Zombie firms' productivity can improve, if they wake up now and take charge.
Back in 2012, one in ten British firms were classed as zombie firms. Zombie firms are defined as those companies that can afford to pay interest on their debt, but not the debt itself. They stay afloat, unable to invest in growth or technologies. They survive, and that’s all. Even insolvency is too expensive an option.
Zombie firms impact productivity in a big way. Their combined inefficiency brings down the productivity average of the entire economy. They suck up the investment and workers that a living company could use. Finally, as The Economist points out, they divert ‘resource allocation by preventing more efficient firms from gaining market share.’
The good news is, The Telegraph reports that the number of businesses paying only the interest on their debts has fallen since 2012. The bad news is, not enough for the economy to see meaningful productivity gains. Problems still exist: as many as 77,000 firms would struggle to repay debts if interest rates rose by even 1%.
The Telegraph writes that almost 60,000 services companies, “the sector that generates the lion's share of revenue for the economy”, are struggling to survive, and they’re not alone: 41,000 consumer businesses and 50,000 construction and real estate companies are also treading water.
The government and central banks have tried to stimulate gains, but as Business Insider UK writes, ‘nothing so far has appeared to work’.
Stephen King, HSBC's senior economic adviser, says we need to let these companies die a natural death. He argues that by keeping zombie companies afloat, we achieved a short-term goal that has had a detrimental impact on productivity. Employment stayed high, but at the expense of firms that could have been more productive.
There is something to be said for letting companies sink or swim. The likes of Ford, Apple, and Lego all once held zombie status, but they found productivity gains that have ultimately made them powerhouses in their industries.
Yes, it can be done.
Manufacturing and logistics company Unipart is frequently called upon to help firms across every sector become more productive. One example, in the engineering and automotive industry: A power generation design company needed help in improving their process of creating Plant and Instrumentation (P&I) diagrams.
Unipart involved employees in the process, helping them to identify improvements. The end result: P&I diagrams are now completed in a standard way, ensuring they’re technically correct. Drawing errors have reduced by 90%, and the time it takes to complete the diagrams has dropped from one to one-and-a-half days to just 1.5 hours.
These are the kind of improvements that can reap huge benefits in productivity. Among the many steps Lego took to turn things around included reducing product development from two years to one and dropping their average pieces per set to 7,000.
Zombie companies can find new life, but first, they have to wake up and adapt. Brexit could very well force the issue, but by then, only companies with healthy productivity will survive.
You might also like:
Video, episode 6: How Unipart can boost your company’s productivity
Attack of the zombie firms
Beware the zombies behind the world’s productivity problem
The UK’s productivity challenge takes different shapes across sectors