By Shannan Dower
Zombies companies are something we’ve all likely come in contact with, albeit not something we were previously aware of.
They are defined as indebted businesses that despite earning money, only have enough money to pay the interest on their loans after basic running costs and fixed costs. Essentially, ‘zombie companies’ are unable to cover their debts with their profits, thus are consistently in debt and never truly making money. Its estimated roughly 12% of companies worldwide are zombies, which in the U.S is slightly higher at 16%.
Usually, the term is only applied to businesses ten years or older. This definition fits a few companies that are rather well known, including Netflix and Tesla (yes, Elon Musk's heralded company is in deep debt, losing USD $896 million in 2019 and having more than USD $13 billion debt total on their books).
Historically, the concept is relatively new, being first applied to Japanese companies around the 1990s. The term saw a resurgence within the media around the Global Financial Crisis in 2008, due to the U.S. Troubled Asset Relief Program being used to bailout various companies.
Firms relying on debt to continue operations has increased over the past decade, and has become a topic of interest – is the supposed ‘zombification’ of the economy going to exacerbate, or even instigate recession?
For example, the Organisation for Economic Co-operation and Development (OECD) reported on ‘Zombie firms and weak productivity’, noticing an increasing survival of businesses that would “typically exit in a competitive market”, and that their existence results in thwarted growth, due to limiting the opportunities for other productive businesses, primarily start-ups. Fundamentally, zombie firms reduce productivity and are often inevitably surviving on borrowed time.
However, the current economic climate is driven by the pandemic. Now, it’s believed many of these companies might not survive through the economic impacts of COVID-19. Banks and the government will be forced to evaluate which businesses are worth investing in to keep afloat – those which have the capacity to rebound when the economy fully reopens will be the priority.
Other economists have theorised Australia’s JobKeeper scheme could unintentionally result in the creation of new zombie firms. Where banks and the government are prioritising businesses that can rebound, as mentioned, JobKeeper may be supporting businesses that are unviable, and will inevitably fail when the cash flow is withdrawn. However – they won’t completely go bankrupt, though neither fully recover, possibly slowing the overall recovery on the economy.
Economic change: upturns and downturns, they are an inevitable aspect of modern society. Often, it is instigated by global events such as the one we are witnessing. It’s difficult to say, so early, what the impacts will be and exactly how widespread they will end up as. Perhaps with less ineffective businesses paradoxically dominating markets, a new generation of start-ups and small businesses will be given opportunities to thrive.
Overall, as a society, we always need to band together for human life, but also do our best to support businesses so people can continue to pay their bills.