The worst?ǣcase scenario

Jarno Trulli, Toyota, Istanbul, 2008, 470150

Call it the credit crunch, call it the sub-prime crisis, whatever you call it, I call it trouble.

It?s hard to pinpoint exactly what the consequences of the developing global economic downturn will be for Formula 1. But it?s hard to imagine them being good.

And to the pessimists it could look very bad indeed.

The car manufacturers

When I first began following Formula 1 in 1989 the only manufacturer-run team in the sport was Ferrari. Renault and Honda were both present as engine suppliers.

Today the car manufacturers account for six of the ten teams and supply all the engines. And much of that transformation has happened since the turn of the millennium. Consider when the each of the various manufacturer teams arrived in F1 in their current guises:

Ferrari 1950
Mercedes* 1995
Toyota 2002
Renault 2002
BMW 2006
Honda 2006

*As engine supplier to McLaren

The popularity of Formula 1 among the world?s car makers is undoubtedly part of the sport’s attraction. But however vast their budgets are, they are subject to the same financial forces as the rest of us.

The impact of the financial down turn on the car manufacturers is starting to become clear. Toyota, which has been gradually edging ahead of General Motors to become the world’s largest car manufacturer, revealed last week its profits in the first three months of the year were 28% down – substantially below expectations.

Only last winter we were hearing rumours that Toyota would can its F1 project if solid results didn’t materialise. All the manufacturers are in F1 to succeed – and they can’t all win the world championship. And, in the form of Max Mosley’s well-documented indiscretions, they all have the perfect excuse to leave.

Withdrawal

Fernando Alonso, Nick Heidfeld, Sepang, 2008, 470313

Whatever slick and glossy marketing spin they use to market their involvement in Formula 1, let?s be clear about one thing: for them F1 only has value as a marketing exercise. Williams Grand Prix Engineering Limited are not using F1 to sell cars, they’re only in it purely to win it. Apart from Ferrari, who’ve been there since the start, you can’t say the same of the other manufacturers.

If F1 ceases to make sense financially, the manufacturers will simply up and leave. Renault did it in 1985 as a constructor and again in 1997 as an engine supplier. BMW did it in 1987 as an engine builder as did Honda in 1992. Others have left the sport and not returned, such as Ford and Peugeot, who currently feel other forms of motor sport (rallying and sports car racing respectively) fit their marketing needs better.

One might argue ??yes, but most of them returned, which proves the enduring appeal of Formula 1.?? That may well be the case ?ǣ but if several of them were to abandon F1 at short notice, where will all the cars come from in the meantime?

On leaving the manufacturers couldn’t sell their old chassis to GP2 teams to run in F1, because that?s not allowed. And besides which they may not wish to leave their intellectual property lying around for others to grab – when Opel left the DTM in 2005 it refused to let anyone use its old cars for exactly that reason.

In the 1990s F1 had independent constructors and engine builders to fall back on. Today they are increasingly marginalised in Formula 1 – no independent constructor has won an F1 race in four years, since Juan Palo Montoya’s last hurrah for Williams at Interlagos.

Chain reaction

One manufacturer leaving could prompt others to do the same. If Toyota left would their fierce Japanese rivals Honda stay long? What about BMW without rival premium car builder Mercedes?

The loss of Super Aguri has left F1 with just 10 teams and 20 cars. This is believed to be the minimum number of entrants Ecclestone is required to bring to Grands Prix. If it fell below that, he may require two teams to each bring a third car.

And if that responsibility fell to regular points-scorers like Ferrari and McLaren the likes of Renault and Toyota could face the prospect of not scoring any points for the rest of the season while their rivals lock-out entire podiums. How well would that go down in their board meetings?

Recovery

A recovery in the markets would not necessarily improve the situation in Formula 1 overnight.

As Ron Dennis has pointed out, because the most valuable F1 contracts tend to be long-term deals, sponsors and the like may be forced to remain in F1 as the economic going gets tough, and already be long gone as the wider economy begins to recover.

The engine freeze regulations might add another unwelcome complication for manufacturers returning to the series or new ones joining. Engine development is presently banned for F1 teams. But if a new team were to join they could spend as long as they liked covertly developing a 2.4-litre 19,000 rpm V8 and hand themselves a whopping advantage when they do join in. Which would not go down well with their rivals…

Admittedly this is a deliberately pessimistic outlook on the future. But I do think the sport is vulnerable as the economic forecasts continue to worsen.

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24 comments on The worst?ǣcase scenario

  1. Sush said on 15th May 2008, 13:17

    I don’t see Honda pulling out, after that wonderful shopping spree Nick Fry went on last year.

    Any news on a possible takeover of Torro Rosso?, surely if the wiegl group was that enthusiastic regarding entering F1 they start drawing up a business plan?.

