Dumping Trucks May Be Isuzu's Best Hope

Its strongest business is selling diesel engines to others

Judging from Isuzu's glitzy pavilion at the Tokyo Motor Show, you'd think the truckmaker was tearing along at full throttle. Customers saw slick displays on low-emission engines, and engineers lectured on Isuzu's advanced diagnostic system. Smiling company officials circulated through the crowds, giving an upbeat assessment of Isuzu's prospects. The company's new diesel engines "are taking the U.S. by storm," said Randy Schwartz, a former General Motors Corp. exec who's now Isuzu's vice-president for operations.

Yet all the presentations and bullish bluster mask a fundamental question: Can Isuzu survive? On Oct. 25, less than a week before the Tokyo show, Isuzu Motors Ltd. (ISUZY ) projected that it will lose a staggering $1.4 billion in the year ending March, 2003. That would be on top of the company's $346 million loss last year. Sales this year, Isuzu said, are expected to fall 21%, to $10.2 billion. Isuzu's stock is down 41% for the year, to 35 cents a share.

The grim forecast came as Isuzu President Yoshinori Ida announced that he is shifting gears on Isuzu's restructuring plan--the fourth such revision in five years. This time, Ida said, Isuzu will exit money-losing light-truck production in the U.S., stop sales of sport-utility vehicles in Japan, speed up job cuts, and refocus on growth markets, such as China. "This should be the last chapter of our restructuring," Ida says.

Key to the plan: Isuzu's bankers and shareholders. Mizuho Financial Group and other Japanese lenders have agreed to cough up $833 million in new funds in exchange for nonvoting shares in the company. Most the money will be used to pay down debts. Isuzu's top shareholder, GM (GM ), will pitch in $499 million even as it reduces its equity stake in the company to 12%, down from the 49% it has held since 1998. In exchange, GM will get majority stakes in Isuzu's diesel-engine units in Europe, the U.S., and Japan. "Everybody's working together to put Isuzu on a sounder footing for the future," says Raymond Grigg, chairman of GM Japan Ltd. Ida, in turn, promises to trim Isuzu's debt load to $4.1 billion from $6 billion today. Better yet, he insists that the company will post a $282 million profit in 2004.

That's assuming Isuzu can last that long. One reason the stock has been pounded is Prime Minister Junichiro Koizumi's tough talk about banks and deadbeat borrowers. Japan's banks are weighed down by $400 billion in bad loans, yet for years they have kept stumbling companies afloat with new credit. Now, Koizumi is promising stringent measures that could force banks to clean up their loan portfolios. While no one has singled out Isuzu, the company's fate clearly lies in the hands of its bankers. "As long as the banks allow [Isuzu] to continue to exist, it'll exist," says J.P. Morgan Chase & Co. analyst Steve Usher.

How did Isuzu--once Japan's third-largest auto maker--get into such dire straits? One reason: After Isuzu stopped making passenger cars in the early 1990s, its SUVs, which were based on pickup trucks, couldn't match the comfort of competitors' car-based offerings. So Isuzu's Rodeo and Trooper SUVs lost their early lead in the U.S. to rival models from Honda Motor Co. (HMC ) and Toyota Motor Corp. (TM ) Since 1995, Isuzu's share of the U.S. auto market has fallen by more than half, to 0.3% this year.

It hasn't fared much better at home. Sales of Isuzu's mainstay Elf two- to three-ton trucks and Giga 10- to 20-ton cargo haulers have fallen by half as business at Japanese construction companies--among Isuzu's top customers--has slowed in the economic downturn. Worse, Isuzu has yet to shut any of its five factories--each of them now working at 50% capacity--even as its heavy truck sales in Japan fell to 18,000 last year from nearly 34,000 in 1997. "We waited too long for a rebound that never came," says Kozo Sakaino, executive vice-president for sales.

Isuzu isn't totally hapless. The company builds state-of-the-art diesel engines that run cheaper and cleaner than many gasoline-powered motors. Its diesels are used in cars sold in Europe by Honda, Renault, Saab, and GM. In the U.S., GM puts Isuzu's diesel engines in full-size pickups such as the Chevrolet Silverado and GMC Sierra. That's one reason GM was quick to buy controlling interests in Isuzu's European and U.S. engine plants.

Still, Isuzu needs to focus its energies if it is to survive. Analysts say Isuzu would do better to pull out of the heavy-duty truck market, where its rivals are backed by deep-pocketed industrial groups such as Toyota and Mitsubishi. Instead, they say Isuzu should hone its edge in diesel engines and smaller light-duty trucks, which together account for half of its sales. "To try to compete in heavy commercial vehicles just doesn't make sense for them," says J.P. Morgan's Usher. Yoshinori Ida may think he needs yet another restructuring plan about as much as he needs a hole in his muffler, but scaling Isuzu down to its bare essentials may be the only way to keep the company alive.

By Chester Dawson in Tokyo

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