Why Samsung will escape from its exploding phone debacle with only a few burns

Samsung's new Galaxy Note 7 smartphone has gone down in flames. Literally.

Less than two months after its Aug. 19 release, Samsung officially killed the entire Note 7 line on Tuesday, thanks to a flood of reports that the smartphone was spontaneously catching fire. So far, there have been at least 92 reported instances of the Note 7 overheating in the U.S. alone — including 26 instances of people suffering burns, and 55 instances of property damage.

"Samsung will ask all carrier and retail partners globally to stop sales and exchanges of the Galaxy Note 7," the company announced. And the carriers themselves are allowing customers to exchange the Note 7 for another smartphone from Samsung or one of its competitors.

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The fiasco has been a blow to Samsung's stock price as well as its reputation: As of Wednesday morning, Samsung's share price had plunged 10 percent on the South Korean exchanges.

But perhaps the most remarkable aspect of the whole saga is that, even now, no one's quite sure what went wrong.

The New York Times reported that hundreds of people beta-tested the Note 7 in the month before its launch, and none found the issue. Nor were all of these testers in house: Plenty came from third-party carriers like AT&T and Verizon. Yet the initial news of the smartphones catching fire flooded in relatively quickly following the launch, and Samsung announced a recall of 2.5 million of the devices on Sept. 2. The company then immediately recruited hundreds of employees to figure out what was wrong. But even after trying out all sorts of scenarios, no one could get the phones to catch fire.

So Samsung chalked it up to problems with a battery: About 65 percent of all Galaxy Note 7 phones use a lithium-ion battery manufactured by Samsung SDI, one of the company's own subsidiaries. The SDI batteries themselves may have had several defects, and may have even been slightly too big for the Note 7. During assembly, the battery was squeezed enough to bring parts that should have stayed separate into contact, creating the potential for a short-circuit. So Samsung initially recalled only the phones with the SDI batteries, while it kept shipping new Note 7s with batteries from another supplier, China's Amperex Technology. Still, the smartphones kept catching fire, prompting Samsung to essentially throw up its hands and abandon the Galaxy Note 7 entirely.

But that still leaves the question of just what the heck happened?

Big picture, lithium is pretty flammable, so lithium-ion batteries have always carried the risk of combusting. At the same time, they are ubiquitous in our electronics, so we've clearly figured out how to manage the risks well enough. Yet somehow, Samsung fell short.

One possibility is the company simply endured an extraordinary run of bad luck. Bloomberg ran a story suggesting the Amperex batteries suffer from their own defect, totally separate from the problems with the SDI batteries. Another theory floated by the Financial Times is that the Note 7's fast-charging feature interacted badly with the design of the Amperex batteries, breaking down their internal structure. Samsung has been racing to compete with the release of the new iPhone 7, so it may have simply failed to work out the kinks with how either battery interacts with the Note 7.

Samsung's corporate culture may have also exacerbated things. Two anonymous former employees told the Times that the company's environment was "militaristic, with a top-down approach where orders came from people high above who did not necessarily understand how product technologies actually worked." They also showed a paranoid streak: Once the testers got underway trying to solve the problem, Samsung reportedly forbade them from talking to one another online or through email, out of fear the communications could become fodder for lawsuits. That certainly didn't make things any easier, either.

So the whole affair has been an embarrassing debacle for Samsung. That said, the company will almost certainly survive.

It's already cut its profit estimates for the latest quarter down to $4.6 billion — a $2.3 billion downgrade — based on assumptions that more customers will seek a refund for their Galaxy Note 7 than a simple exchange. As the Chicago Tribune noted, "That effectively erases all the mobile business profit that analysts had been projecting." And when all is said and done, the Note 7 disaster is expected to knock $5.1 billion out of Samsung's total profits between now and the end of 2017.

But remember Samsung was originally estimating a $6.9 billion profit just for this quarter. And while mobile is certainly a hefty portion of its overall business, Samsung also generates a lot of money from semiconductors, consumer electronics, and other device components like display screens. The company made roughly $20 billion in profit in both 2014 and 2015, respectively, and was projected to make that again in 2016. So it's probably safe to figure 2017 would've delivered yet another $20 billion. Add on this quarter and next, and we're probably looking at $30 billion in profit Samsung could've anticipated before the smartphones began exploding.

So if the Note 7 debacle cuts $5.1 billion out of that $30 billion, that's extremely unpleasant, but $24.9 billion is still a lot of money. Samsung will escape from this with only a few burns.