  2. Sush said on 15th May 2008, 13:24

    Also what I don’t understand is Bernie wanting street and night races, thereby escalating the cost of F1 in other respects, such as logistics.

    the FIA and the cost cutting plans of
    * KERS which will escalate the costs
    * the standard ECU**

    ** which toyota has been quoted saying the cost of fitting the car around it was as much as developing a whole new engine.

  3. The further question for me is: would that be a bad thing?

    I don’t for one second think that F1 would fold, but it might become much cheaper almost overnight possibly allowing the current GP2 teams to get enough sponsorship to step up as independent manufacturers. Might that be an improvement?

  4. Any new engine in F1 during the engine freeze has to be approved by the other engine manufacturers specifically to prevent anyone stealing a march on anyone else.

    There’s a certain inertia keeping the manufacturers in, but it would be foolish for F1 to depend on their continued presence, as the FIA seems determined to do.

    • I found your site while browsing on google for snooker and saw a few of your other pieces too. I’ve just added you to my yahoo rss Reader. Just wanted to say” keep up the good work” and congrats on a job well done! thumbsup from me :D

  5. Steve K said on 15th May 2008, 14:17

    It’s a fun sport to watch, but what does one expect when only three drivers(two teams)are capable of winning a race this year? The other 17 drivers are not dog meat. The other teams are at such a disadvantage. The sport needs more parity for the greater good of it. I’ve asked this before, who wants to run/own a team that has no chance of winning?

  6. Robert McKay said on 15th May 2008, 14:42

    Keith, good article. One thing: with or without the credit crunch, this is emminently possible. Manufacturers won’t throw money at the sport in such huge sums forever.

    Formula 1 has to increase the number of teams somehow to prepare for this situation. Either by making it much cheaper to compete, or with customer cars, or whatever. But this problem has to be addressed, and soon, REGARDLESS of the world’s faltering economy.

  7. Diacho said on 15th May 2008, 15:28

    @ Steve K – The underdogs in F1 haven’t had a chance to win since the 60′s, or even before… Actually, the grids have never, never been so close. Ayrton Senna said the 1st place is so unique, and that’s why only 3 or 4 drives can win in a year. So, I don’t think that’s the problem… unless you’re a manufacturer.
    When I was reading the post, I thought the same as Andrew: The F1 brand is just too strong. If the manufacturers left in a rush, certainly the powers that be would make some room for the privateers. I’m not sure about what happened in the late 50s, but it was like that – the manufacturers simply went away.

  8. Dan Brunell said on 15th May 2008, 17:51

    Diacho, the reason why the Manufacturers went away from F1 in the late 1950′s is because of 1955 LeMans accident and manufactures didn’t want to associated with motorsports because of the bad press and liability.

    What is most troubling for me is not only the teams, but the races. This is the bind that Bernie has gotten himself to. Because he decided to expand the sport to the middle east and east asia, Bernie now depends on these high fee track fees. The teams get stuck with the costs of transporting teams to these exotic locations. Couple this with the revenue lost with races in non-primetime slots in Europe, then you really have to question the whole structure of the race calender.

  9. Oliver said on 15th May 2008, 19:32

    I thought Mercedes supplied Engines to the Sauber team 1993/1994 seasons?

  10. MrPippy said on 15th May 2008, 20:35

    That would be an interesting statistic: for each of the last 20-30 seasons, how many different drivers won a race, and from how many teams? Taking out the 1-win outliers (Fisi winning in the Jordan in 2003 as an extreme example), I expect that you would only see 3 or 4, maybe 5 drivers per season who really had the pace to win.

  11. At least if F1 development was more relevant to road cars, then it could be justified as R&D. But today a huge slice of F1 development is aero, and you aren’t exactly going to see a new Honda road car come out with rabbit ears any time soon..

    The size of a teams budget in F1 varies from $80M to $500M, and the difference between the net result of each team is around 1-1.5 seconds. So in effect, 80% of a team budget is poured towards the final 1% of performance improvement.

    Based on that, you could easily cap the budgets at $100M per year per team (and a personell cap of say, 250 people) and then trim the regulations to bring 3-4 seconds back to the cars… or…

    Currently a large portion of performance improvement (I would say 80%) comes down to aero – which is a very expensive exercise (and it results in uglier cars that are harder to pass). So if you strip back aero development by specing simpler and more standard aero, you remove that whole part of the budget (can work without a cap). Development would then involve incremental engine work, reliability, balance and car design and it would cut the budgets down a lot..

