How Samsung’s rush to beat Apple backfired

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

Earlier this year, managers at the Korean company began hearing that 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, including phone chief Koh Dong-jin, 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.

Then it all backfired. Just days after Samsung introduced the Note7 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 scurrying to understand what went wrong. On Sept. 2, Koh 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 and smartphone vendor HTC.

Samsung declined to comment specifically on whether it moved up the Note7 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 battery is a critical component. Smartphone makers have been pushing the boundaries of the technology for years as they try to satisfy consumer demands for long-lasting devices that charge faster. That increases manufacturing challenges and raises the risks of defects.

Samsung opted to give the Note7 a 3500 milliampere hour (mAh) battery compared with 3000 mAh for the previous model. For comparison, the iPhone 7 Plus has a 2900 mAh battery. The main battery supplier for the Note7 was Samsung SDI, a person with knowledge of the matter has said. The company, founded in 1970 and 20 percent owned by Samsung Electronics, makes batteries for other phone-makers too, including Apple.

As the launch date approached, employees at Samsung and suppliers stretched their work hours and made do with less sleep. Though it’s not unusual to have a scramble, suppliers were under more pressure than usual this time around and were pushed harder than by other customers, according to a person with direct knowledge of the matter. One supplier said it was particularly challenging to work with Samsung employees this time, as they repeatedly changed their minds about specs and work flow. Samsung declined to comment on whether deadlines were moved, reiterating that products are only introduced after proper testing.

When the fires began after customers started using the phones, executives at Samsung headquarters in Suwon were in shock. Choi, the co-vice chairman, gathered senior managers, demanding to know what went wrong, according to one of the people familiar with the matter. The phone division pointed fingers at battery maker Samsung SDI, while managers there argued the problem could be elsewhere, including in the phone design or insulation. Samsung said there is no ongoing debate on the issue and that the phone unit has taken responsibility.

The company’s most complete explanations so far have come in reports to government agencies in Korea, China and the U.S. The initial conclusions indicated an error in production that put pressure on plates within the battery cells. That in turn brought negative and positive poles into contact, triggering excessive heat that caused the battery to explode.

The chairman of the U.S. Consumer Product Safety Commission was more explicit when his agency announced an official recall on Thursday. He said the phone’s battery was slightly too big for its compartment and the tight space pinched the battery, causing a short circuit. “Clearly, they missed something,” said Anthea Lai, an analyst with Bloomberg Intelligence. “They were rushing to beat Apple and they made a mistake.” Bloomberg