Samsung exploding battery crisis began with rush to beat iPhone

Few things motivate Samsung employees like the opportunity to take advantage of weakness at Apple Inc.

Earlier this year, managers at the South Korean company began hearing the next iPhone wouldn’t have any eye-popping innovations. The device would look just like the previous two models too. It sounded like a potential opening for Samsung to leap ahead.

So the top brass at Samsung Electronics Co., including phone chief D.J. Koh, decided to accelerate the launch of a new phone they were confident would dazzle consumers and capitalize on the opportunity, according to people familiar with the matter. They pushed suppliers to meet tighter deadlines, despite loads of new features, another person with direct knowledge said. The Note 7 would have a high-resolution screen that wraps around the edges, iris-recognition security and a more powerful, faster-charging battery. Apple’s taunts that Samsung was a copycat would be silenced for good.

Then it all backfired. Just days after Samsung introduced the Note 7 in August, reports surfaced online that the phone’s batteries were bursting into flame. By the end of the month, there were dozens of fires and Samsung was rushing to understand what went wrong. On Sept. 2, Koh held a grim press conference in Seoul where he announced Samsung would replace all 2.5 million phones shipped so far. What was supposed to be triumph had turned into a fiasco.

Samsung drew criticism for the recall too. It announced the plans publicly before working out how millions of consumers in 10 countries would actually get replacements. Then it sent mixed signals about what customers should do. First, Samsung told people to shut off their phones and stop using them. A few days later, it offered a software patch to prevent batteries from overheating, signaling consumers could keep using the phones.

"This is creating an enormous problem for the company -- for its reputation and ability to support its customers when there’s a problem," said David Yoffie, a management professor at Harvard Business School and board member at Intel Corp.

Samsung declined to comment specifically on whether it moved up the Note 7 launch because of its perception of the iPhone. “Timing of any new mobile product launch is determined by the Mobile business division based on the proper completion of the development process and the readiness of the product for the market,” the company said in a statement.

The misstep has set off soul-searching at the Samsung conglomerate and in South Korea, where the company employs hundreds of thousands and is revered for leading the nation’s rise since the Korean War. Samsung’s flagship electronics unit built its reputation on high-quality products and cutting-edge technology, becoming the largest phone maker in the world and a powerful rival to Apple in innovation. One employee, in an online discussion group, called the episode "humiliating."

The crisis is straining a management team that’s been without clear leadership for more than two years. Lee Kun-Hee, the Samsung patriarch who is chairman of both the electronics unit and the broader conglomerate, suffered a heart attack in 2014 and hasn’t been back to the business since. His son, Jay Y. Lee, is heir apparent, but hasn’t taken his father’s title because Korean culture precludes such a move while the elder Lee is alive. The result is that no one appears to have the kind of authority that, say, Tim Cook wields at Apple to take responsibility and hammer out solutions.

“The battery issue arrived at the worst moment for Samsung and it seems like there was a delay in reacting to this communication crisis,” said Thomas Husson, an analyst at Forrester Research. “This may indeed be due to the change in top management.”

Samsung said in the statement that its focus now is on doing the right thing for customers and that it is working to replace the Note 7s as quickly as possible. “For us at Samsung, to earn consumers’ trust back is very important.”