Samsung, that South Korean chaebol has earned itself a reputation as a giant slayer—and with good reason. But did it just made a tactical blunder in recalling 2.5 million Galaxy Note 7 handsets? Received to rave reviews and widely perceived by many as a potential Apple killer, a lot many people had been waiting for this launch.
Things started to go horribly wrong when media went berserk with news reports that the Galaxy Note 7 is a combustible device. Literally. Manufactured by Samsung Electronics, a subsidiary of the conglomerate that is Samsung, it got the world’s attention and Samsung Electronics announced it is suspending sales after 35 such cases were reported.
Early estimates compiled by Bloomberg suggest the company will spend as much as $1 billion in replacing all of the 2.5 million handsets that went on sale. Worse still, on the financial impact, the president of the smartphone business said it is a “heartbreaking amount”. Not because $1 billion is large in Samsung’s scheme of things. But because of fears what damage this recall will inflict on Samsung’s image across the world.
Early reports have it that $14.3 billion has been wiped off Samsung Electonic’s market capitalisation. To earn it, the company has fought tooth and nail against Apple as the “go to place” for quality and innovation. The company’s head honchos understandably went into a funk.
To understand whether or not there is merit in the decision, I reached out to six veteran founders who have built formidable brands in the competitive landscape that is India—including the head of a leading handset manufacturer; another one who has been through a similar situation in the past; two CEOs of multinationals operating in India; the founder of a creative agency responsible for many successful brand launches; and Harsh Mariwala, chairman of Marico Industries, who transformed Bombay Oil Industries that used to sell edible coconut oil into Marico, a fast moving consumer goods (FMCG) company now focused on health and wellness with formidable brands and with footprints across the world.
Except Mariwala, everybody shied from commenting formally. Perhaps, because Mariwala is the outlier. He unambiguously stated in the longer-term, after the heat and dust has settled down, customers will look at Samsung from a fresh perspective. “So long as the impact on the profit and loss statement is negligible, I think the $1 billion spent on recalls as an investment in the long run and one that will actually do the brand a lot of good.”
Samsung’s stated position on why the call was taken is that it was in the larger consumer interest. Mariwala says as a matter of principle it is what he would do as well if Marico were to face a situation like this.
Not everybody sees it that way though. Instead, they ask, was that the only solution on hand? Was the call a hasty one?
All evidence suggests it was indeed a hasty call. After battling hard, Samsung Electronics had gotten to be the world’s largest handset brand with a market share in excess of 21%. It had overtaken Apple—which has not just conceded its position as Number One, but is losing market share to China’s Huawei as well. The Galaxy Note 7 would have shut everybody up as well as those who had argued Samsung had gathered volumes on the back of low-end phones. Because this device was positioned to be the iPhone killer.
Even if looked at that way, Mariwala maintains this move will pay Samsung rich dividends in the longer run. “When you reach the top, you are under intense scrutiny and pressure. Any and every setback will be used against you. It requires a lot of guts to take a call like this and take a hit. But when you make a comeback, your position is cemented for a long time because consumer confidence in your brand is reinforced that you are committed to do what is right for them,” he says.
In off-the-record conversations everybody concedes there is merit in Mariwala’s arguments. But they maintain it need not have come to this in the first instance. Various reasons exist in their minds why.
Reason #1: The most pertinent one is that Samsung is a conglomerate mollycoddled by the South Korean government. One-fifth of the country’s exports are now accounted for by this giant. This gives Samsung enormous clout. It shows in various ways, they argue. For instance, in 2009 when Samsung’s former chairman Lee Kun Hee was found guilty of embezzlement and tax evasion to the extent of $3.8 billion, he was given a Presidential pardon. It created a furore. A quiet burial of the scandal followed. From that perspective, Samsung, they argue, is actually a behemoth with not just money and firepower, but political patronage as well.
The CEO of a multinational speaking off the record told me situations like this aren’t peculiar to South Korea. It is one they deal with in India often times. Right now, a clutch of them have banded together to form a coalition and take concerted action against an entity that has got the attention of the masses. While in part the ascendency of this home-grown entity, everybody argues, is on the back of “guerrilla warfare”, their contention is it also has to do with political patronage, the CEO says. That is unacceptable and it is only inevitable it will attract a coalition fire. The strategy apparently is being fine-tuned to be deployed.
To go back to Samsung Electronics, Tizen, an Operating System (OS) the company has been at work on for years, is sniggered upon. The stated intent it was announced with was to eventually take on Google’s Android—an entity with whom Samsung now shares an uneasy relationship. Much talk later and after making its debut in Indian markets last year on Samsung powered devices, there is no evidence to indicate it has taken off.
When asked why, critics say, Samsung’s strategy until now has been to churn out a lot of stuff, earn profits out of what sticks, ramp up production until all cash is extracted out of it, and move on to replicate the next winner some other entity has thought up. Innovation is not built into its DNA. Samsung has gotten this far because it pulled the right levers at the right times—including the political ones. It may work on home turf, but not when competing in the global ecosystem.
Reason #2: Cellular phones have been exploding forever—from the sturdily built Nokia to the much revered iPhone. This has got nothing to do with the phone itself, but the lithium-ion batteries that power these devices.
That said, the overall failure rates of lithium-ion batteries are extremely low at around 1 in 10 million. In real terms, nearly a billion consumer electronic devices across the world are powered by these batteries. The actual number of incidents reported annually though do not exceed 600. In the overall scheme of things therefore, what we are talking about are ridiculously low failure rates. It is a feat for which engineering teams that build these batteries ought to be feted.
