Formula One: An Embarrassment of Riches?

Formula One: An Embarrassment of Riches?

Despite Formula One racking up profits reaching over £300 million over the last year, 2013 saw both the Lotus and Sauber teams in a public battle for financial survival. How is it that teams in a sport so flush are forced to fight to survive financially? Does Formula One still remain financially viable for privateer teams in 2014? Dan Paddock investigates.

_L0U5352

When the commercial rights holder of Formula One, CVC, reports earnings of over £500 million, £300 million of that believed to be profit, over the last financial year, one feels pressed to ask how it is that the very same week, Marussia, a team entering its fifth year in the sport can post a record loss of £59 million.

Is it simply a matter of bad business on the part of the Anglo-Russian team? You could be forgiven for thinking so, with the team failing to score points in any of the 80 races it has participated in since the start of 2010. However, Marussia are not the only Formula One team to find themselves in such a predicament.

Lotus, a team that has won twice over the last two years, and consecutively finished fourth in the Constructors’ Championship in both 2012 and 2013, suffered the indignity of seeing their talismanic driver, Kimi Raikkonen, openly tell the assembled media in Abu Dhabi that he had not been paid a penny over the course of 2013, are also deemed to be on the financial precipice.

Not only that, but even Sauber, a team that can trace its history in Formula One back to 1993, faced great uncertainty in 2013, selling a stake to a Russian conglomerate to ensure it could pay its bills until the end of the season.

Even the ever mercurial Williams and McLaren, with 17 Constructors’ Championships between them, are feeling the pinch. Williams posted losses of £5 million over the last year, while McLaren, celebrating their 50th year in the sport in 2013, reported a loss of £3 million in 2012, despite winning six grands prix, and having made a profit of £22 million a year before.

sun_china_start_01

The 2013 season saw teams up and down the gris struggle financially, with from-runners Lotus, as well as perennial back-markers Marussia feeling the pinch.

All of this happens whilst Force India and Caterham rely principally on the financial backing of their mega-bucks owners, Vijay Mallya and Tony Fernandes respectively, without whose continued interest the teams could not operate.

Evidently, there is clearly a serious flaw with the financial state of Formula One. While the sport remains as popular as ever, and as shown, CVC continue to profit from it, why then are so many teams in such a precarious position financially? As already identified, over half of the eleven teams on the current grid are in some form of debt, or have reported losses, with the future of at least two of those teams very much under threat. How has this come about and what does it mean for the future of the sport? Is Formula One still finically viable for teams who can’t commit hundreds of millions of dollars to compete?

For Jonathan Noble, F1 Group Editor at Autosport, the answer is simple: “Longterm the way it is going, no.” As he explains, one problem is that the so called ‘Big Four’, those teams with manufacturer or major corporate backing – Red Bull, Mercedes, Ferrari and McLaren – are competing in an “arms race, fuelled by Red Bull.” Noble said: “F1 has got itself into this. As soon as one team throws money at something, the second and third best team have to decide, do we stick to our own game of low costs, or do we join them. And then that team joins up, and a third team joins up, and then a fourth. As F1 is so competitive, with its incentive to win so big, everything is pulled forward by the team in front.”

However, as Noble identifies, there is a far deeper issue at hand, one which stems from the way that F1’s profits are allocated back to the teams – without which it is important to note there would be no show – be that via prize money, or other means. He said: “If commercial revenue coming back to teams balanced out the costs it would be more viable. If a season costs a $100 million and your prize money is $120 million then that’s viable for anybody. But at the moment the problem is that the prize money for many teams is around $60 million and it’s costing them $140 million to compete. That’s where the disconnect at the moment has come from.”

Which is where a major travesty lies, as Dieter Rencken, AUTOSPORT Columnist, revealed late last year. CVC, Formula One’s commercial rights holders, “[creamed] off over £550m in direct profits in 2012,” while teams competing in the very sport they own struggle to seek out financial support to survive.

Aside from an ongoing arms race, and a downright odd financial support structure from the sports owners, teams have also faced the challenge of a fresh set of technical regulations in 2014, one that has forced a fresh aerodynamic approach, as well as a move to 1.6 litre V6 engines. This was a move that Jonathan Noble believes will drive up costs. “If you’re a straight customer team, beyond having to scrap all you’ve learned since 2009 [the last set of regulation changes], teams must deal with an all new concept of car, with engine costs going up by around 50 per cent,” he said. “Manufacturers demanded an upfront payment [from customer teams buying engines] in year one and year two. So while over a ten year period teams will pay less, it is all front loaded, so they will be paying more right now.”

