Shares in Samsung Electronics (SSNLF) were going down in flames as I watched the Korean trading day on Tuesday. They closed down 6.9% under their Seoul listing, KS:005930, dragging the entire Kospi 1.1% at the close.
The sharp decline of the smartphone maker shows the value of trading in real time on Asian markets, after Samsung early on Tuesday morning instructed shops and carriers across the world to stop selling the Galaxy Note7. It later announced it permanently stopped production of the phone.
It has told owners of the phones to stop using the devices and power them down, whether a new or replacement model. The double-recall product is fast gaining the unfortunate nickname of the "fire phone" thanks to its lithium-ion battery, prone to going up in smoke.
The Korean benchmark index is unlikely to be down for long, gaining support from U.S. stock gains. But electronics experts and market watchers are already saying Samsung's double recall of both the original and replacement phones will go down in textbooks for MBA students studying how not to handle a crisis with a defective product.
The company will struggle to rebuild its image. Unfortunately, Korea's huge chaebol conglomerates are occasionally haughty and heavy-handed in their approach to the public. A handful of them completely dominate the domestic Korean economy and act like they rule the nation.
Who can forget the "nut rage" incident at Korean Air (KS:003490) -- parent company the Hanjin Group -- in which the heiress of the company forced the delay at New York's John F. Kennedy airport of a Seoul-bound plane. Sitting in first class, she refused the nuts served to her in a bag instead of on a plate. Then accused of trying to cover the event up, she resigned and was ultimately charged with violating air-safety laws, receiving a one-year sentence.
The advice is always to get out ahead of any negative publicity. I remember the discovery at a North Carolina lab in 1990 that low levels of benzene were present in some bottles of the bubbly water Perrier. The company insisted that the problem was an isolated incident in the United States, and ordered a limited North American recall - only for the same discovery to happen in Europe.
With the brand criticized for its slow response and mixed messages, Nestlé (NSRGY) ended up buying Groupe Perrier two years later. That's already taught as an example of how not to handle a crisis.
In contrast, Johnson & Johnson (JNJ) won plaudits for its swift and total recall of Tylenol in 1982 when seven people died in the Chicago area after bottles of the drug had been tampered with and tinged with cyanide. The company acted immediately, improved security, and its image, and preserved a valuable brand that some people had predicted would never recover from the sabotage.
It will be fascinating to see how Samsung now handles its dire problem with exploding batteries, which its own scientists thought they had fixed. Now it's obviously back to the drawing board with that plan. There's speculation the company will now just ditch the product altogether.
Nomura estimates the company now must dispose of 3 million units already sold and another 1 million in inventory. At $350 per phone, the brokerage estimates a hit of 1.6 trillion won ($1.4 billion) in the "worst-case scenario." Then there's opportunity cost and an ultimate hit to the smartphone unit of up to 3.1 trillion won ($2.8 billion) in the end.
That's the practical impact of a recall of all the phones. But the image damage? At a time Action Alerts PLUS portfolio holding Apple (AAPL) was under fire for an iPhone update that didn't set the world alight, and with Google and parent Alphabet (GOOGL) introducing its Pixel phone, based on the Android system it shares with the Galaxy Note7, that's much too hard to estimate.
"Second-tier" smartphone makers such as Samsung's Korean rival LG Electronics (KS:066570) will also be worth watching. It is struggling with poor sales of its flagship G5 phone. Nomura estimates the company sold fewer than 1 million in the third quarter.