How does F1 approach the cost cap era?

How does F1 approach the cost cap era?

0734LW1D2162Marginal costs versus marginal benefits. That is the most basic principle of economics. Any business or economy must weigh these two variables in order to make sound economic decisions.

Formula One is a business. Fans (the consumers) spend their hard-earned money on a service that is provided by the teams and organizers (the producers). On the face of it, a very simple relationship. Conversely, fans are producers in the sense that they work for teams to help them function, work at tracks as marshals to keep the races safe and journalists as the mediators for the sport. While not paid directly by the sport, they are paid to make the sport work. The sport is the consumer in that sense. Add to that the technology conglomerates, oil companies and banking groups that want a piece of the pie, and the once simple relationship becomes confusing, dysfunctional and unsustainable. The fact that the global economy is in the toilet only complicates the matter further.

I won’t claim to be a master of economics, because I am not, but as a concerned observer, I worry about the direction Formula One is heading in. It seems that the sport has lost its way when it comes to weighing up costs and their benefits. The top teams spend exorbitant amounts of money in a sort of technological arms race to be the best, while the majority of the grid spends as much as they can to stay afloat, only to realize they remain uncompetitive.

There is a sort of treadmill like effect on the small teams of Formula One in which hard work is done, time is spent, money is sunk, minds are exercised and technology is created, only for it to prove not enough. The belt on the treadmill continues to turn rendering all that work pointless, because no matter what you do you can’t overtake it.

Two teams in Formula One represent two very different ways to work around a midfield-size budget. Lotus and Sauber were on different ends of the competitive spectrum in 2013 – their budget models back that up – but over the long-term it looks like one may be better off than the other.

With Sauber, you have a small team of hard-working, talented and dedicated employees working to the best of their ability to produce the fastest car they can with the resources they have. Sauber are not one to over spend in the pursuit of success. They work with what they have, and they make the best of it. That certainly shone through towards the end of the 2013 season when Nico Hulkenberg was challenging the top five on a regular basis. This isn’t to say that Sauber are the most cash-strapped team on the grid. They aren’t rolling0729LW1D0515 in money, but they aren’t about to miss the 2014 season. With arguably the best wind tunnel of any team on the grid, they have some advantages. However, this is balanced out by their lack of simulator, an increasingly important tool in the sport for the past few years.

But this is what makes Sauber so impressive. They, like I said, work with what they have and do the best they can with it.

Lotus on the other hand have dug themselves in a little bit of a financial hole. In a bid to be the team to beat in Formula One, they arguably spent more than they were capable of recovering over a long period of time. Now, even though they were Red Bull’s most consistent challenger at the end of last season, the same may not be true in 2014. The team’s association with the technology consortium Quantum Motorsports was, frankly, a farce. Promises were made and quickly broken. Faith in their financial security vanished as quickly as Kimi Raikkonen did when he wasn’t paid.

Will Lotus be scrapping it out with Caterham and Marussia in 2014? Probably not. But will they enjoy the same success they have in the last two years? I’m finding it harder and harder to believe so.

Back to economics.

Lotus and Sauber have fundamentally different views on costs and benefits. The former spends more to get more, while the latter is of the “less is more” school of thought. Which is better? Undoubtedly, the new regulations could weed out a winner soon enough. But with a cost cap looming in 2015, finding out now would be a good idea.

The upcoming F1 teams’ summit in Geneva has been called to discuss options regarding this cost cap. There are three options I would like to talk about. One would serve Sauber well, the other, Lotus. The third, if a bit complicated, could be the compromise of the century.

The first cost cap philosophy is simple: budget limits. A simple budget limit needs to be set to ensure teams are spending the same amount of money each year. This would be difficult to monitor, as the failed Resource Restriction Agreement proved, but for the sake of the sport, that would need to be overcome.

The second philosophy is of prize money distribution. Currently, there is a disproportionate amount of money given to teams who place higher in the constructors’ championship to those who place lower. This drives some teams to spend beyond their means to achieve success. Lotus is a prime example of this. The solution? Ensure prize money is more evenly distributed. All the teams work equally as hard, so why should the money they receive not be equal? The only reason Marussia and Caterham do “worse” than Red Bull and Mercedes is because they had only a fraction of the money to start with. Make the prize money distribution completely linear and give the small teams a couple of years to catch up, and I can almost guarantee a very competitive field of teams.

Finally, a compromise was recently voiced by Ferrari’s Stefano Domenicali. Speaking to AUTOSPORT, the Italian said: “Why do we not consider for example an approach where a team that can earn a certain amount of money can spend a certain amount of money?” This “multi-layered” cost cap takes into consideration the needs of all the teams, especially the engine factor. Manufacturers are at a huge copyright octaneadvantage here because they don’t have to buy their engines, while smaller, customer teams have to allocate a significant portion of their budget to buying engines. With brand-new power units for 2014, the distinction between manufacturer and customer will be at an all-time extreme.

This isn’t a perfect solution to Formula One’s growing money problems, but on the surface, it does seem like a plausible one. A lot of thought will have to be put into deciding the discrepancies in budget between the teams based on their specific needs, but it doesn’t seem to pose such huge threats like the first two proposals should it go wrong.

Formula One will never sort out its problems, for when this one is solved another will crop up. That is the nature of the sport. In a way, though, this is a good thing. It means those who run the sport are never satisfied. They care. Formula One was founded on the principle of self-improvement, and a cost cap is just the latest update waiting to be installed.

Images courtesy of Octane Photographic.


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