Now, Apple under the genius of the maverick that was Steve Jobs knew all technologies get commoditised. After the initial euphoria that accompanies the introduction of a new one evaporates, others get into the fray, improve upon whatever it is the pioneer did, and the pioneer eventually bleeds to death. Those who come in later get better and better at what was pioneered. Unless the pioneer reinvents all of the time. Anybody remember a certain device called Nokia as the cellular phone of choice? Or Blackberry that united executives in the C-suite across the world? All of these remained the leader until Apple did away with conventional form factors and introduced the touch screen. It was a disruptive moment.
The device was elegantly designed in a closed ecosystem, a clunky one you could argue, but marketed as one that integrates seamlessly with everything else that is part of it. From then on, it was only a matter of time before the laity were lining up to pay a premium to be a part of this ecosystem. This, in spite of the fact that iPhones with lithium-ion batteries were blowing up as early as 1997. It continues to do so and cases continue to be reported including in India with the most recent iPhone 6 and even the iPhone 6 Plus.
Apple spokespersons though simply decline to comment and resort to Apple’s by now standard practice that delights customers no end: a “no questions asked replacement policy” for anything defective that emerges from anything you buy from an Apple store.
But back at Apple, their hardware engineers have a tough mandate. Put your heads down and get to work at making the phones as sleek and as beautiful as the designers want them to be. It is a brutal challenge because getting lithium-ion batteries to perform optimally under the conditions designers want the device to look like is nerve wracking work. It hasn’t been perfected yet. No company has. That explains why those 600 in a billion incidents occur.
The problem begins when you try to out-Apple Apple and make a big song and dance out of it. Where do you begin? The most obvious place would be to throw money.
Samsung critics and technology analysts I spoke to independently think there is a certain desperation in the company. They point to numbers which suggest that. Back in 2013, it spent $14 billion on marketing and promotion. As against this, Apple spent $1 billion. While these efforts have paid off with Samsung taking over as the world’s largest handset manufacturer, Forbes magazine ranks Apple as the world’s most powerful brand in 2016 with a brand value of $154 billion. But Samsung, the conglomerate, stands at Number 11 and its brand is valued at just $36 billion. Subtract the erosion in brand value of one of its subsidiaries after the current episode and what are we talking about, they ask?
What is often lost in this race to the top is the inability to factor in for the inevitable as well. What do you do when a crisis of this kind hits? How do you protect your brand? Samsung hadn’t spent time thinking over it. Steve Jobs had when he was around.
Then there is research and development on which Samsung spent close to $14 billion last year. As against this, Apple spent $6 billion. But where are all of Samsung’s monies going, critics ask? Sure, there are patents to show. But where are the people who know what to do with these patents? To develop the original iPhone, The New York Times Magazine in a meticulously reported essay pointed out that Apple invested $150 million. On the back of this investment, by 2013, Apple had generated $10 billion in revenue. Incidentally, Google spent $9.8 billion and Amazon $9.3 billion on R&D. Does Samsung have anything disruptive to show for all of its investment?
Here again, the numbers tell it as it is. In 2015, the US patent office granted the granddaddy of them all, IBM, 3,059 patents—the most to any company in the world. Samsung came a close second and was awarded 3,052. What for, they ask?
As against this, Google was awarded 1,083 patents, Microsoft earned 1,037, Apple got itself 783 and Amazon 391.
Filing a patent does not necessarily translate into innovation. While it is a necessary condition, it is not a sufficient one. Because if that were the case, the next question is, what industry has Samsung upended?
The New York Times writing about Apple put it succinctly: “The impact has been not only economic but also cultural. Apple’s innovations have set off an entire rethinking of how humans interact with machines.” This is not to suggest Apple does not have its share of problems.
Apple is in the middle of a strategic transformation and I had written about what it entails when the company’s global CEO Tim Cook visited India earlier this year. Under him, the company moved from Steve Jobs’ idea of a deliberate strategy to that of an emergent strategy. This is a tough ask because every day is a new one. But it has to be done because the constraints and environment is such.
The sum and substance of my argument then was that Apple took this call because margins in hardware are on a downward spiral and software is where the monies lie. But building a software ecosystem ground up that talks to the consumer’s heart demands an entity think in an altogether different way. To that extent, Apple is perhaps not losing sleep over conceding market share in hardware to rivals.
It’s much the same story that is playing out at Google. It started out as a search engine. Over the years, it has ubiquitously woven its way into people’s lives and has become part of the lexicon across cultures. Sure, it had a string as failures as well. It is now moving into complex terrain like Artificial Intelligence on the back of projects like Google Brain and Tensor Flow.
Amazon first disrupted how the world reads and then morphed into the world’s largest online retailer. In the US, it controls in excess of 74% of the e-commerce market as compared to Walmart, the world’s largest offline retailer that has managed only 2.8% so far.
This is again not to suggest Samsung is sitting pretty. All of the right noises have come from its headquarters. For instance, where are all of the monies it is expending on R&D going? Reports have it that Samsung foresees a future where it sees a bulk of its revenues coming from the Internet of Things (IOT) space, an idea where everyday objects are connected and can talk to each other. It is acquiring start-ups in the space, which it thinks are doing interesting work even as it pours money into R&D. But minus a well thought through brand strategy, what chance does Samsung stand?
All this said, do not, for a moment forget that veteran Harsh Mariwala. He has fought many a battle. And as he sees it, in the current scheme of things, from a strategic perspective, recalling a flagship product was the best call a leader could have taken. To the consumer, what sticks is whether or not the company delivered on a promise.