COVID-19 is bringing about a reckoning for companies around the world. According to Yelp, 60% of U.S. businesses that closed due to COVID-19 will not re-open their doors. Of course, this is heartbreaking for the people who will lose their jobs — not to mention the entrepreneurs who will be losing their life’s work…

But one can’t help but wonder: is it for the best?

COVID-19 has laid bare the inadequacies of thousands of companies.

Toxic debt.

Poor cash flow.

Defunct business models.

Yet many governments continue to support, and in some cases, even bail out these companies. Unfortunately, government subsidies that prop dying businesses up only delay the inevitable, as evidenced by what’s occurring in Europe…

Via The New York Times,

“About nine million European workers, up to a fifth of those currently enrolled in the short-work programs, are in what the German bank Allianz has called “zombie jobs” — positions in the auto and airline industries, restaurants, shops and hotels and other sectors ill equipped to confront shifting consumer behavior. Many of these jobs are still on the books almost solely because of government subsidies, the bank said.”

The choice is clear for nations like Europe: continue to spend hundreds of billions of dollars subsidizing stagnant businesses and preserve jobs, or cut them loose and let companies try to navigate market forces on their own.

It’s important to note that, despite all of the flak that Europe gets for its subsidy programs, the issue of zombie firms is not unique to Europe. It’s prevalent in Canada as well.

Deloitte sounded the horn on Canada’s zombie companies two years ago to the day.

According to a Financial Post article published in September 2018,

“. . .a new report from Deloitte . . . found that at least 16 per cent of [Canadian] publicly traded firms . . . could be classified as “zombies” — defined as mature firms more than 10 years old that lack sufficient revenue to cover interest payments on their debt.”

The article includes an ominous excerpt from Deloitte’s report,

“We’ve [Deloitte] warned business leaders and policymakers about Canada’s lagging productivity, and we’ve cautioned companies about the impact of the coming age of disruption. Today, challenges that were once on the far horizon are now on our doorstep — and we’re still not ready.”

It’s not just mature, publicly traded Canadian firms that are zombies either. Many smaller companies appear to be getting “infected” as well…

Via Wolf Street,

“. . .smaller companies have also taken on more bank loans, largely or completely backed by government. Many firms, particularly in the sectors most affected by the crisis, have lower revenues and weaker cash flow. As a result, the borrowed cash gets used up quickly but the debt remains. If they weren’t zombies before the Pandemic, they’ll be zombies going forward.”

With the Fed and other central banks pledging to keep interest rates near zero for the next few years, the problem of zombie companies may only get worse.

Governments Play a Key Role in the Zombie Company Problem

Though vital in areas such as R&D and commercialization, government subsidization and cheap loans can give unnaturally long life to dying businesses. This is a phenomenon we are witnessing play out today en masse, due to widespread COVID-19 relief programs. Before newer, more resilient firms can take the stage, companies clinging to life will need to pass on — and governments will have to let them.