If you've been keeping an eye on the economic news over the last few years, you will have seen the term zombie company being mentioned more and more often. As large parts of major economies around the world are still shuffling through the post-COVID world, it is an increasingly fitting term for large amounts of companies.
Unlike other economic terms based on the mythical or mundane, such as unicorn companies and gazelle companies, a zombie company does not have a specific definition and is used in several different contexts.
Despite the differences in what makes a company a zombie and exactly how they function, they all share the characteristic of lurching through the economy much like their namesake, and, most significantly, are economically unproductive.
Why call them zombies?
The term zombie brings to mind an individual, neither truly alive nor dead, mindlessly shambling along whilst achieving nothing or adding nothing.
In much the same way zombie companies amble through the economy without achieving anything in the way of success or growth, not insolvent but not profitable in a meaningful way. They also don’t develop as a company, innovate, or progress.
Zombie companies also pose a threat to healthy, well-run and otherwise viable businesses in both their industry and region. If the zombie company is large enough, or there are too many zombie companies, then they can actually harm the economy of a country.
Types of zombie companies
Just like their namesakes in film and folklore, zombie companies come in all shapes and sizes and become zombies through several different processes. Below we will break down the different kinds of zombies you might come across.
Debt Zombie – A common type of zombie company, the debt zombie has moderate to significant debts and makes enough profits to service the interest on them but not pay off the debt itself, sometimes dropping behind on payments to catch up later. In a lot of cases, the lender will be aware that their debtor is a zombie but are better served to continue collecting interest payments rather than trying to force insolvency proceedings.
Debt zombies operate on the brink of insolvency and may not be able to reliably pay their unsecured creditors on time. They are also extremely vulnerable to interest rate rises.
Arrested development zombie – Some zombies never grow up and it’s the same with zombie companies. Arrested development zombies bet from year to year without achieving any real profit or significant loss. They never grow or increase revenue and may slowly accrue debts over time, especially to HMRC.
Cash injection zombie – These are companies that perpetually run at a loss and survive by a third party periodically injecting cash. This third party will usually be an owner (either an individual or corporate owner) or in some cases the government. Cash injection zombies may exist for several reasons, some of which are: an owner of a small business who is not necessarily concerned with making a profit or owning a business, an outside investor or parent company who does not want to lose the investment they have already made into the company, or the government bailing out a company they feel is too big to fail.
COVID zombie – Very much the zombie of the moment and the type driving the recent spotlight on zombie companies. Covid zombies are companies that are kept alive by the government COVID relief payments they received during the lockdown period.
When COVID struck and nations entered into lockdowns, governments rolled out generous support schemes to tide businesses over until economies opened up again. Whilst this helped many good, viable companies survive, it also allowed companies that would have organically gone insolvent if COVID never struck to continue operating and lurching on. This meant that the usual turnover of zombie companies going insolvent has been significantly lower in the last few years. Which has led to a significant number of economically unproductive companies in economies around the world.
Why are zombie companies dangerous?
While it may seem like a company staying in business, even if it is not successful or profitable, is a good thing, they are actually harmful to their competitors, sector and region. Just like a zombie, they have the potential to drag down healthy companies in these spaces and make them zombie companies too.
The issue with zombie companies is that they siphon resources, credit, investment, talent, and business away from well-run companies and either limit or stop their growth. This prevents them from creating jobs, innovating and contributing to the economy as much as they would otherwise be capable of. A high number of zombie companies in any given space can stifle successful and innovative companies, in turn forcing them to operate in a state of zombieism.
There can be a temptation for governments to bail out large zombies, such as in the case of the Australian car manufacturing industry and the Japanese supermarket Daiei, for fear that they are too big to fail and would lead to an unacceptable number of job losses. Similarly, if there is a high number of zombies, governments can be hesitant to allow mass job losses.
Economists argue that by stifling growth and innovation from competitors, net job creation is actually hurt in an economy. If these companies were allowed to fail, the evidence suggests that others that are better run, innovative and economically productive would grow to fill the spaces left and create more jobs in turn.
They are dangerous to do business with as they maintain a state vulnerable to fluctuations in the macroeconomic environment, such as interest rate rises, and any credit extended to them can quickly become a bad debt.
The final significant danger zombies pose is that as they don’t grow, don’t innovate and are not economically productive they inhibit growth in the wider economy, lead to obsolescence in their sector and generate low tax revenues.
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