This effectively puts even more at stake for teams, as a wrong move in development can see all of a their work made obsolete, forcing designers back to the drawing board, and driving costs up further. Noble explains: “When things are new you can spend a lot of money going down the wrong development path, and then you’ve got to start all over again.”

This itself highlights another problem with the current financial state of the sport, which is the growth of a clear divide into a two tier formula, something that fans vehemently appose. “With the way that it is with the power units that are more important, it means manufacturer teams have a huge advantage as their chassis people can tell their engine people we need to change where this exhaust is, or the location of the turbo, or so on,” said Jonathan Noble. “Whereas the customer teams are left with what they are given.” In his mind, the current regulations, mixed with the financial situation of those teams without manufacturer support, means that Formula One will effectively be a two their series in 2014. He added: “It may be over time things will equal out as they usually do, but at the start we will have a two tier cost system, with teams at the luxury of being able to spend what they want, and then those who are fighting for survival.”

GER_Sun_Vettel_and_Hamilton_0741

Red Bull and Mercedes were the most successful of the so called ‘big four’ teams during 2013. The Brackley-based outfit have started 2014 in fine form, with three wins from three races.

But what of those teams in the second tier? Do the so called ‘Big Four’ – with their financial backing – and the power that brings within the top echelons of the sport – have a responsibility to protect those less financially stable teams, such as Marussia and Caterham by keeping costs down? As Jonathan Noble identifies, while the top teams clearly have a vested interested in the health of the grid as a whole, the responsibility to set a financially fair playing field should principally rest with the FIA. “I think it is in the big teams interest to ensure that there is a sport there to be racing in,” he said. “It’s not in Red Bull’s interest to drive every other team out of business, as they’d have no one to race. But it should’t be Red Bull’s job to frame rules, or frame regulations to sort a way out for a team that is not as effective. It’s the governing body’s duty to come in and impose these regulations and recommendations and rules.”

But as Dieter Rencken explains, some teams, principally Red Bull, actually directly oppose any form of cost restriction, in what can be seen as direct hostility to those teams of a poorer nature. Rencken said: “It appears Red Bull Racing is hardly doing its bit, for the minutes indicate the team is ‘vehemently’ opposed to any form of cost control in the belief that such restrictions are impractical and impossible to police. All good and well when you’re part of a billionaire-owned marketing group, but hardly of consolation to F1 personnel employed by teams unable to maintain the levels of spend committed by the Big Four.”

For Richland F1’s Andy Young, the continuation of this selfish attitude can only end one way, with teams being priced out of the sport. He said: “Tony Fernandes has already threatened to walk out if Caterham fail to improve this season. Teams outside the ‘Big Four’ are definitely being driven further down, we’ve already seen it happen with Williams and Sauber. Lotus have clearly struggled in recent weeks and it also appears that McLaren are struggling to find a title sponsor.” He added: “No-one seems safe at the moment, apart from Red Bull and Ferrari.”

BEL_Sun_Hulkenberg_and_Kimi_93

Lotus and Sauber suffered most publicly with financial difficulties during 2013. Both teams have struggled in the early part of 2014.

For Jonathan Noble, the only positive is that the problems experienced by Lotus and Sauber during 2013 seem to have brought the severity of the issue to light. Although he fears that it will take the complete failure of one of the big names before real change is implemented. He said: “I think that the fact that we’ve come so close, look at Sauber at the end of last year, we’ve had Lotus who have hit a difficult situation, it has woken people up to the fact that we need to do something. I do fear that it will take one of the major ones, like a Sauber or a Lotus, to go, for anyone to care enough.”

Quite clearly there is a creeping sickness in Formula One, which if allowed to fester will claim one of the eleven teams, with the privateer teams most at threat. While a cost cap has been proposed for 2015, it remains to be seen if such a measure can truly succeed in halting the financial rot that has set into the sport, with the topic of policing such a cap another question entirely. However, succeed or not, with Lotus continuing to haemorrhage staff over the winter, and with rumours of late pay and redundancies doing the rounds, Jonathan Noble’s aforementioned point could soon become a reality. But even then the question is will anyone care enough to make the wholesale changes that are desperately needed to ensure that Formula One remains financially viable.

Images courtesy of Lotus F1 Team and Pirelli Motorsport.

@CosmicDanzo

Dan Paddock

Dan Paddock

Dan Paddock is an FIA accredited freelance motorsport and Formula 1 journalist and the recently appointed Grand Prix Editor of Richland F1. Dan joined the site in July of last year as a Staff Writer, fresh off the back of completing a master’s degree in journalism. He has since gone on to represent Richland F1 at the 2014 British Grand Prix, his debut in the Formula 1 paddock. Aside from Richland F1, Dan also writes for Rumble Strip News, as well as maintaing his own modest blog.