Analysis: Sayonara Honda, who else is at risk?
Honda F1 website
Honda website

DECEMBER 5, 2008

Analysis: Sayonara Honda, who else is at risk?

The Honda Motor Company has confirmed that it is pulling out of Formula 1 racing. The company's chief executive Takeo Fukui told the media in Japan that the move was necessary because of difficult business conditions and added that there are no plans to supply engines in F1 either. The team in England is evaluating the possibilities for the future and the management, led by chief executive officer Nick Fry and team principal Ross Brawn, are "deeply committed to securing the team's future" and are engaged in looking for a new team owner, given that the team has high expectations for 2009.

Fukui explained that the difficult decision came "in light of the quickly deteriorating operating environment facing the global auto industry, brought on by the sub-prime problem in the United States, the deepening credit crisis and the sudden contraction of the world economies".

"Honda must protect its core business activities and secure the long term as widespread uncertainties in the economies around the globe continue to mount," he said. "A recovery is expected to take some time. Under these circumstances, Honda has taken swift and flexible measures to counter this sudden and expansive weakening of the marketplace in all business areas. However, in recognition of the need to optimize the allocation of management resources, including investment regarding the future, we have decided to withdraw from F1."

Extracting the team from F1 is not going to be the work of a moment as Honda must have given certain commitments to the Formula One group as part of the commercial agreements that govern the sport - even if there is no Concorde Agreement as such at the moment. This commitment will probably be until the end of 2012. This does not preclude selling the team (as Ford did when Jaguar Racing was transformed into Red Bull Racing).

The sale of the team is not the problem. It will probably be just a nominal sum of money, the key point will be to find someone who is willing to pay the $200m that will be needed to pay for the 2009 season. Engines can be bought from Ferrari.

The biggest question in the sport is not about Honda, however, as everyone is watching to see whether or not this will result in other automobile manufacturers heading for the door. They are all facing the same financial troubles at the moment and Honda was actually considered to be among the strongest in terms of its commitment to Formula 1.

A look at the other companies involved reveal the scale of the current crisis in the automobile world.

Toyota, the world's most powerful car company, has reserves of $40bn in cash but it recently reported a drop in US sales of 34% in November as consumers simply stopped buying cars. The company has started to discount by offering 0% financing for 12 models and $5,000 off its Tundra pickup and Sequoia SUVs, but despite this Toyota was forced to report a $330m loss in the US in the third quarter. The fourth quarter will be worse. Ironically, Toyota opened a new $850m plant at Woodstock in Canada yesterday, to assemble the RAV4, a compact sports utility vehicle, but has delayed a new Prius plant in Mississippi. The firm will also stop production at all of its US facilities for two days this month to reduce the number of cars being built. This will provide workers with a longer Christmas break. Despite this Toyota says it still has about 73 days' worth of unsold cars and more trucks.

BMW took a major hit in the United States as well last month with its sales tumbling 26.7%, with the 11-month annual sales down by around 6.8%. That will probably reduce further in December. The good news for the German firm is that Mini sales were up by 31% and Rolls Royce is also doing well, its sales rising by 29%. BMW has cut one of the two shifts from its Leipzig factory and is laying off 5,000 temporary workers. The company has also cut back on research spending and delayed several projects.

Mercedes-Benz has suffered similar disasters in the United States with sales down 30% but overall 11-month sales only 1.2% under last year. The company has flexible working rules which mean that workers can work less but get paid the same on the understanding that when there is more demand they will work more.

Renault is fortunate in that it is not yet in the US market and has been a major beneficiary of a recently-announced French government package worth $32.8bn to help boost the national economy. The company is still saying that production cuts are necessary because of falling sales. Renault has no plans to announce any more job cuts, although it is already committed to cutting 6,000 jobs across Europe and is shutting many of its sites for several weeks in December.

American sales are also important to Ferrari, but the exclusive nature of the cars means that demand for new models is not as badly hit as might be expected.

Overall US vehicle sales dropped 37% in November and the industry says that December will be worse with estimates of drops of between 35% and 40%. The total US vehicle sales for the year are expected to fall 20% as a result of the crisis.

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