Carriers Halt Sales of Samsung Galaxy Note 7 Replacements Over Safety Concerns

Samsung suffered another blow in its effort to move past a crisis over exploding smartphone batteries, as customers reported problems with replacement devices and the company was forced to halt production of the Galaxy Note 7 phones.

Samsung has temporarily stopped making the high-end phones, a person with direct knowledge of the matter said Monday, asking not to be identified because the decision hasn't been made public. The move came after wireless companies in the US and Australia stopped selling Galaxy Note 7s following reports that replacement devices thought to be safe were overheating and bursting into flames. Samsung shares fell as much as 4.6 percent in Seoul.

(Also see: Replacement Samsung Galaxy Note 7 Said to Emit Smoke on US Plane)

The Korean company was engulfed in controversy after its most expensive phone hit the market two months ago and customers began posting videos of devices that had exploded. Samsung quickly issued a recall and began working with officials worldwide to replace the original shipment of 2.5 million phones. But reports of fires from supposedly safe devices began emerging two weeks ago in China and then with replacements in the US, fueling concerns Samsung hasn't solved the battery problems after all.

"It's an ongoing nightmare," said Bryan Ma, vice president of devices research for IDC. "You would have hoped that they could have gotten past this already and moved on. Clearly, it keeps coming back."

AT&T and T-Mobile US both halted sales of the devices in the US over safety concerns, while Telstra Corp. followed suit in Australia. "Based on recent reports, we're no longer exchanging new Galaxy Note 7s at this time, pending further investigation of these reported incidents," AT&T Inc. spokesman Fletcher Cook said in an e-mailed statement on Sunday.

Suwon-based Samsung said it will take immediate steps approved by the Consumer Product Safety Commission if it finds a safety issue exists.

The production suspension raises questions about Samsung's original investigation into the battery problems. The company said the issue stemmed from one supplier, which it had stopped using.

AT&T is the third-biggest customer of the South Korean company while T-Mobile's parent is No. 4, according to estimates compiled by Bloomberg. Sprint Corp. said its exchange policy is unchanged while Verizon said the phone is out of stock at its stores.

Telstra, Australia's biggest phone company, is offering alternative phones to customers as Samsung investigates the issue.

(Also see: DGCA May Issue New Advisory on Samsung Galaxy Note 7 Phones)

The latest imbroglio coincides with mounting pressure from investor Paul Elliott Singer, who this month advocated a break up of the complex Samsung empire. Singer's Elliott Management Corp. - through affiliates Blake Capital LLC and Potter Capital LLC - proposed that Samsung separate into an operating company and a holding company, dual-list the former on a US exchange, pay shareholders a special dividend of KRW 30 trillion ($27 billion or roughly Rs. 1,79,617 crores) and improve governance by adding three independent board members.

Ma at IDC said the production halt will deal another blow to a smartphone that had won strong reviews when it first came out in August.

"They've invested so much in the product, which was supposed to be the product that helps turn the company around," Ma said. "To their credit, it was doing really, really well. That's why it's such a shame it has developed the way it has."

© 2016 Bloomberg L.P.