Zombie company

Description

Zombie companies are indebted businesses that, although generating cash, after covering running costs, and fixed costs (wages, rates, rent) only have enough funds to service the interest on their loans, but not the debt itself. As such, they are generally dependent on the refinancing of maturing debt for their continued existence and may face solvency risks should interest rates rise or investors withdraw from further financing.

History

The term "zombie company" was applied to Japanese firms supported by Japanese banks during the period known as the "Lost Decade" after the collapse of the Japanese asset price bubble in c.1990. Japanese banks continued to support weak or failing firms. The retailer Daiei is an example of a large company that expanded greatly during the period leading to the 1990 crash, and under different circumstances would have been expected to have entered receivership or bankruptcy. The finance minister, Takeo Hiranuma, was reported as describing the 96,000-employee firm as being 'too big to fail'.

The term zombie company returned to the economic professional discourse towards the end of the decade (2010 onwards) following the situation of 0 interest rate (i.e., Zero Lower Bound - ZLB) in the western countries.

By 2016, following the economic downturn in China (see also 2015–16 Chinese stock market crash), Chinese industrial companies (steel, aluminum, paper, etc.) had developed gross overproduction capacity problems, with overcapacity rising from 0% in 2007 to an average of 13% by 2015, with figures higher than 30% in some industries (cement, steel in 2014). At the 2016 National People's Congress, the country's government recognized the issue of the 'Zombie Enterprises' and announced that it was to close or reorganize many state-owned (public) industrial companies by 2020. In the coal and steel industries, the resultant loss of work was expected to result in 1.8 million redundancies (15% of the workforce), with total redundancies estimated to be up to 6 million workers.

The term saw an increased amount of usage in 2022, with concern over a number of zombie companies in the United States possibly going bankrupt or needing to layoff workers due to a spike in interest rates.

References

References

1. (13 Nov 2012). "'Zombie' companies eating away at economic growth". [[BBC]].
2. Denny, Charlotte. (20 Nov 2002). "Japan's zombie economy – not buying but browsing". The Guardian.
3. Brooke, James. (October 29, 2002). "They're Alive! They're Alive! Not!; Japan Hesitates to Put an End to Its 'Zombie' Businesses.". New York Times.
4. Adalet McGowan, Müge. (2018-08-28). "The walking dead? Zombie firms and productivity performance in OECD countries". Economic Policy.
5. (27 Feb 2016). "The march of the zombies". The Economist.
6. (17 Jan 2016). "China to clean-up 'zombie' companies by 2020: Xinhua". Xinhua / Reuters.
7. Tu, Lianting. (8 Mar 2016). "China's Takeover Troubles Putting Xi's 'Zombie' Reforms to Test". Bloomberg.
8. Petricic, Sasa. (3 Mar 2016). "Massive layoffs coming as China confronts its overbuilt 'zombie economy'". CBC News.
9. "A huge number of 'Zombie' companies are drowning in debt. This CEO sees a reckoning as interest rates soar".