Samsung's spectacular self-inflicted crisis continues to shock and awe this morning. The South Korean company put out its first estimate of the financial damage from lost sales of its Galaxy Note 7 Wednesday, revising its forecast for third-quarter operating profit by 33 percent to $2.3 billion. Analysts say that the company could lose up to $17 billion in revenue from the fiasco, so there is a certain imperative to be up-front with the losses, the better to manage market expectations.
That $17 billion figure doesn't even begin to incorporate the damage to its brand. The company will need to be painfully thorough with its explanations to convince customers that future products won't be subject to similar problems. Nor can it be certain that future customers will distinguish between smartphones and other Samsung-branded devices and appliances which all have a role to play in its strategy for exploiting the Internet of Things, and which don't catch fire. Having your name in front of the consumer at every turn can be a two-edged sword.
Samsung hasn't risen to its current lofty status by accident. It's an excellent company with a strong record of turning out excellent products. But it will need to show a heroic degree of frankness and humility to confront this, and that--putting it mildly--hasn't always been a hallmark of South Korea's chaebols.
More news below.
• Stocks Slump After Alcoa’s Dismal 3Q Report
The S&P 500 and DJIA fell over 1% and the Nasdaq Composite fell 1.5% after a dismal start to earnings season. While some profit-taking ahead of today’s release of the Federal Reserve’s minutes was to be expected, Alcoa was the chief culprit: it missed consensus forecasts for revenue and profit due to continued low pricing and weaker-than-expected demand for its higher value-added automotive and aerospace products. That rather dampened hopes that the company’s problems would end as it spins off a lower-margin commodity aluminum business that is subject to lower-cost production elsewhere (notably China). Its shares fell 11% on the news. CEO Klaus Kleinfeld said he expected commodity demand to grow faster than supply next year, but growth is still unlikely to be more than 5%. Fortune
• Amazon on the March
Amazon’s march into new services continued on two fronts Wednesday: first it launched a full-fledged music streaming service (‘Amazon Music Unlimited’) with subscriptions as low as $3.99 per month for owners of its Amazon Echo speaker (rising to $9.99 for non-members of Amazon Prime). The low price for Amazon’s streaming service is consistent with its reputation for undercutting its competition and signals the music industry is beginning to move away from the $9.99 per month model. Meanwhile, The Wall Street Journal reported that the company is planning to push deeper into the grocery business with the introduction of convenience stores and kerbside pickup locations, mainly for selling perishable goods. The WSJ said the company could be “just weeks” from opening its first drive-in grocery store. Delivering groceries is a viciously competitive business which creates challenges that Amazon hasn’t faced so far. But then it isn’t the kind of company that shrinks from those kind of challenges. Fortune
• Nigeria Comes to North America
Environmental protesters took a leaf out of the emerging market protester playbook, disrupting the flow of millions of barrels of crude oil from Canada to the U.S. in a rare and coordinated action that targeted several pipelines (accounting for up to 15% of U.S. consumption) at once. Activists, ostensibly in support of the Standing Rock Sioux Tribe which is protesting against the completion of the Dakota Access Pipelines, were arrested after entering remote flow stations in an effort to turn off valves on the pipes. No damage to the lines was reported, but the attack is an uncomfortable reminder of how vulnerable U.S. energy infrastructure is to low-tech attacks. Reuters
• Sterling Hits All-Time Low Despite a Partial Climbdown by May
The pound hit its lowest trade-weighted value in history after a partial climbdown by U.K. Prime Minister Theresa May, allowing parliament a “full and transparent debate” on the government’s strategy for leaving the EU before she triggers the start of formal negotiations. That’s still some way short of allowing parliament a binding vote on the strategy, let alone on the outcome of the talks, so it keeps alive the possibility of leaving the Single Market with no immediate backup plan. Sterling had fallen 3% in two days on such fears, a wrenching move for a currency with pretensions to reserve status. Its recovery has been proportional to May’s climbdown—extremely modest. Bloomberg
Around the Water Cooler
• Executive Pay Deals Are Too Complex, Says Nobel Laureate
Arguably, you don’t need to be a Nobel Prize Winning economist to know this, but it always helps to have the smart guys back your hunches. Bengt Holmstrom, one of two U.S.-based professors who took this year’s Nobel for economics for their research into contracts, told a press conference that executive pay plans have grown too complex and rely too much on consultants (he cited Nokia, where he was a board member for 13 years, as a prime example of a company that lost control of its compensation processes). Asked what he’d like to see, Holmstrom answered “robust plans that don’t change every year.” He might have added “brevity”: 20-page disclosures in financial reports are more suited to concealing the real structure of executive compensation than to elucidating it. [bs_link link="http://fortune.com/2016/10/12/2016-nobel-winner-economics-holmstrom-ceo-pay-contracts-too-complex/?iid=leftrail "source="Fortune"]
• From Bad to Worse at Ericsson
Shares in Ericsson, the world’s largest maker of mobile network equipment, plummeted 18% after a shocking set of third-quarter figures. Revenue in the core networks division was down 20%, while operating profit dried up almost completely. There had already been a hint of an earnings shock when the company announced recently it would expand its domestic layoffs. The results make it even more urgent for the Swedish company to appoint a new CEO, having parted with Hans Vestberg in July. The results have also dragged down shares in rival Nokia by over 5% in Europe this morning. Fortune
• Windfall for Yum! Shareholders
Yum! Brands, the owner of KFC, Pizza Hut and Taco Bell, doubled the size of its capital return program to a total of $13.5 billion by 2019, the fruit of its spin-off of its China business and a near-total migration to a franchising-based model. Those moves will cut the company’s annual capital expenditure bill from some $500 million last year to $100 million by 2019, and will cut another $300 million from general running costs. The value of the China operations, which had promised to underpin growth for years to come, has been eroded recently by the after-effects of a tainted food scandal, and by increasing anti-American sentiment linked to territorial disputes over the South China Sea. Yum’s China business will start trading on the NYSE on Nov 1.Fortune
• Sprint Sells the Family Silver
Mobile carrier Sprint is having to get innovative as it tries to keep its balance sheet intact through a painfully long price war with its bigger competitors. The Wall Street Journal reported that it intends to raise up to $3.5 billion from selling and leasing back its wireless capacity. That may not come all at once: the WSJ said Sprint values its airwaves at $14 billion, but that it only intends to put a little more than 10% of them up for sale initially. For context, $3.5 billion is around 10% more than the company’s negative cash flow for the year ended March 31. With intense competition for subscribers still continuing, the Softbank-owned company is trying to cut costs by $2 billion or more in the current fiscal year. Fortune