Samsung profits dive 30% following recall fiasco as heir apparent ushered in

Samsung’s Lee Jae-Yong took a major step towards control of the family-run conglomerate on Thursday, joining the board as the company reported a 30% profit dive following the recall of its flagship Galaxy Note 7 handset.

The nomination was approved by an extraordinary meeting of Samsungshareholders, which also focused on the recall fiasco surrounding the handset that has hammered the reputation of the world’s largest smartphone maker.

The shareholder meeting began just hours after Samsung announced a third-quarter operating profit of 5.2tn won ($4.6bn) – down from 7. 3tn won a year ago.

The profit slump was in line with a revised earning estimate issued by Samsung two weeks earlier after it killed off the Note 7 when devices overheated and burst into flames.

Scrapping the Note 7 saw earnings of the company’s core mobile business drop off a cliff, with the mobile division’s operating profit for the third quarter down almost 98% from the previous quarter at just 100bn won.

Co-chief executive J K Shin apologised to shareholders and said it was “not acceptable” that the company failed to meet its own quality assurance standards.

“Samsung Electronics will revisit and re-examine every step of our engineering, manufacturing and quality control processes,” Shin said.

“We know we must work hard to earn back your trust and we are committed to doing just that,” he added.

The nomination of Lee to the board is being seen as a coronation of sorts for the 48-year-old, who is already vice chairman of Samsung Electronics and has seen his influence grow since his father, Samsung patriarch Lee Kun-hee, suffered a heart attack and was hospitalised in 2014.

The board’s chairman, Kwon Oh-Hyun, said Lee’s elevation would give him a greater say in decision-making at the highest level and help foster “long-term, sustainable value” for Samsung shareholders.

Lee Chaiwon, the chief investment officer at Korea Value Asset Management Co said: “We can now say that Lee’s regime has officially begun.

“I think a new era is coming. The company will become more market-friendly,” he told Bloomberg News.

Samsung’s share price was up about 1 percentage point in morning trade.

The decision to discontinue production of the Note 7, a model aimed at competing with arch-rival Apple’s iPhone, was a devastating move for the company, which prides itself on the quality production of cutting-edge technology.

The impact on the brand is still being calculated, with Samsung itself having predicted another $3bn-plus in lost profits over the next two quarters.

Greg Roh, an analyst at HMC Investment Securities, said: “The mobile business hit bottom, but it should pull off a partial recovery in the fourth quarter.

“But we’ll have to wait until the second quarter of next year for a full recovery with the launch of the Galaxy 8 smartphone in March.”

The founding Lee family controls the Samsung Group companies, with interests that extend into financial services, hotels, biopharmaceuticals and fashion, through a complex network of cross ownership.

As the newest and most high-profile board member, Lee will have to deal with the harsh spotlight the Note 7 recall shone on the company’s management style.

“It was a problem caused not only by technical errors but also by rigid corporate governance structure,” said Kim Sang-Jo, a Samsung shareholder and head of the Seoul-based monitoring group Solidarity for Economic Reform.

“All the executives here are, I’m sorry to say this, those hired by [the Lee family] and remarks by such executives will not be enough to earn the trust of the market,” Kim said at the shareholder meeting.

“Only messages delivered by Lee himself will be significant … so I hope he will come out in public to talk about these pressing issues of how to improve corporate governance and corporate culture,” he said.

Lee did not attend the shareholder meeting.

Despite the pall cast over the smartphone division, Samsung’s display and chip businesses – which supply screens and memory chips to TV makers and rival phone brands – have held up well.

Operating profit in the semiconductor division stood at 3.37tn won in the third quarter, up 28% on the previous quarter.

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