Canadian Manufacturing

Deloitte report warns of productivity hit from lingering zombie firms

Zombie firms are defined by OECD as those more than 10 years old but unable to earn enough to cover interest payments on debt; They tie up $130 billion in capital in Canada


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TORONTO—There is a concerning number of so-called zombie firms that are plaguing Canadian productivity, according to a new report from Deloitte.

About 16 per cent of Canadian public companies fall into the category of zombie firms established by the OECD—more than 10 years old but unable to earn enough to cover interest payments on debt.

The Canadian firms, numbering at least 350 from Deloitte’s findings, divert resources away from more productive and dynamic enterprises and diminish opportunities for growth, said Duncan Sinclair, chair of Deloitte Canada and Chile.

“That’s tied up $130 billion in capital, and even more importantly tied up people, that might otherwise be deployed into organizations that have more momentum, more growth, more capacity to assert themselves as global leaders.”

The issue is especially concerning in Canada, where the number of such companies stands 60 per cent higher than the global average of 10 per cent, and shows Canadian firms are vulnerable to economic shocks and technological disruption.

The consultancy did not specify which sectors were most affected, though Sinclair said more capital intensive businesses run a higher risk of falling into the situation over time.

The issue comes as part of a wider challenge of aging businesses in Canada as the global economy requires nimble enterprises to respond to changing market dynamics. More than 40 per cent of Canadian businesses are 15 years or older, up from just over 30 per cent a decade ago, said Deloitte.

“We do have an issue of, relative to other major countries in the world, a larger percentage of our companies that are sort of lagging, they’re reached a level of maturity in their business cycle,” Sinclair said.

While many older businesses thrive, a significant number show issues of profitability. Deloitte found 44 per cent of firms aged 10 years or older had stagnant or negative three-year revenue growth rates between 2009 and 2016.

Deloitte lays out five key criteria companies need to pursue to remain successful, such as disrupting with resilience and pursing tough decisions.

The firm found Canadian businesses most lagged in the need for asserting global leadership through exports and exploring opportunities abroad. It found just 13 of the 700 Canadian firms surveyed as embodying the ethos.

Companies need to see that competition is going global and they need to respond, said Sinclair.

“There’s no question that in a world where information is more democratized, where there’s more of an opportunity to business online, you can’t just think within your own local borders.”

News from © Canadian Press Enterprises Inc. 2016

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