November 17, 2014    5 minute read

Does F1 Have the Wrong Formula?

   November 17, 2014    5 minute read

Does F1 Have the Wrong Formula?

Formula 1 is one of the richest sports in the world. Companies will pay as much as $25 million just to have their company name printed on the rear wing of a team’s car for a season. Circuits will pay large fees just for the right to host races with Singapore, Malaysia and Abu Dhabi all paying over $65 million to draw the money spinning circus that is F1 to their tracks for the weekend. In return F1 brings with it prestige and the exposure that comes with a global audience of 500 million viewers. In aggregate F1 turns over around $1.7 billion a year. To put this into perspective the average revenue of the last 3 Olympic games was also $1.7 billion, and the last 3 FIFA world cups, $1.6 billion, which demonstrates that F1 is of the same accolade as the greatest sporting events in the world. However, it appears that F1 is struggling financially.

The problem first emerged at the recent Grand Prix in Austin, Texas where both the Marussia and Caterham teams were unable to race due to lack of finances. They have now subsequently both filed for bankruptcy and are unlikely to return to F1.

At the moment around $900 million of F1’s total revenue is given to the teams. Half of this is distributed evenly amongst all the teams, and the other half distributed according to how successful the team is (where it finishes in the championship). Bernie Ecclestone, Chief Executive of the Formula 1 Group, which manages F1 has stipulated that such compensation is more than enough for the teams to survive and identified the poor management as the cause of their financial woes. He advised that teams “start running the business as a business” and went further to say “The way forward is very easy – don‘t spend as much.” Thus one may raise the point as to whether there is a more prevalent issue in comparison to just mis-management.

A brief glance at the teams’ budget indicates the ltter proposition. Marussia and Caterham already spend the least of any teams on the grid at $70 million and $60 million respectively. This compared to Red Bull and Ferrari at the top of the grid spending in the region of $250 million annually. So to say that they’re spending too much when their competitors are spending quadruple them seems not only unfair but also unjust. But how can other teams spend orders of magnitude more than them and yet they’re the ones spending too much and being labelled as incompetent.

In June of this year American businessmen Gene Haas announced his intention to put a team on the grid for 2016. Mr Haas is the founder of machine tools business Haas Automation and believes that the excessive running costs of being in F1 will be more than covered by the extra sales generated from the global exposure F1 will give to his company. Haas said “I need to penetrate not only Europe and South America but China and Asia. These are all these markets that we have a tough time even getting any kind of notice in and they really like Formula One.” He then went on to claim “the percentage of our production that is sold overseas will increase from 50% to maybe 70%.” In essence he doesn’t intend for the F1 team to be profitable, rather to just boost the profits from the company’s other operations and use this to bolster the F1 team’s balance sheet. This is also what the dominant incumbent F1 teams are doing, enabling them to spend more than they are getting back.

Is the growing necessity of teams being backed by large corporations a cause for concern for F1? Probably not, it has always been the case to some extent and it’s an issue not just held by F1 but also by other sports. Increasingly football teams are being backed by rich investors not concerned by making a loss enabling the team to outspend and hence outplay their opposition. They are tackling this is in football through financial fair play regulations limiting the losses they are permitted to have over a 3 season period. Perhaps this is also the solution for F1 to make it a more an equal playing field for smaller teams.

Additionally, not long ago a Resource Restriction Agreement (RRA) was instigated which limited the teams to $40 million budgets for that year. This was also part of what attracted Caterham and Marussia to the sport initially believing that this would enable them to compete. However, the issue of whether or not to have the restriction in place proved too divisive amongst the premier teams and thus was abolished.

In light of the growing financial pressures on the teams, Ecclestone recently warned that only fourteen cars might be on the grid in 2015. Having such few cars on the grid may start to hurt F1 as a spectacle and force a re-think regarding the RRA. A spending cap certainly would enable smaller teams to survive and even flourish in F1 but trying to get it re-instated would undoubtedly meet strong opposition from the larger teams who want to maintain their dominant position. Nonetheless, a spending cap seems the solution to F1’s financial woes.

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