SEOUL—A worsening crisis over faulty Samsung Electronics Co. smartphones has thrust the conglomerate's heir apparent, Lee Jae-yong, into his first critical leadership test.

In a series of phone calls on Tuesday with Samsung's mobile chief, D.J. Koh, and other executives, Mr. Lee decided to pull the plug on the Galaxy Note 7, a highly regarded smartphone that Samsung had hoped would outflank Apple Inc.'s new iPhone, according to a person briefed on Mr. Lee's conversations.

Instead, it had become an albatross as the company struggled to cope with a string of reports about the device catching fire. On Tuesday, Samsung told Galaxy Note 7 users world-wide to immediately switch off their devices.

Mr. Lee's decision, which came more than a month after Samsung first issued a global recall of 2.5 million smartphones, is likely to cost it $4 billion or more in recall expenses and lost sales, analysts estimate, enough to wipe out an entire quarter of mobile profits. The move is an attempt to ringfence once and for all a reputational crisis that looked poised to spread far beyond the Galaxy Note 7, the person familiar with the matter said.

Samsung declined to make Mr. Lee available for an interview, or to comment about his role in the Galaxy Note 7 crisis.

"Samsung needs to act swiftly and move on to protect their brand image," Mark Newman, an equity analyst for Sanford C. Bernstein & Co. in Hong Kong, said Tuesday. He argued that Samsung should even consider ditching the Galaxy Note series altogether. Analysts argued that the company has its flagship Galaxy S series to fall back on, which outsells the Galaxy Note at a rate of roughly three to one.

The Note 7's woes came just as Samsung was getting back on track after two years of falling profit. Consumers had flocked back to its phones, helping push Samsung's stock price toward all-time highs and reaffirming the company's place as the world's dominant manufacturer of smartphones by revenue.

Samsung's shares tumbled 8% on Tuesday—the company's biggest one-day decline in eight years. Its move to discontinue the Galaxy Note 7 is likely to lift the holiday sales of rivals, including China's Huawei Technologies Co. and Apple. Alphabet Inc.'s Google—the maker of Android, which powers most Samsung devices—is making a renewed push into smartphones.

Adding to the raft of challenges that Mr. Lee faces, U.S. hedge fund Elliott Management Corp. last week launched a campaign to split Samsung Electronics in two ahead of a shareholder vote later this month, where Mr. Lee is expected to win a board seat for the first time.

Since his father was incapacitated by a heart attack more than two years ago, Mr. Lee, a 48-year-old Samsung Group vice chairman and the third-generation scion of South Korea's biggest business empire, has been thrust into the limelight, overseeing a sprawling conglomerate whose businesses span the gamut from shipbuilding to life insurance, refrigerators to biologic drugs.

Mr. Lee remains distant from day-to-day decision-making, largely delegating the handling of the Note 7 fiasco, for instance, to executives like Mr. Koh, the mobile chief.

Mr. Lee's low-key approach stands in contrast to his father, Samsung Chairman Lee Kun-hee, a restless manager who would occasionally insert himself into key decisions.

In one mid-1990s incident that has now become Samsung lore, the elder Mr. Lee, angered by the shoddy craftsmanship of his company's products, had 2,000 employees watch as a heap of 150,000 phones was set aflame, with bulldozers dispatched to crush the remains.

His son has maintained his focus on the conglomerate's broader direction. This includes a long-term campaign to divest Samsung of unwanted parts like its defense and chemicals arms, while reshaping the conglomerate's hidebound culture. Mr. Lee has promoted maternity leaves and sabbaticals, pushed his executives to spend more time in the U.S. and made proficiency in English a bigger factor in determining which executives get promotions.

One key trait he shares with his father: a sense of paranoia about Samsung's recent ascendance, according to a person familiar with his thinking. The younger Mr. Lee, in conversations, has described the consumer-electronics business, and smartphones in particular, as a cutthroat world where fortunes can turn on a dime and where Samsung is fighting less for dominance than for "survival," according to the person.

Mr. Lee pushed for a recall of Galaxy Notes 7s in early September in hopes of quickly stemming potential damage to the brand, according to the person, overruling executives who sought to play down early reports of fires as a statistical blip.

As reports began emerging late last month that Samsung's replacement phones were also suffering from the same problems, Mr. Lee was at first reluctant to throw in the towel, the person said.

But after a Southwest Airlines flight was evacuated last week after reports of a smoking Samsung smartphone, he began leaning toward a total shutdown of the product, the person said.

Conferring with Mr. Koh and G.S. Choi, another top lieutenant, in daily phone briefings, Mr. Lee argued that U.S. aviation authorities' continued insistence that the Galaxy Note 7 must be shut off during flights would hamper the brand.

While Mr. Lee has remained behind the scenes throughout the crisis, there are signs that he could begin to assert himself more publicly, particularly after a shareholder meeting later this month where he is set to win a board seat at Samsung Electronics—his first-ever on any of Samsung Group's 58 affiliates.

The new position will give him legal responsibility within a conglomerate in which his power and influence have so far been exercised through nonofficial channels, the person familiar with the matter said.

Marcelo Claure, the chief executive of Sprint Corp., on Tuesday said he had spoken directly with Mr. Lee about the Galaxy Note 7 problems, as well as other Samsung executives.

"They have always been straightforward about what the issues were," he said.

Mr. Claure said he expected Samsung to recover quickly. "Brands recover when you make great products, and they do make great products," Mr. Claure said. "It's a blow but it's not a fatal blow."

Eun-Young Jeong and Ryan Knutson contributed to this article.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

 

(END) Dow Jones Newswires

October 12, 2016 01:05 ET (05:05 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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