The not so zombie company

Mike Redwood

Columnist

International Leather Maker

Last week, I heard a term that had long gone out of my mind. It was being used to generalise about the current state of the leather and leather using industries.

The “zombie” company has a specific economic meaning related to businesses that are kept alive by banks continuing to extend credit or lenders avoiding forcing insolvency. Often this is encouraged when interest rates are very low, but it means the company might be alive, but not really growing, investing or generating adequate returns. It was a concept born in Japan as they entered their dreadful 1990s decade and became familiar in the West at the time of the financial crisis amid worries that such companies were the barrier to productivity increases.

In today’s leather industry, this sort of thinking is arising, albeit with a looser, more industry-specific use of the phrase. With sales struggling and costs inflating, many leather companies are battling to cover costs.

The nature of tanners has always been to keep strong balance sheets to survive through difficult periods. Such firms may indeed be debt-free and financially prudent yet still be described as “zombies” because they are surviving rather than thriving. From time to time, such situations may depend on family members taking low dividends or low salaries, delaying investment in new machinery, marketing or technology. They keep going because owners have a responsibility to employees, suppliers or family history. That is slightly different from the textbook definition from a “zombie” business.

Recognition of value

The 20^th century was generally bad news for leather as it rewarded volume, scale, low prices and frequent replacement. Leather struggles under such conditions and is never the cheapest option at purchase. But if society increasingly values durability, repairability, emotional attachment, traceability and lower lifetime material consumption, then leather’s competitive position changes.

A tannery, leather merchant, component supplier, glove maker, or leather goods manufacturer may have spent 100 years building expertise and customer trust. The owners often see themselves as custodians rather than simply investors and so continue operating through difficult years when a private-equity owner would quickly close. This creates an interesting paradox as such firms will appear economically weak and can subside to low margins. But they do usually preserve specialist knowledge, skilled employment, industrial resilience and very long-term customer relationships. When a downturn ends, those capabilities should suddenly become valuable again.

Today, there are some wider realities to be considered.

1. Demand growth is clearly weak

Many traditional leather markets are mature. Footwear, upholstery, automotive and fashion sectors are not experiencing the growth rates seen in previous decades. At the same time, synthetic alternatives have become more sophisticated.

2. The industry has excess capacity

Across Europe especially, there are often more tanneries and leather processors than current demand requires. This means many companies compete fiercely on price and struggle to earn attractive returns. Yet there is no shortage of hides and skins, which are increasingly being lost to leather.

3. Succession is becoming a major issue

Many in the next generation do not wish to take over a business that requires large amounts of capital, faces environmental scrutiny and offers uncertain returns. There are apparently easier returns elsewhere, usually away from manufacturing.

4. Capitalism is changing

For much of the 20^th century, a family leather business might have accepted modest profits in return for providing employment, preserving skills, maintaining reputation and supporting a local community. This approach now gets classed as inefficient.

The long-term value of slow businesses

Since the 1980s, the financial environment has placed much greater emphasis on returns on capital, making a business that once looked respectable appear underperforming. While true zombie companies, in leather or elsewhere, do need to close, this is no longer normally true for the rest. In fact, they might be better called “slow” businesses.

They are not trying to maximise growth. They are planning to survive, maintain skills and pass something on. If you look across the leather supply chain, from livestock and hides through tanning to finished goods, you can see many businesses operating on this philosophy. The challenge is that a slow business which is admirable socially cannot afford to be vulnerable economically.

Realisation of the fast-accelerating impact of an ageing world suggests choosing continuity over maximum profit, preserving skills and relationships that would otherwise disappear, is the better route for looking ahead. Many of the capabilities that make leather special today have survived in some tanneries and product makers precisely because its owners behaved less like financial optimisers and more like custodians.

Maximising durability, stewardship and resilience

If future growth is slower because of ageing populations, environmental constraints and resource limits, then societies should shift from maximising throughput to maximising durability, stewardship and resilience. Getting GDP growth above 2% is now difficult in all but a few companies, even before demographic changes hit.

It is possible that climate change and ageing do not of necessity eliminate growth and instead force innovation and productivity improvements. But most of the rapid growth of the past two centuries was associated with expanding populations, urbanisation, increasing labour participation and rising consumption. Now, lower birth rates, ageing populations, slower workforce growth, rising healthcare and pension costs all make the old growth model harder.

I am not convinced that a smartphone replacing cameras, maps, calculators, radios and many other devices benefits society if it is thrown away every two years and demands endless rare metals to function. Those maps, radios, cameras and the like all lasted perfectly well for decades in our households while phones run out of battery, reception or WiFi and have high running costs. Has there been any proven gain? I think not.

Nor do I like agriculture that produces far more food per hectare than in the past via monoculture and immense loss of biodiversity through use of pesticides and fertilisers. Even some engineered grass-based rotational livestock systems take a silage crop too early and replant vital long-term grassland. These apparent productivity gains are quite the reverse.

On the other hand, a leather briefcase lasting 30 years is competing against perhaps five or six synthetic replacements and a pair of well-made leather shoes that can be repaired repeatedly tells a different sustainability story from a disposable product. This changes the terms of the debate although it does not automatically make leather sustainable in every circumstance.

But what is starting to happen is that the broader stewardship perspective asks if the tannery is preserving skills, employment, local identity, material knowledge and industrial resilience, and these will become more important than mere return on capital. Many economic activities create value that is not captured in profit and loss accounts or even GDP statistics. A stable tannery will support local schools, train apprentices, sustain specialist engineering firms, maintain relationships with farmers, support community organisations and provide meaningful careers.

I do not argue that every manufacturing job is automatically superior to every service job. Both can develop people, maintain assets, strengthen communities and create products with long lives. But it is wrong to consider manufacturing jobs to be inferior or unworthy.  We have learned over the last few decades that chasing money without purpose, or without care or consideration about waste, biodiversity, resource consumption and mental health, will not keep us alive and prospering. Even AI seems keener to monitor and marginalise employees work rather than replace them; it definitely needs human control. Even the very hiring process has been made an inefficient nightmare when using AI.

Lives with purpose and connection to place

So, we are already seeing young people seeking lives with purpose, craftsmanship, connection to place, environmental responsibility and tangible outcomes. A tannery, leather goods maker or shoe factory can provide those things in a way office-based occupations struggle to match. The irony is that for much of the late 20^th century, ambitious school leavers were encouraged to leave manufacturing behind.

The challenge for the leather industry is proving that it is not simply part of an old industrial economy, but part of a future economy centred on longevity, material responsibility and craftsmanship. If it can make that case convincingly, some businesses that look to be merely “surviving” today will come to be seen as holding capabilities that become increasingly valuable in a slower-growth world. And owners’ children will consider preserving and improving a productive industrial enterprise as not a second-best option at all, but one of the more important careers available.

A tannery or small-batch shoe manufacturer creates a community of practice: chemists, operatives, craftspeople, quality controllers, apprentices, machinery engineers, pattern-cutters and designers, all in proximity, all transmitting knowledge to each other and to the next generation. That web of skill and social relationship generates value that is not well captured in financial returns to shareholders but is deeply real in terms of local social capital, place-based identity and workforce resilience.

We should be clear that family ownership is not automatically virtuous. The zombie company discussion is a reminder that family attachment to a business can preserve heritage but can also preserve inefficiency, poor working conditions and resistance to necessary change. Even the traditional must be courageous, keep investing and take risks from time to time.

mike@internationalleathermaker.com

You can find Dr Mike Redwood across social media at @michaelredwood.

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