Isuzu lifeline seen only as short-term solution

TOKYO, Aug 15 Edwina Gibbs writing for Reuters submitted this report. "General Motors Corp may have changed its mind and extended Japanese affiliate Isuzu Motors Ltd (Tokyo:7202.T - News) a much needed lifeline, but the move is seen as only a temporary salve for a company facing a hard road to recovery.

In a sharp turnaround from past statements that it would not inject more funds, the U.S. auto giant announced with truckmaker Isuzu on Wednesday that a package, including support from banks, worth at least 160 billion yen ($1.37 billion) had been arranged.

"It solves the problem of Isuzu not having any money at the moment but as part of the deal, Isuzu has sold important assets and it's not clear how the future is going to pan out," said Seiji Sugiura, auto analyst at Nomura Securities.

Under the deal, GM will spend 60 billion yen. The U.S. automaker's current 49 percent holding in debt-ridden Isuzu will be cancelled and 10 billion yen will be spent for a 12 percent stake in the recapitalised company.

The rest of GM's cash will go on gaining control of Isuzu's diesel engine technology and key engine plants in the United States and Poland -- seen as the truckmaker's crown jewels.

The scheme also included a 100 billion yen debt-to-equity swap by the truckmaker's major creditor banks, with most of the amount to be covered by Mizuho Financial Group (Tokyo:8305.T - News).

Isuzu will seek additional funds for further restructuring from banks amounting to more than 100 billion yen.

Analysts agreed the rescue package had likely saved Isuzu, which faces 37 billion yen in bond redemptions this business year, from bankruptcy.

NO ALTERNATIVE FOR GM

They differed, however, on how much support the package would give with some saying it was only enough to see Isuzu through the rest of the year and others saying the truckmaker was now placed well enough to accomplish its three-year restructuring plan.

"This crucially gives Isuzu the basic strength to fully execute the V-Plan recovery programme," said Takaki Nakanishi, auto analyst at Merrill Lynch.

For GM, there were both merits and demerits to the deal.

On one hand, the U.S. automaker had to break its promise to shareholders that it would pump no more money into the company.

On the other, the political and business ramifications of Isuzu failing would have been too ugly to face.

Analysts said if Isuzu were to collapse, the domino effect on Japanese suppliers would likely be huge -- creating an unwelcome wave of fresh unemployment for Japan's fragile economy.

GM, which analysts say must bear some responsibility for not forcing Isuzu to restructure more aggressively sooner, also needs to maintain good relations with its other Asian partners.

In addition to its stake in Isuzu, GM holds 20 percent each in minivehicle-maker Suzuki Motor Corp (Tokyo:7269.T - News) and Subaru automaker Fuji Heavy Industries (Tokyo:7270.T - News), and is trying to rebuild South Korea's Daewoo Motors. On a more positive note for GM, it has gained control of Isuzu's diesel engine technology and plants if the truckmaker were to falter again.

And with a stake of only 12 percent, even though GM remains the top shareholder, it has put some distance between it and the company it first invested in in 1971.

"It wants to be seen as a good partner but GM also could have been concerned that as a 49-percent shareholder it would have been on hook for some of Isuzu's liabilities," said Stephen Usher, auto analyst at JP Morgan.

"It has taken a significant step away from that."

OVERCROWDED INDUSTRY

But although Isuzu has gained an opportunity to get its long-term act together, analysts are unsure whether it can, given the unforgiving outlook for domestic truck demand and chronic oversupply in the industry.

All four Japanese truckmakers have been battered by a decade-long slump in demand -- with domestic sales of medium-to-heavy trucks at below 80,000 vehicles in the last business year ended in March, less than half the peak in 1990.

Economic woes have shrivelled demand for freight, and construction firms, key truck buyers, are in the throes of a shake-out as the government cuts back on public works.

Even industry executives say Japan no longer needs four truckmakers and they would not be surprised to see some consolidation.

Local media on Thursday cited rival Hino Motors Ltd (Tokyo:7205.T - News), a Toyota Motor Corp (Tokyo:7203.T - News) unit and the strongest of the four, as a possible partner for Isuzu. The two are in talks to integrate their bus operations. While some analysts do not dismiss the possibility of consolidation, most say they find it hard to envision -- saying stronger makers such as Hino and Mitsubishi Motors Corp (Tokyo:7211.T - News) have enough troubles.

"What's going to force them together that hasn't already happened?" said JP Morgan's Usher.