The recent rapid increase in the number of bankruptcies also has its good side: Among the companies that had to give up, many were zombie companies that were only able to survive for so long thanks to special circumstances and that damaged the economy.
Zombies - that sounds like voodoo, superstition and scary characters in horror films. But since the financial crisis of 2007/2008, the term has also found its way into the economic vocabulary. It refers to heavily indebted companies that are only barely able to survive thanks to favorable credit conditions. They generate an operating profit that is not enough to pay the interest on their loans. In other words: they live off their assets and are "subsidized" by their lenders, as it were. Without their cheaply made available funds, zombie companies could not survive.
Such "undead" are not a marginal phenomenon that can be ignored. According to estimates by the management consultancy Kearney, which regularly publishes studies on this phenomenon, the number of zombies has been rising year after year for a long time. Cheap loans and government aid programs, especially during the Corona pandemic, ensured that even companies whose business model was no longer viable were protected from getting into trouble. In Germany, between four and five percent of companies were considered zombies for a while.
But now a turnaround is taking place. In 2024, corporate bankruptcies rose rapidly to 22,400 cases. Among them, there are likely to have been an above-average number of zombies. Why? Because higher interest rates and the challenging economic environment have unmasked many "undead": They can no longer hide the fact that they are not competitive. Under other circumstances, they would have dropped out of the market much earlier. Seldom has the quote attributed to the legendary US investor Warren Buffet been more fitting: "When the tide goes out, you can see who has been swimming without swimming trunks." In this case, the low tide is the weak economy and more expensive loans.
Short-term vs. long-term effect
With every company that goes bankrupt, people lose their jobs - even if it is a zombie company. For this reason, even such a bankruptcy hurts at first on the surface. But that is only the short term. In the long term, companies that are only artificially kept afloat have a negative impact on the entire economy. Zombies have no money for investments, their equipment becomes outdated and they do not invest resources in research and development. The more zombies there are in an economy, the lower their productivity and innovative power. In addition, zombies distort competition. The most important thing for them is to obtain liquidity. That is why they often sell their goods and services primarily on price rather than quality. This makes it difficult for competitors who actually offer their customers better and more innovative offers to compete with them. The result: economic growth is slowed. If there are many undead companies on the market, a “zombie congestion” occurs: inefficient companies tie up valuable resources such as skilled workers and real estate that could be used for more productive companies.
Be careful with late payments
And finally, zombie companies are poison for a healthy economy for another reason: their risk of infection is similar to that of the zombies in horror films. They maintain relationships with banks, customers and suppliers who rely on products or payments. The longer these business partners help zombie companies survive, for example through supplier credit, payment deferrals or favorable conditions, the greater their own risk. If the zombie then stumbles, they are dragged deep into the crisis. How can you protect yourself from zombies? By remaining vigilant and carefully monitoring and questioning relationships with business partners. Even small delays in payment can be an indication of a deteriorating financial situation. Sometimes just a glance at the balance sheet can give you an indication of the worst. If the operating result is less than the interest expense, extreme caution is advised.
Danger for the entire value chain
Almost six percent of all listed companies worldwide did not generate enough profits from their operating business in 2023 to be able to pay their loan interest. This is the conclusion reached by the management consultancy Kearney in a study on zombie companies. The experts identified the highest proportion of "undead" in the real estate sector with a rate of 11 percent. "A high proportion of zombies in real estate companies has the potential to have a major knock-on effect on construction companies, tradesmen and the building materials industry, for example," says Christian Feldmann, partner at Kearney. This shows the danger posed by zombies. "If they tip over uncontrollably, they quickly endanger the entire value chain."
Source: Creditreform
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