nokia and Blackberry, Fitch Ratings said the fiasco could end up benefiting Samsung's rivals such as Apple.
"Note 7 and other potential SEC handset customers may now chose Apple - SEC's principal competitor in premium handsets - or mid-tier companies, if damage to the Samsung and Galaxy brands is sustained," the agency said.
The Galaxy Note 7 episode has already forced Samsung Electronics Corporation (SEC) to revise its September quarter results.
"SEC revised down its preliminary 3Q16 results on 12 October 2016 from the previously announced figures. Operating profit decreased by one-third to KRW5.2trn (USD4.7bn), which is now 30% lower than the same quarter last year. The revision is to reflect the cost of the decision to scrap the Note 7, which is estimated to reach around KRW2.6trn (USD2.3bn)," Fitch Ratings said.
"We expect SEC's profit for the next few quarters to be affected by a loss of smartphone sales and additional expenses related to the Note 7, such as legal claims," the agency warned.
Samsung shares closed 1.43 percent higher at KRW 1,557,000 on the Korean Stock Exchange (1 US dollar = 1135.73 South Korean Won, or SKW).
The company has already taken a $19 billion beating in its valuation as a result of the Galaxy Note 7 setback.
A report in The Independent said that the debacle could not have come at a more opportune time for Apple, as the American handset maker will face "significantly less competition" during Christmas sales.
Samsung will find it difficult to undo the damage caused to its brand image due to the recall and production stoppage of Galaxy Note 7.
"The reason consumers prefer brands like Samsung and Apple is because of product reliability. So in this case, brand damage is inevitable and it will be costly for Samsung to turn that around again," Greg Roh at HMC Investment Securities was quoted as saying by The Independent two days ago.
