Do zombie companies have a chance of surviving?

Zombies are those companies that are neither alive nor dead. They’re just barely surviving. Such firms produce just sufficient income to pay the interest on the debt and can't decrease the actual principal amount. Along these lines, they don't have a surplus of money or capacity and are static, implying they are too feeble to even consider financial planning or development. Zombie firms intensely rely upon low financing costs to get by. Because legislatures and national banks attempt to balance out their economies after a financial emergency, business banks are compelled to expand credit and proposition low financing costs.

The term zombie company started in Japan to depict organizations that were just producing sufficient money to pay revenue on their obligations. After the breakdown of the Japanese asset price bubble in late 1991, Japanese banks kept on supporting feeble firms as opposed to letting them fail. Japan was having a slow-moving economy back then. In 2010, the term “Zombie Companies” also got its popularity in the USA and the US firms that were facing financial difficulty were referred to as zombie companies. It is estimated that “Zombies” account for more than 20% of Europe's companies. The central banks usually dig many of these zombies' graves. Goldman Sachs recently estimated that some 13% of U.S.-listed companies “could be considered” zombies, which it called “firms that haven’t produced enough profit to service their debts.” (Fortune, 2022)

Some examples of Zombie companies are Exxon Mobil Corporation, Boeing Co and Delta Air Lines, Inc. The business revealed a net loss of $2 billion for the third quarter and $20.8 billion for the entire year of 2019. Since 2002, Exxon had not reported a quarterly deficit until that point. Exxon has made significant investments in its downstream operations. Investments in programs to upgrade existing facilities and add additional manufacturing capability online. These kinds of investments have the potential to result in short-term losses but raise returns in the long run. They were designed to keep growth rates steady and to remain competitive with other oil corporations. They also make it more challenging for businesses to continue to be profitable when prices are low, which is what happened.

The first yearly deficit for Delta Air Lines, Inc. in eight years was announced in 2017. The worth of its planes had to be written down by the firm by $5.7 billion. The business said it would be restructuring its operations and cutting costs in the fourth quarter of 2018. It involved dismissing 9,000 employees, or 20%, of the workforce. The business reported a $2.3 billion net loss in 2019. It's crucial to remember that even while businesses like Delta are reporting losses, they are still making money in various areas of their business. These earnings, however, do not make up for losses the business has suffered in other areas.

Another example is Boeing Co, everything began with the 737 Max. In an effort to compete with the brand-new Airbus A320neo, Boeing developed the 737 Max. However, what was meant to be a game-changer for Boeing ended up being a disaster. Boeing's issues were caused by the banning of the 737 Max fleet after the aircraft was involved in two fatal incidents. Since then, the corporation has suffered enormous losses and seen a sharp decline in the value of its stock. But despite all, Boeing remains a zombie company.

Moving further we’ll discuss what are the major reasons why companies become zombies. Starting with the most common reason which is huge debts. Interest rates globally were almost significantly low from 2009 to 2016. Low-interest rates encourage businesses to take on debt. However, if interest rates increase, the added debt might not be manageable. As a result, it may be challenging for businesses that are losing money to pay back their loan. In this case, businesses don’t have enough profit to manage their daily operations and as they can barely pay back their debts they become zombies.

Secondly, companies that borrow funds from abroad are vulnerable to currency devaluation. For instance, if businesses in Eastern Europe borrow money in euros, they might assume stable exchange rates. However, the overall cost of servicing the Euro obligations increases if the currency's value declines in relation to the Euro. Therefore, the expense of paying loan interest may be greater than their earnings. Usually, Pakistani firms face this issue a lot and this is one of the major reasons why they become zombies.

Another major reason is competition, large firms have the advantage of economies of scale, and however, small firms are deprived of this characteristic due to which they become zombies. Moreover, this can also occur when a company is unable to adapt to market changes. It occurs when a business can no longer remain put due to greater competition from a rising rival. It could be the result of several things, such as bad management or an unsound business plan or higher costs of production.

Any company can become a zombie, however, this can be prevented by making the right decisions and having a proper business strategy. The lesser zombies a country has the better it is for the economy because zombies impact the economy negatively. In some cases, the government needs to pitch in to save the zombies so it is quite costly for them too. For example, albeit these organizations unfavorably influence the economy, a few organizations assume a significant part in the economy. For instance, a zombie organization might be rescued by the government basically because the organization utilizes countless workers. If the organization were to fail, the huge employment losses could cause substantial economical and societal effects.

Lastly, a zombie firm has very few chances of ever covering its costs however, it still at times keeps on working with no genuine reason. These organizations are frequently kept above water by government endowments or credits, and their reality can hurt the economy all in all. At the point when they all actually do bring in cash, it is used in covering their debts. So all we can do is hope that no company ever turns into a zombie.