The potential long-term brand damage to Samsung from the recall and production suspension of its Galaxy Note 7 phone is a greater threat to its credit profile than the direct financial impact, ratings agency Fitch said today.
“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,” Fitch said in a statement.
Fitch believes that the benefits of Samsung’s diversified product portfolio have reduced its vulnerability to this shock. Samsung recalled 2.5 million Note 7 smartphones in September 2016 after a number of the units spontaneously burst into flames.
Faulty batteries were blamed at first and Samsung issued replacement phones that it claimed were safe. However, the new phones suffered the same problem, and Samsung asked consumers to switch off Note 7s on October 11. All production and sales of Note 7 handsets have been stopped, and the model has been withdrawn.
“Samsung’s other divisions, such as semiconductors, displays and consumer electronics, continue to record robust operating performance,” Fitch said.
However, the problems with Note 7 have raised long-term uncertainty about Samsung’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 said.
Note 7 and other potential Samsung handset customers may now choose Apple — Samsung’s principal competitor in premium
handsets — or mid-tier companies, if damage to the Samsung and Galaxy brands is sustained, it added. Samsung has already revised down its revenue and profit forecast for the third quarter.
“Nevertheless, Samsung’s balance sheet will remain healthy, underpinned by strong liquidity and relatively low debt,” it said.