Dec. 5 (Bloomberg) -- Honda Motor Co. quit Formula One racing, cutting at least 20 billion yen ($216 million) in costs after the carmaker slashed its earnings forecast, fired assembly workers and reduced production.

Japan’s second-largest automaker may put the Brackley, England-based team up for sale, President Takeo Fukui said today at a news conference in Tokyo. Honda will also no longer supply engines to other teams.

Honda cut its profit forecast 13 percent in October as the recession in the U.S. cripples car demand. Max Mosley, president of F-1 ruling body the Federation Internationale de l’Automobile, said the $1.6 billion teams spend annually on the racing series is “unsustainable” and the sport could lose more teams unless expenses got under control.

“Honda’s withdrawal highlights just how awful the situation surrounding the auto industry is,” Koji Endo, an analyst at Credit Suisse in Tokyo. “Other teams may follow, and the F-1 may not be held in the future.”

Honda’s vehicle sales in the U.S., the company’s most profitable market, plunged 32 percent in November, the most since 1981, as the economic slowdown and the weak consumer sentiment hurt demand for Civic models.

“This difficult decision has been made in the light of the quickly deteriorating operating environment facing the global auto industry,” Fukui said. “Honda must protect its core business activities.”

Development Emphasis

Honda needs to speed up development of diesel engines, hybrid and small cars, said Fukui. The 400 engineers who work on Formula One will be reassigned to those projects, he said. The company will review all of its businesses as economic conditions may remain poor, he added. Honda plans to continue racing in the MotoGP motorcycle series and U.S.-based IndyCar.

Operating the Formula One team cost about 20 billion yen annually, Fukui said. The figure does not include development costs for the engines and cars.

Mosley said 2009 will be “difficult” as races and teams come under pressure because of the global financial crisis. Fans, sponsors and broadcasters are going to look to cut spending, which may result in fewer teams, he said.

“I think it could be difficult,” he said. “No one knows how serious the world crisis is. It’s not just the racing teams. It affects fans’ ability to attend racing and sponsors paying fees.”

Cutting Costs

The solution, he said, is to use stock equipment for many parts, leaving some areas where better design will give cars additional speed and advantage. One team, he said, uses 1,000 wheel specially designed lightweight nuts a season. The $1,200 nuts are used once and then discarded, he said. Most of the things teams spend money on aren’t seen by fans, he said.

“There are very few businesses where you could take out 80 percent of the costs and not have the customer notice,” he said.

Honda’s stock has dropped 56 percent this year, set for the worst annual performance since at least 1975. The shares fell 1.9 percent to 1,650 yen at the close of trading in Tokyo.

Honda finished eighth and ninth the past two seasons after placing fourth in 2006 on its return as a constructor. Ross Brawn, the former Ferrari technical director who helped Michael Schumacher win five straight driving titles, was hired to run the team 13 months ago.

Honda was the sport’s biggest spender in 2008, the U.K.’s Daily Telegraph reported. The team this week canceled an end-of- season media lunch at a Michelin starred-restaurant near Oxford, England, the newspaper added.

Nine Teams

Its withdrawal will leave the sport, dominated by carmakers including Fiat SpA, Renault SA and Toyota Motor Corp., with nine teams and 18 cars if a buyer can’t be found. The 2009 season- opening Australian Grand Prix is scheduled March 29.

Toyota has no plans to withdraw from the sport, said spokesman Hideaki Homma.

The last team to quit Formula One was Honda-backed Super Aguri, which folded in May because of a lack of funding.

Honda’s decision is the latest blow to hit the sport in the past 18 months.

Earlier this year, F-1 was rocked by the distribution of a sex video involving FIA President Mosley which led to some carmakers voting for his removal. In 2007, McLaren was kicked out of the constructors’ championship and fined $100 million after its chief designer, Mike Coughlan, was found in possession of 780 pages of technical documents belonging to Ferrari.

Lower Earnings

Honda expects operating profit of 550 billion yen for the 12 months ending March, the lowest in eight years. The carmaker cut its forecast as the yen’s 39 percent gain against the dollar squeezes its profit. Every 1 yen gain against the dollar cuts Honda’s annual operating profit by 18 billion yen, according to the company.

The company yesterday said it plans to offer early retirement for workers at its U.K. factory and will cut 490 additional temporary jobs in Japan, as demand slumps in overseas markets.

Honda, led by founder Soichiro Honda, owned a Formula One team as early as 1964, even before it began making cars in 1967.

It returned to F-1 in the 1980s as an engine supplier, then in 2004 purchased a stake in the BAR team from British American Tobacco, which it bought out a year later to form the Honda team for the 2006 season.

Jenson Button and Rubens Barrichello are the team’s current drivers and could be left without a seat for next year’s championship.

To contact the reporters on this story: Dan Baynes in Sydney at dbaynes@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net.

Last Updated: December 5, 2008 10:40 EST