Back at the end of June (Terrie’s Take 380), we carried a news item about a Dell laptop that exploded into flames at a conference here in Japan and which was caught on video.

Little did we know at the time, but this presaged one of the largest recalls of electronics products in history, starting with 4.1m notebooks from Dell and followed ten days later with 1.1m notebooks from Apple.

The batteries were made by Sony Energy Devices, and we’re sure that many were wondering just how severe the fall-out would be in terms of Sony’s stock price after the two recalls. To be sure, there was a hit on the stock price, but it wasn’t as bad as many expected, with the stock dipping just 5% after the both incidents.

This got us to thinking, how is it that a faulty product which could literally bring down an airplane (think fire in an overhead storage compartment) have such a small effect on Sony’s shares?

We think there are three main reasons:

  1. Although the news was very visible and negative, the battery business is just a fraction of the company’s overall sales, and overall Sony appears to be on the mend. Investors have factored in the recall cost and decided the company can get past it.
  2. The battery problem can be partially blamed back on to the manufacturers — on the basis that their design to do rapid recharging of batteries pushes the performance envelope for Lithium-ion cells too far.
  3. The quality of PR spin. Sony has put out that although the battery problem is “rare,” the company and its partners are concerned about public safety and are playing on the safe side by conducting a general recall.

Let’s look closer.

Firstly, we see the small stock market impact of this very negative problem as being an excellent indicator of how well the company is doing again. Clearly if the company was still down on its knees instead of being on the mend, then the doomsayers would be having a field day at the moment.

The fact that they are not shows that the market anticipates that even if Sony has to eat all the potential JPY39.4bn
(US$342m) cost of replacing the batteries, it may still turn a small profit next quarter thanks to booming sales of other devices.

So the markets, it appears, are unphased.

The technical causes of the batteries overheating were well explained in a recent Nikkei interview of a professor at Kyoto University, who is an expert on battery technology.
He points out that there are two possible, complementary reasons for the Dell notebook fires — one of which offsets some of the blame from Sony.

Firstly, there was the well publicized manufacturing failure, consisting of metal particles that were introduced into the battery electrolyte and which can eventually lead to internal short circuits and thus overheating. Sony takes full responsibility for this.

The second reason, however, is probably not so well known, but allows Sony to share the blame with with Dell and Apple.

Apparently some PC designs by both companies push the Lithium-ion battery technology past its safe point by virtue of the fast recharging cycle the makers have implemented. According to the professor, when Lithium cells are exposed to rapid charging, they can form metal fragments through chemical reaction betwen the electrodes and a high concentration of Lithium atoms.

Once formed, these conductive metallic fragments can penetrate the plastic separator between the positive and negative electrodes, causing major short-circuits and thus catastrophic over-heating. This failure in circuit design is probably why Sony investors are betting that the company won’t have to cover the entire cost of the recall.

OK, so what about public perception? Aren’t people worried about laptops blowing up in their hands? Are they buying less Sony products?

The media has it that the number of batteries to actually combust has been less than 5 units among 5m machines, and thus by inference the level of malfunction is probably acceptable. This almost lets Sony off the hook, but it is worth noting that the company has had overheating problems in its batteries before, due to manufacturing errors, and resulting in a general recall of InfoLithium cells back in
1999 and 2000. In that case also, there was very little negative reaction from the public.

Clearly then, Sony has been doing a great job with its PR and damage control in general.

In the press release put out on Sony’s global site, phrases such as, “Sony is committed to the safety of consumers and supports this recall” and “The recall arises because, on rare occasions…” all represent a masterful spin on the fact that even though the fault is there, Sony is going the extra mile to make sure that we the consumers are protected. Of course, the company has NO choice but to recall the batteries anyway since a US federal agency has told them to — but at least our safety comes first, sort of…

But perhaps Sony’s shareholders and customers should not be sanguine. Already a Washington DC personal injury law firm called Schmidt & Clark have on their website an appeal for consumers who have been injured or have suffered losses due to defective batteries in Dell notebooks. The site lists several known incidents which have had the makings of a major damages suit but which were luckily caught in time.

Such an incident was a notebook at a food processing plant which caught fire and required a fire brigade response.
Another was a truck exploding in Nevada after a glove box fire (where the PC was located) ignited gun ammunition which then shot out the gas tank! A third was in February when a UPS cargo plane in Philadelphia caught fire for unknown reasons… but coincidentally the airplane was transporting lithium-ion batteries.

Lithium-ion batteries are used in millions of consumer electronics devices, not just laptops. If it is found that the technology in general is inherently unsafe, especially in the presence of perhaps more unexplained UPS-type fires, then this could have major repercussions for Sony. The problem would no longer be the batteries themselves but the fact that without the dense, compact energy that Li-ion can provide, most modern electronic gadgets won’t work.
And that’s a problem.

This is not a far-fetched scenario. For example, the Schmidt & Clark website points out that among the products recalled by the US Consumer Product Safety Commission
(CPSC) in the last 6 years were 12 recalls for consumer electronics products such as a Disney children’s DVD player.

If the more non-PC devices claims surface now that public awareness has increased, and the US media picks up on the batteries being at fault, then Sony could be headed for another period of turbulence.