    So the regulations could be steadily shifted to frame an environment where expenditure takes a back seat to raw innovation. The current attempts at limiting costs (the ECU, tyre blankets, engine freeze) are just band aid solutions that usually have the opposite effect

  12. Nik mentions the main issue, that no matter what the regs do to contain costs, the teams will be over-competitive and spend insane amounts of time and money just to find some hole in the rule that gains an extra second. When FIA propose changes intended to make F1 cheaper, they forget this principle entirely. FIA also have a habit of forcing all the teams to buy brand new equipment that is cheaper than the old equipment but still new and therefore an expense.

    FIA need more accountants.

    I haven’t been that pessimistic about the economy, I have to admit, though much of that is personal luck. I think the global economy is a bit of a red herring here. The problem is that when you have an economy that has grown way too much, eventually there will be a collapse of some sort, and evidence of this can be found in athletic sport as well, like football, basketball, baseball, and ice hockey.

    Changes result, but when the right heads prevail, there isn’t too much damage, except maybe a season-long stoppage or a missed championship here and there.

  13. Green Flag said on 15th May 2008, 23:14

    The world economy is no worse now than it was 5, 10 or 20 years ago. And F1, because of hugely growing TV audiences, will keep attracting more sponsors. As always the major teams will be well financed, and the smaller teams will struggle to survive, as usual. As for engine manufacturers, most will stay, because a) F1 is high visibility, tax-deductible advertising and PR, b) they are not spending that much on engineering development anyway, and its tax deductible. It’s the teams that have the huge chassis and aero development costs – and that goes for the in-house manufacturer teams too – BMW, Toyota, Renault – and they cover their costs from sponsorships and Bernie’s handouts. Only the Honda team refuses sponsorship and they could doubtless get it if they change their mind; companies like Coke, Pepsi, McDonalds and dozens more major brands are just waiting for the chance at F1 visibility. The F1 economy is doing just fine, thank you.

  14. The biggest problem is filling the grid back up again. In terms of the current teams, I think BMW, Honda, Renault and Toyota are well locked in:

    If finances were pressing Honda, they could pick up a title and other sponsors to make up 50-60M a year.

    If toyota were financially pressed, they would probably be spending less than they are now (like a Renault-sized budget)

    BMW are finally starting to see returns, so they will be around for a while too

    Renault have the patience to know that having a bad year or two is no reason to leave the sport, esp as they have done so well

    These guys are all commited, but the current problem is finding new teams (either factory or privateer) and finding them quickly

    BMW edged in over years via Williams and Sauber. Renault edged in via prior engine supply and Benneton. Honda edged in steadily via BAR. Every current engine supplier already has a team, so there is nobody on the edge via either engine supply or ownership stake ready to step in. There is also some uncertainty with Concorde which could potentially mix things up for a potential new factory team

    So we probably wont see new factory teams on the grid soon.

    Privateers usually depend on financing from external sources, and a lot of the financial paper out there atm is being used as toilet paper – it is difficult to raise funds for anything atm, let alone an F1 team

    Because of all these factors (compounded by the economic situation), going to 12 teams by next year (which would require 3 new teams with STR changing hands) will be impossible. I think its going to take a huge effort from F1/FIA to even find somebody to pick up STR

    A lot of teams applied for 2008, but none of them are viable as they had nowhere near the financial support to run a full constructor team

    Huge problem, and either allowing customer cars or a complete finance/budget massacre are required to fix it

  15. the limit said on 16th May 2008, 3:08

    With the loss of Super Aguri, it is natural for people to show concern, and your article highlights those concerns to a T.
    Concerning the major manufacturers, such as Honda or Toyota, I don’t see them leaving F1 and for a number of reasons.
    F1 is a constantly evolving sport, always developing and changing, and its is almost always in a crisis in one way or another.
    The future, it would seem, is in South East Asia, if Bernie is to be believed, and that affects the manufacturers also.
    India and China, for example, are two huge, relatively untouched markets for some of these companies. In India especially, F1 will be the biggest motorsport event of the year, and what better arena to sell your products?
    In America, there is too much competition, too many people chasing the same dollar, it is a more diluted market.
    This is why Bernie wants more Asian races, and why the major companies will stay in F1, if not as teams, then as engine suppliers.
    My fear, as you pointed out, is the death of the independant team, like Williams for example. It is not too far flung an idea to imagine, in five years say, a Toyota Williams Team knocking around, with all the decisions being made by Toyota and not Frank Williams.
    You only have to look at Peter Sauber’s old team to see that it can be done, and with the right people, successfully.
    This for me, as a fan, is distastefull. I like teams like Williams, McLaren, and when there were around, Jordan. It adds to the character of the sport, its soul.
    However, so far as cutting costs so the ‘little fish’ can swim, don’t bank on it!
    Also, don’t forget that in a few weeks we may have a new FIA President, and that is important. If it is Jean Todt, then I’ll have to watch snooker on a Sunday instead of Grands Prix.
    The thought has made me puke all over the keyboard.

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