Samsung Drops After Warning to Stop Using Note 7 Smartphones

September 10, 2018

Shares of Samsung Electronics Co. fell the most in almost three weeks after U.S. regulators and the company itself warned users of its Note 7 smartphones to immediately turn off and stop charging them.

The cautions were issued by the U.S. Consumer Product Safety Commission and Samsung, which are also in talks on an official recall of the devices as soon as possible. Aviation authorities around the world have also called on passengers to stop using the devices during flights. About three dozen of the phones, released just three weeks ago, had batteries that caught fire or exploded.

The troubles come at a critical time for Samsung. The company rolled out the Note 7 last month to give it a head start on Apple Inc.s new iPhone, which were unveiled last week. But that advantage has now disappeared. Samsung shares fell as much as 5.5 percent, the biggest intraday drop since Aug. 24. Including a 3.9 percent decline on Friday, Samsung has shed about $19 billion in market value. Battery-making affiliate Samsung SDI Co. fell as much as 5.9 percent to 96,500 won, the lowest on an intraday basis in five months.

The recent introduction of new products by the two leaders of the global smartphone market are critical to their competition, Bloomberg Intelligence analyst John Butler said in an interview.

Samsungs troubles, and theyre meaningful at this point, are a positive development for Apple and its competitive position vis-a-vis Samsung,” Butler said. “Were rolling quickly into the holiday quarter, so Samsung has to move quickly to recall the Note 7 devices with faulty batteries and get replacement units to people who already bought this model.

The Suwon, South Korea-based company has already announced a voluntary, worldwide recall of all 2.5 million of the smartphones it has already shipped, at a cost to the company estimated at as much as $1 billion. On Saturday, Samsung told users in South Korea to stop using the devices and to bring them to the companys service centers. Customers can rent replacement phones until Note 7s with new batteries become available on Sept. 19. It wasnt clear whether the fixed Note 7 models would also be offered elsewhere on that date.

Almost all CPSC recalls are done voluntarily in conjunction with a company and the scope of any action on the Note 7 may be identical to what Samsung has already suggested to consumers. But once the agency becomes involved, it triggers additional protections for people. For example, U.S. law prohibits the sale or resale of any recalled item once CPSC acts.

The CPSC action came as aviation regulators in several countries and airlines advised passengers against turning on or charging the devices during flights.

The European Aviation Safety Agency on Friday issued such a warning and cautioned against packing them in checked bags, according to a posting on its website. That followed a non-binding warning issued Thursday by the U.S. Federal Aviation Administration. 

Indias Directorate General of Civil Aviation banned switching on the phones during flights, or placing them in checked bags that arent carried in the cabin. Singapore Airlines Ltd. has barred travelers from powering up or charging the devices on flights, the company said in an e-mail.

Following the FAAs statement, U.S. carriers were taking a variety of steps. Delta Air Lines Inc. posted a notice on its website telling passengers to comply with the FAAs guidance. Southwest Airlines Co. will share information on its website and social-media channels to make passengers aware of the FAA recommendations, said Lisa Tiller, a spokeswoman for the Dallas-based carrier. Spirit Airlines Inc. said all passengers will receive a copy of the FAA notice 12 hours prior to flying.

American Airlines Group Inc. and JetBlue Airways Corp. said they are consulting with the FAA on the issue. JetBlue added that it is trying to get more FAA guidance for its employees so they can answer customer questions.

The Airlines for America trade group, which represents most large U.S. carriers, said in an e-mail it is closely monitoring the situation.

The actions are the latest to focus on the risks of lithium-based batteries on aircraft, which have been linked to three accidents on cargo carriers, two of which were fatal. The FAA has logged dozens of more minor incidents in which the batteries caught fire, smoldered or exploded on airline flights.

The United Nations International Civil Aviation Organization in February voted to ban passenger airlines from carrying bulk shipments of rechargeable lithium-ion batteries, such as those on the Samsung device. The group stopped short of placing restrictions on batteries contained in devices because any fires that occur are much easier to extinguish.

The Air Line Pilots Association, the largest flight-crew union in North America, said the recent incidents underscore the need for greater controls on lithium-battery shipments.

These batteries can self-ignite, explode, and are unresponsive to halon, the primary fire-extinguishing agent used aboard aircraft, the union said in an e-mail.

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